SoFiTechnologies(NASDAQ: SOFI) has done an excellent job expanding its customer base and growing revenue. However, it has contended with sluggish loan growth in the high-interest rate environment, leading to investor skepticism about its short-term prospects. As a result, the stock remains 62% below its all-time high price in 2021.
However, the company has found multiple levers for growth and is seeing encouraging progress in its nonconsumer business. If you're considering buying SoFi today, here's what you should know.
SoFi's rising lending business has drawn investor attention
In its early days, SoFi focused on helping people refinance their student loan debt. Then in 2020, the pandemic and policies around student loan forbearance forced SoFi to reevaluate its business. One area that helped drive its ongoing growth was personal lending. From 2020 to 2023, SoFi's personal loan originations grew from $2.6 billion to $13.8 billion.
The higher-interest rate environment of the past couple of years has been a double-edged sword for SoFi. On one hand, consumers have had to grapple with higher interest rates, which could make it harder for them to pay down their debts.
In the second quarter, SoFi charged off $151.8 million in personal loans, giving it a charge-off ratio of 3.84% on its $15.9 billion personal loan portfolio. This is up from 2.94% one year ago and is one metric that investors have kept a close eye on. Charge-offs have risen across the banking sector over the past couple of years, which many attribute to normalizing conditions rather than systemic weakness across the consumer.
Additionally, SoFi projects that its lending segment revenue will decline 5% to 8% compared to last year. CEO Anthony Noto told investors during the first quarter that the fintech is taking "a more conservative approach in light of macroeconomic uncertainty."
Deposits and net interest income have surged higher
Conversely, higher interest rates have helped SoFi grow its net interest income significantly. One big reason for this was its 2022 acquisition of Golden Pacific Bancorp, which enabled SoFi to hold deposits and thus, more loans on its books. Since acquiring the bank, its total deposits have grown to nearly $23 billion, thanks to its high-yielding savings accounts offering an annual yield of up to 4.5%.
Last year, SoFi brought in almost $1.3 billion in net interest income, up over 400% from 2021. This solid growth continued through the first half of this year, with its net interest income increasing 55% to $815 million.
SOFI Total Deposits (Quarterly) Chart
SoFi's growing tech business
SoFi's banking business is steadily growing, but what excites me is the potential of its technology platform. In recent years, the company has made substantial investments in Galileo and Technisys to develop a robust technology infrastructure aimed at bringing banking services to nonbank companies.
Galileo serves as the backend infrastructure for fintech companies without banking charters, enabling them to handle payments and offer various banking services through SoFi.
Meanwhile, Technisys replaces outdated legacy systems, which hindered rapid innovation, and it can simultaneously support multiple products, run in the cloud, and allow banks to process and analyze data in real time. With this powerful technology stack, SoFi aspires to become the "Amazon Web Services (AWS) of fintech."
SoFi's technology platform has evolved into a significant business and can provide stability thanks to long-term contracts. In the first half of this year, the technology platform generated net revenue of $190 million, marking a 15% increase from the previous year, and boasted a robust contribution profit margin of 33%.
Is SoFi a buy?
On Oct. 14, SoFi announced a $2 billion loan platform business agreement for personal loans with funds managed by Fortress Investment Group. Noto said in a press release that the agreement will help it "diversify toward less capital-intensive and more fee-based sources of revenue." The agreement shows investors' risk appetite for SoFi's loans may be returning after skepticism over the abovementioned rising charge-offs.
SoFi has done an excellent job growing its banking presence and increasing its deposit base rapidly over the past few years, and its earnings continue to improve as it pulls on multiple growth levers across its business. The company has done an excellent job of adding customers and improving the economics of its business over the past several years. This is why I think the stock is a solid buy for long-term investors today.
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