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A digital bank SoFi Technologies (NASDAQ: SOFI ) hasn't had a good time so far this year. Growth stock is down 26% since early 2024.
A market capitalization of $7.5bn is empty. Does this business, which has reported annual losses for the past few years, deserve such a rating?
It might gain more, meaning the recent fall opens up a buying opportunity for my portfolio? The CEO has been buying SoFi stock for the past few months. Should I do that?
Why SoFi has been falling
SoFi has both fans and critics in the stock market.
It can be seen as an established digital bank and financial services provider that is investing now to build a loyal customer base for the future.
But it can also be seen as just one player in a crowded marketplace, where legacy banks have attempted to capitalize on the innovations of smaller fintechs.
The US economy is not looking good to me. There is a risk that it may be damaged next year. That could increase loan default rates.
That would be bad news for banks in general, including SoFi. But not all listed banks are suffering like this. Bank of Americafor example, it's up 17% this year, with a 34% gain in share price over five years.
So I think the fall in SoFi stock reflects broader concerns than the recession and its possible effects on default rates.
A mixed recent performance
In part I think it's because of the mixed picture presented by the company's performance so far this year.
In the second quarter, there was good news. SoFi reported its third consecutive quarter of profits (using Generally Accepted Accounting Principles or GAAP basis of preparation). Net income was up 20% compared to the previous period.
However, diluted net income attributable to shareholders for the quarter was $8m. For a company with a market capitalization of $7.5bn, that's small beer – although it may be that we see growth from here, the market cap explains.
What about automation? The average annual default rate for both personal loans and student loans was unchanged from last year.
However, there were potential warning signs of the area's deterioration. While personal and student loan default rates were low, there was an increase in unpaid balances. That may suggest that borrowers are paying less than before, possibly because their financial circumstances are becoming more difficult even if they are currently avoiding payments.
A job to be done
On balance, I thought the second quarter, while mixed, was pretty good for the company. I think its focus on meeting multiple financial needs of a specific type of client can help it do well in the future.
But even after the decline, SoFi doesn't strike me as a bargain growth stock for my portfolio at its current valuation.
The risks posed by a weak US economy that could weaken in the coming years worry me. Unlike many of the largest and oldest banks, SoFi has no experience navigating the US financial crisis.
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