SoFi: Buy, Sell, or Hold?

SoFi Technologies (NASDAQ: SOFI) has made excellent progress in diversifying its business into becoming a one-stop shop for customers' financial needs. It has also expanded its technology platform, which lets non-bank companies offer financial products to their customers.

These growing businesses have helped SoFi report its third consecutive profitable quarter, but the stock continues to struggle and is down by a third this year. What's holding SoFi back is its significant personal loan portfolio and related charge-offs .

Investors got some positive news on this front during the company's second-quarter earnings call. But is it enough to make the stock an attractive buy today? Let's dive into the good and bad of it for SoFi and where things go from here.

SoFi's credit quality has been a point of concern

Early on, SoFi's primary business was helping customers refinance their student loan debts. This changed in 2020 when the pandemic hit, as the federal government placed a moratorium on student loan payments -- leaving top lenders like SoFi scrambling to change their businesses.

One area that SoFi leaned into was personal lending , a natural transition, as it had already been heavily involved in lending. Over three years, SoFi's personal loan originations grew from $2.6 billion to $13.8 billion by the end of 2023.

This pivot helped buoy SoFi's business, but has also left it vulnerable to the ebbs and flows of the economic cycle. The main concern is the consumer and rising net charge-offs and delinquencies across the banking sector.

SoFi's annualized net charge-off ratio in Q2 was 3.84%, which increased from 3.45% in the previous quarter. During the quarter, SoFi sold $69 million of late-stage delinquent loans. Without selling those loans, its annualized net charge-off on personal loans would've been about 5.4%. Investors are concerned about SoFi's loan book and a potential revaluation of loans if credit losses continue rising.

Image source: Getty Images.

On a positive note, personal loans 90 days or more past due was 0.64% of the portfolio in the quarter, down from 0.72% in the first quarter. During the company's Q2 earnings call, Chief Executive Officer Anthony Noto told investors that he is "encouraged by the trends we're seeing in credit."

One trend Noto and Chief Financial Officer Chris LaPointe pointed out was the performance of personal loan vintages, which shows improving credit performance for newer loans compared with older ones. At the end of 2022, the company began to tighten lending standards and slow the pace of personal loans, and these newer loans have performed better.

Here's what is driving SoFi's growth this year

Concerns about its credit quality continue to overshadow some of the more positive news for SoFi. For example, the company has posted three consecutive profitable quarters and recently raised its full-year earnings projections as its Financial Services and Tech Platform segments become a more important part of its overall business.

In Q2, SoFi's reported revenue of $598 million beat average estimates of $565 million. Its Financial Services segment, which accounts for its financial products, including SoFi Money (checking and savings accounts), SoFi Invest, credit card, and personal finance management, raked in $176 million, representing 80% growth from last year. Meanwhile, its Technology Platform segment revenue was $95 million and grew 9% from last year.

SOFI Revenue (Quarterly) data by YCharts.

These two segments comprise about 45% of SoFi's adjusted net revenue and have become an increasingly important part of its overall business . Last year, these segments were 38% of adjusted net revenue, and 32% the year before that.

SoFi projects that its financial services revenue will grow 80% from last year, while its tech platform will grow in the mid- to high teen percentages. It expects lending revenue to be about 5% lower than last year as it maintains tighter lending standards. It also raised its full-year revenue forecast to $2.45 billion at the midpoint, above its past estimate of $2.41 billion, and it expects net income of $180 million at the midpoint.

Buy, sell, or hold SoFi?

SoFi has done an excellent job reinventing its business during the past several years amid a challenging backdrop for lending. Its financial services and tech platform businesses are growing steadily, but investor concerns about credit quality now overshadows that growth.

Management believes it has hit an inflection point for its loan portfolio and that things are looking up from here. Investors should continue monitoring SoFi's personal loan portfolio performance, including net charge-offs and delinquencies, which could weigh on the stock in the short term.

For this reason, SoFi stock is vulnerable to further volatility as things unfold and may not be suitable for all investors. However, the longer-term growth story remains intact. With the stock valued at just 2.9 times sales, near its lowest valuation since going public, I think SoFi is an excellent buy today for long-term investors willing to hold on for the next five years or more.

Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .