SoFi Technologies (SOFI 6.69%) reported solid results a few weeks ago. The digital financial institution posted adjusted revenue of $460 million and adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) of $76 million in the first quarter, both representing huge year-over-year gains. Those figures also meaningfully exceeded even the high end of management’s target.
Regardless, the stock hasn’t performed as well, and was only up 7% this year as of May 19. Moreover, SoFi shares are still down 81% from their peak. Does this present a worthwhile buying opportunity? Let’s dissect the bearish and bullish arguments for this fintech stock so investors can have better information to make a smart decision.
The bear argument
Although SoFi is a digital bank, the products and services it offers are really the same as what other banks provide. Things like savings accounts, personal loans, and credit cards can also be found at a seemingly endless number of competitors. These commoditized offerings, and lack of true differentiation, might turn off some investors who are really only after businesses that have something unique to give customers.
Despite its rapid growth and innovative potential, SoFi has yet to produce consistent profits. This might have worked in an environment of ultra-low interest rates, but with the cost of capital rising, businesses should optimize for self-sustainability and eliminate the possibility of having to raise excess cash from the capital markets. In my opinion, investors should be a bit more cautious these days about companies that aren’t profitable.
Yes, fast growth can one day lead to a positive bottom line. But until this actually happens, there is so much uncertainty and execution risk. To its credit, though, SoFi’s net loss of $34 million last quarter was much less than the net loss in the year-ago period of $110 million.
Another bear argument is that growth is slowing down significantly. Adjusted revenue increased 43% in the first quarter, and it’s expected to rise between 32% and 35% in the current quarter. This continues a negative trend from the last two full years, a sign that the uncertain economy might be taking its toll on SoFi.
And this goes back to the prior point: Is it worth the risk of owning an unprofitable enterprise while growth is decelerating noticeably?
The bull argument
One of the most compelling bull cases working in SoFi’s favor is how well it has held up amid the banking crisis that has characterized the past couple of months, particularly when it comes to deposits.
Customers are moving money around for safety reasons. What’s impressive is that SoFi’s deposit balance of more than $10 billion as of March 31 is up from $7.3 billion just three months prior. Boosting this figure and attracting more depositors to SoFi is the fact that it now can offer FDIC insurance on up to $2 million in balances, meaning that 97% of deposits are insured today.
Another sign of SoFi’s strength versus the failed regional banks is the composition of its loan portfolio. As of March 31, about 98% of the loan book consists of personal loans and student loans. These are shorter duration than the long-dated Treasurys that the failed regional banks owned, and as a result, it isn’t exposed as much to changes in interest rates.
SoFi’s business appears to be performing quite well, as the latest financial results showed. Total members jumped 46% to 5.7 million. And there are currently just under 8.6 million active products, up 46% year over year.
Management was so impressed that it raised full-year guidance, and now expects adjusted revenue to increase between 27% and 31% this year (from 25% to 30% before). Thanks to its balance-sheet flexibility and focus on high-quality borrowers, leadership thinks the business is well positioned in this environment.
As I’ve outlined above, I think SoFi possesses compelling arguments on both sides of the aisle. Bears point to its commoditized products, lack of profits, and slowing growth, while bulls call out its deposit growth, a shorter-duration loan book, and upgraded guidance. It’s hard to decide based on these factors.
From my perspective, I think the bear case shines brighter here, especially as it relates to net losses. What’s more, I just think it’s really difficult to get a full grasp of the true risks with any banking institutions, as they are incredibly complex organizations. This makes me want to avoid the stock.
But for some investors, SoFi’s positive traits might be enough of a reason to buy the stock. It’s ultimately up to individuals to decide based on their time horizon and risk tolerance.