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Digital bank SoFi Technologies (NASDAQ:SOFI) hasn't had a great run so far this year. The growth stock is down 26% since the start of 2024.
The market capitalization of $7.5 billion is not insignificant. Does this company, which has been posting annual losses for the past few years, deserve such a valuation?
Could it be worth more, meaning the recent drop presents a buying opportunity for my portfolio? The CEO has been buying SoFi stock for the past few months. Should I do so?
Why has SoFi crashed?
SoFi has both fans and critics in the stock market.
It can be considered an innovative digital bank and financial services provider that is investing now to build a loyal customer base for the future.
But it could also be seen as just another player in a crowded market, where traditional banks have been trying hard to imitate the innovations of smaller, more agile fintechs.
In my opinion, the US economy is not in very good shape. There is a risk that it will deteriorate over the next year, which could push up default rates.
This would be bad news for banks in general, including SoFi, but not all publicly traded banks are suffering this way. Bank of AmericaFor example, it is up 17% this year, representing a 34% increase in the share price in five years.
So I think SoFi's stock decline reflects broader concerns than just a recession and its potential implications for default levels.
Mixed recent performance
I think this is partly due to the mixed picture of the company's performance so far this year.
In the second quarter, there was positive news. SoFi reported its third consecutive quarter of profitability (based on Generally Accepted Accounting Principles, or GAAP). Total net revenues increased 20% compared to the same period a year ago.
Still, diluted net income attributable to shareholders in the quarter was $8 million. For a company with a market cap of $7.5 billion, that's a paltry figure, though we may see growth from here, which would explain the market cap.
What about defaults? The weighted average annual default rate for both personal and student loans was unchanged from the previous year.
There were, however, some warning signs that could indicate a deteriorating environment. While personal and student loan default rates remained stable, there was an increase in unpaid balances. That could indicate borrowers are paying less than before, possibly because their financial situation is becoming more difficult, even if they are avoiding default for now.
Work to be done
Overall, I think the second quarter, while uneven, was mostly positive for the company. I think its focus on meeting a broad range of financial needs for a specific type of customer could help it perform well in the future.
But even after the drop, SoFi doesn't look like a value-priced growth stock for my portfolio at its current valuation.
I am concerned about the risks posed by a weak U.S. economy that could weaken further in the coming years. Unlike many larger, more experienced banks, SoFi lacks the experience to weather a U.S. financial crisis.
