It seems that macroeconomic conditions are weakening every day, and in the wake of such sentiment, SoFi Technologies, Inc. (NASDAQ: SOFI) (“Sofi”) has suffered a lot in recent months. The continued decline in stock prices happens even after surprise profit in the last quarter, Q2 2022, as investors continue to believe that Sofi’s risks from macro conditions far outweigh future potential.
I think otherwise. In fact, I think Sofi’s Q3 2022 earnings report will be another surprise. Demand for personal loans has been higher than ever, due to the demand for readily available loans for years, especially during tough economic times when some consumers need additional loans. Additionally, sharp increases in interest rates are pushing people with variable loans such as credit cards to consolidate with personal loans. Therefore, given that Sofi is a financial services platform offering both consumer financial services and loans, I believe that Sofi is in a position to benefit from this underlying trend, which prompted my rating of purchase.
Personal loan application
With the rise of fintech companies such as Sofi, the demand for personal loans has been increasing since 2012. Companies like Sofi have made it easier and more accessible for normal consumers to take out unsecured and secured personal loans from the comfort of their hearth within minutes often. Thus, as the graph below shows, the demand for personal loans has benefited and continues to benefit from a strong secular trend. In 2022, total personal loan debt increased 24% year over year to $178 billion from $144 billion.
Moreover, looking at the data from the New York Federal Reservethe “other” category consisting of personal loans grew by 10% year over year, which was the fastest of all other forms of loans.
Despite the weakening economic conditions and outlook, Americans continue to take out more personal loans. One of the strong reasons for this phenomenon is that personal loan rates are fixed. So if consumers with credit card debt, often at variable rates, are looking to consolidate in times of sharply rising rates, personal loans will be one of the accessible forms of new lending. Additionally, for various other reasons of taking out a loan, be it for financial relief in times of inflation or for home improvement, a personal loan has been popular due to its easily accessible nature through companies like Sofi. Thus, the favorable trend in the personal loan market should continue.
How Sofi Benefits
The development and growth of the personal loan market are clearly favorable to Sofi. Sofi is a financial platform that attracts millions of consumers through its loss leaders such as high-yield checking and savings accounts, credit cards, brokerage services and many other financial services. Then, with an established customer base, the company offers loan products when customers seek one. Since Sofi will already have many data points on its customers through previous relationships, the company will be able to provide loans faster and at more competitive rates, giving consumers more reason to stay on the market. Sofi platform. For consumers, they don’t have to worry about using multiple financial services companies for their daily needs. So, given this platform advantage, Sofi will be one of the biggest beneficiaries of the high demand for personal loans.
Looking at Sofi Second Quarter 2022 Earnings Report, I think it makes sense to say that Sofi could beat expectations in the next earnings report on top of a strong personal loan trend. First, as the charts below show, Sofi’s membership and product growth has continued to increase at a rapid pace, increasing potential future customers and making services more accessible, personalized and widely available through product expansion.
Finally, even in the prior quarter, Sofi outperformed on top of strong personal loan demand with a 91% year-over-year increase in loans. I think this data proves the strength of Sofi in the market. Sofi was able to significantly outpace the annual personal loan market growth of 24% year-over-year. Therefore, given the strengthening of Sofi’s platform and the continued growth of the personal loan market, I believe that Sofi will be able to surprise investors in the upcoming November 1 earnings report.
Some investors may point out that personal loans have higher average default rates than other forms of loans, making an investment in Sofi unsafe in tough economic times. While this argument may be true in the future, the data suggests these fears are overblown. According Experian, crime rates are still at historically low levels. As shown in the image below, given the continued low delinquency rate, I think the concern that the potential delinquency rate is overstated.
Also, given Sofi’s major customers, average market default rates may not affect Sofi as much as investors fear. The average Income of Sofi loan product customers exceed $100,000 per year, about $30,000 more than the actual median household income, according to the FED of Saint-Louis. So, given the relatively higher incomes of Sofi’s customers and still low delinquency rates, fears of a mass default on Sofi’s personal loan products may be overblown.
Many investors view Sofi as extremely risky, especially in the current macroeconomic environment, as the company is not yet profitable. However, given the strength of the balance sheet, rapidly improving finances and positive net cash operation expected in 2023.
First, Sofi has an extremely strong balance sheet. The company has approximately $700 million in cash, or approximately 16% of total market capitalization in cash, with a total liabilities to assets ratio of approximately 56.5%. Moreover, the business losses have improved considerably. Sofi posted a loss of 26 cents per share in 2021Q2, which improved to $12 per share in 2022Q2. These levels in the coming months in 2023 are expected to turn positive. Of Sofi’s three main businesses, lending, technology and financial services, only financial services are unprofitable, which has been the source of the company’s losses, citing marketing and products. call for growth. Through optimization and growth, the company expects this segment of the business to also turn positive by the end of the year. end of 2023. Therefore, given the company’s strong financial health and expected improvements in operations, I do not believe that the company’s current losses will be an impediment to Sofi’s future growth and vision.
I expect Sofi to surprise in the upcoming Q3 2022 results on November 1st. Personal lending, which has been strong in recent years, continues to be strong as consumers seek debt consolidation and easily accessible debt, and because Sofi has proven to be able to capitalize on this opportunity by increasing its personal borrowings faster than market growth, I think Sofi will surprise investors in the upcoming earnings report. Therefore, I think Sofi is a buy.