SoFi Technologies (NASDAQ:SOFI) highlights broader economic concerns

On paper is the narrative that financial technology (fintech) giant SoFi Technologies (NASDAQ:SOFI) seems extraordinarily convincing. Basically, modern consumers often prefer digital interactions over their analogue counterparts. More importantly, the company recently reported solid earnings results. But deep in the fine print, concerns about shifts in consumer sentiment materialized. Therefore, I am bearish on SOFI stocks.

To be fair, one has to say that the framework conditions for the fintech specialist are optimistic. Earlier this month, SoFi announced its third-quarter results. Corresponding TipRanks Reporter Shrilekha Pethe, the loss per share was $0.09, which didn’t compare favorably to the loss of $0.05 in the year-ago quarter. Still, it beat the estimate of a $0.11 loss.

On the revenue front, SoFi generated a total of $419.3 million. Here, the number topped its 2021 third-quarter earnings by a robust 51% margin. It also surpassed Wall Street’s consensus revenue target of $391.8 million.

To bolster the fundamental case for SOFI stock, management raised its outlook for fiscal 2022. Per Pethe, the company now expects “adjusted net income to be in the range of $1.52 billion to $1.5 billion versus its previous guidance of between $1.508 billion and $1.513 billion.”

“SoFi has also raised its Adjusted EBITDA outlook and now expects it to be between $115 million and $120 million from its previous guidance in the range of $104 million to $109 million,” Pethe continued.

Anthony Noto, CEO of SoFi, added, “Our strong momentum in member, product and cross-buy additions reflects the benefits of our broad product range and our unique Financial Services Productivity Loop (FSPL) strategy. We added nearly 424,000 new members and ended with over 4.7 million total members, a 61% increase over the previous year.”

At SOFI Stock, the devil is in the detail

Looking more closely at the details of Q3, investors will find even more compelling data. According to the company’s accompanying investor presentation, total lending for the quarter was $3.48 billion. This is the biggest record of the year so far. It also represents an increase of 2.4% year-on-year. On paper, circumstances appear to be positive for SOFI stock. However, the devil is in the details.

As the post-pandemic new normal evolved, so did the context of SoFi’s lending. For example, in the first quarter of 2020, most of that balance sheet was focused on student loans, which accounted for 63% of total loan size. However, in the third quarter of 2022, student loans accounted for just 13% of total lending.

Well, that’s not particularly surprising given the impact COVID-19 has had on the broader academic complex. Additionally, a political debate ignited over President Biden’s eventual landmark student debt relief program, putting the issue under a cloud of ambiguity for some time.

During the “meat” of the new normal, home loan originations saw a massive spike for obvious reasons. With then historically low interest rates as an incentive to buy real estate (for financially strong consumers), this sub-segment shot up. In the first quarter of 2020, home loans accounted for just over 10% of total lending. At its nominal peak in Q3 2021, this metric rose to over 23%.

However, by far the biggest “winner” is personal lending. In the third quarter of this year, this sub-segment accounted for almost 81% of all lending. For comparison, in the first quarter of 2020, personal loans accounted for less than 27% of the total.

While most people focus on the total number, ignoring the finer details can have serious consequences for SOFI stock stakeholders.

What is the price target for SoFi stock?

On Wall Street, SOFI stock has a moderate buy consensus rating based on seven buys, five holds and zero sells over the past three months. The average SOFI price target is $7.50, which represents a 60.94% upside potential.

Conclusion: Most personal loans are economically unproductive

To be clear, an excess of lending activity towards the personal loan segment does not necessarily imply negative dynamics. For example, personal loans cover almost everything except home mortgages and student debt. Still, one of the most popular uses of personal loans focuses on debt consolidation. In other words, this segment typically targets either backend consumption or commercially unproductive and therefore non-profitable endeavors.

To be fair, several institutions have sounded the alarm about the student debt crisis. Admittedly, it is a massive problem when young people enter the workforce with long-term commitments. However, most people do not go to college for fun, but to prepare for a career.

Eventually, the borrowed money is then turned into productive endeavors. A similar situation can be said about home mortgages. By signing the dotted line, homebuyers bring economic activity to the entire real estate value chain: agents, brokers, builders, government agencies, etc. Over time, these homeowners can either sell or rent their property, allowing for additional economic activity.

In contrast, personal loans related to debt consolidation imply that the underlying economic activity has already taken place. It also suggests that society as a whole has no future activities to look forward to (e.g. students becoming workers or houses becoming rental properties). In many cases, people in debt are merely relieved to be debt-free and promise never to fall down the hole again.

This is wonderful for the individual debtor. However, in SOFI stock, overexposure to consumer credit suggests a lack of quality in future income streams. As such, it is probably best to be skeptical about SoFi until macroeconomic conditions turn favorable.

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