On the front of the matter, online personal finance firm SoFi Technologies (SOFI) generated unexpectedly-strong results for its Q2-2022 earnings report. Much of the enthusiasm centered on the performance being strong amid powerful economic headwinds. While SOFI stock continues to maintain its momentum following the disclosure, analysts appear to be glossing over one key detail. I am long-term bearish on SOFI stock.
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As TipRanks reporter Swati Goyal mentioned, the financial technology (fintech) specialist delivered results in Q2 that “improved significantly from the year-ago quarter and beat Wall Street’s expectations. Also, the company raised its full-year guidance.” Following the report, SOFI stock rallied almost 8% in extended trading hours as investors reacted positively to the surprisingly optimistic print.
Per Goyal, “Revenue in the quarter increased 50% from the year-ago quarter to $356.1 million, beating consensus estimates of $340.87 million. The increase was driven by growth in all three of the business segments — Lending, Technology Platform, and Financial Services.”
On the bottom line, SoFi “posted a loss per share of $0.12, a significant improvement from the loss of $0.48 per share in the year-ago quarter.” Further, this figure beat the Wall Street consensus, which was calling for a loss of $0.14 per share.
If these outstanding results weren’t enough, during the quarter, “SoFi Technologies added over 450,000 new members. It exited the quarter with 4.3 million members, a 69% increase from the year-ago quarter. The company also added 702,000 new products, a 79% increase from the year-ago quarter.”
In light of such outstanding news, what could possibly be wrong? The devil, as it turns out, is in the details.
Interestingly, on TipRanks, SOFI has a 5 out of 10 Smart Score rating. This indicates moderate potential for the stock to perform in line with the broader market.
SOFI Stock and the Curious Loan Origination
As a financial firm at its core, SOFI stock benefits tremendously from the underlying company distributing loan products and accruing interest from them. Of course, some loan categories are “better” than others depending on the underlying economic circumstances, and one loan origination line item stood out from the others.
Indeed, on a year-over-year comparison in Q2, it was glaringly obvious. Per SoFi’s investor presentation, student loan originations were nearly $399 million, down 53.6% from the year-ago quarter. Similarly, home loan originations were $332 million, down 58% during the aforementioned period. So, what was left in the loan category? Personal loan originations. This metric almost doubled to $2.47 billion from more than $1.29 billion against the prior-year level.
Interestingly, in Q1 2020, SoFi’s investor presentation demonstrates that student loans represented the lion’s share of total loan originations. At $2.13 billion, this tally represented a whopping 63% of all loan originations.
In contrast, the latest Q2-2022 earnings report shows that personal loans have taken the mantle to a staggering 77.2% of all loan originations. This is the key reason why many analysts covering SOFI stock state that the underlying company needs the federal moratorium on student loans to end before shares can really blossom.
Adding to the point, comparing year-end 2020 to the last-12-months (LTM) period, only personal loan originations stood out as the sole winner. Back in 2020, personal loans amounted to $2.58 billion. In the LTM period, it was $7.78 billion. In comparison, student loans slipped almost 23%, while home loans declined by 4%.
The Issue with Personal Loans
To be clear, the lending industry is almost as old as human civilization. Therefore, this focus on SoFi’s personal loan originations isn’t meant as a criticism of the practice. Many people require loans for a variety of reasons. That said, certain loans are geared toward economically productive endeavors.
For instance, while critics lash out at the gargantuan size of U.S. college debt, the reality is that students attend institutions of higher education to improve their odds of acquiring a high-paying job. Of course, nothing in life is guaranteed, and some degrees may be more competitive in the modern workforce than others.
That’s a different story for a different day. For the purposes of discussing SOFI stock, student loans represent a rational investment toward a (hopefully) economically productive future.
Likewise, home loans are tied to prudent financial endeavors. Here too, critics can lash out at the wisdom of buying residential real estate during what looks to some analysts as a bubble. Again, it’s a different story for a different day. The main point is that most people buy homes with the understanding that they can build equity, something that’s not possible with renting an apartment. Further, real estate (especially in high-demand locales) tends to rise in value over time.
However, personal loan originations could mean anything; essentially, whatever doesn’t fit the above two categorizations. Personal loans include diverse motivations such as covering medical expenses, making home improvements, and responding to an emergency. Among the most popular reasons is debt consolidation.
What really stands out, though, is that most of the reasons that people take out personal loans are not economically accretive. In many cases, the expenditures tied to accretive activities have already been spent; it’s just that the payer is now trying to get out of a financial hole.
Arguably, this is not the greatest argument for SOFI stock over the long run.
What is the Price Target for SoFi Stock?
Turning to Wall Street, SOFI stock has a Moderate Buy consensus rating based on five Buys, three Holds, and no Sell ratings. The average SOFI price target is $9.31, implying 22.2% upside potential.
Conclusion: SoFi’s Long-Term Prospects Aren’t Highly Attractive
Despite the concerns about personal loan originations, it cannot be denied that SOFI stock has blossomed since the Q2 report. It’s trading about 19% higher than it was before the report. Nevertheless, with the company’s business mostly tied to non-accretive activities, this circumstance likely cannot last if broader economic conditions don’t improve.
