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prologue
Macroeconomic conditions seem to be weakening day by day, and as a result of such sentiments, SoFi Technologies, Inc. (Nasdaq: SOFI) (“Sofi”) stock has fallen significantly over the past few months.Stock prices continue to fall come even after earnings surprise Investors continue to believe that Sophie’s risks due to macroeconomic conditions far outweigh its future potential.
I don’t think so. In fact, Sofi’s Q3 2022 earnings report will come as a surprise to him. Demand for personal loans is higher than ever after years of demand for easily accessible loans, especially in times of economic hardship when some consumers need additional loans. Additionally, the sharp rise in interest rates has forced people with variable loans, such as credit cards, to consolidate with their personal loans. Therefore, as Sofi is a financial services platform that serves both consumer financial services and loans, I believe Sofi is well positioned to benefit from this potential trend, prompting my purchase evaluation. I’m here.
personal loan demand
The rise of fintech companies such as Sofi has increased the demand for personal loans since 2012. Companies like Sofi have made unsecured and secured personal loans easy and accessible for ordinary consumers from the comfort of their own home. Therefore, as the chart below shows, demand for personal loans is strong and continues to maintain a strong long-term trend. In 2022, total personal loan debt increased 24% year-over-year, from $144 billion to $178 billion.
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Additionally, data from the New York Federal Reserve shows that the ‘other’ category, which consists of personal loans, grew 10% year-over-year, the fastest of all other forms of loans. .
Despite weakening economic conditions and prospects, Americans continue to take out more personal loans. One strong reason for this phenomenon is that interest rates on personal loans are fixed. Therefore, for consumers with credit card debt, often at floating rates, who are looking to consolidate their debt during a period of skyrocketing interest rates, personal loans are one of the new available forms of loans. increase. And when people take out loans for a variety of reasons, like financial relief during inflation or home renovations, personal loans are popular because they are easily accessible through companies like his Sofi. As a result, the strong personal loan market is expected to continue.
Benefits of Sofi
The rise and growth of the personal loan market is very favorable for Sophie. Sofi is a financial platform that attracts millions of consumers through loss leaders such as high-yield checking and savings accounts, credit cards, brokerage services and many other financial services. And with an established customer base, the company offers loan products when customers want them. Sofi already has numerous data points about its customers through previous relationships, allowing the company to provide loans faster and at more competitive rates, keeping consumers on his Sofi’s platform. more reasons. Consumers don’t have to use multiple financial services companies to meet their daily needs. Sophie will therefore be one of the biggest beneficiaries of strong personal loan demand given the advantages of this platform.
Looking at Sofi’s Q2 2022 earnings report, I think it’s fair to argue that, in addition to strong personal loan trends, Sofi could beat expectations in future earnings reports. First, as the chart below shows, Sofi’s member and product growth has been increasing at a consistently fast pace, increasing potential future customers and making services more accessible and personalized through product expansion. and make it widely available.
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Finally, Sofi also outperformed last quarter with a 91% year-over-year increase in loan originations on top of strong demand for personal loans. I think this data proves Sofi’s strength in the market. Sofi was able to significantly outperform the market’s personal loan annual growth rate of 24% year-over-year. So, given Sofi’s enhanced platform and continuously growing personal loan market, we think Sofi will be able to surprise investors with his November 1 earnings report.
risk
Some investors may point out that personal loans have a higher average delinquency rate than other forms of loans, making investing in Sofi risky during difficult economic times. While this argument may be true in the future, data suggests these concerns are exaggerated: delinquency rates are still at historically low levels, according to Experian. I think fear of potential delinquencies is exaggerated given the continuously low delinquency rates, as the chart below shows.
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Moreover, given Sofi’s key customers, the average delinquency rate in the market may not affect Sofi as much as investors fear. According to the St. Louis FED, the median income of Sofi loan product customers exceeds $100,000 annually, which is about $30,000 higher than the actual median household income. So, given the relatively high incomes of Sofi’s customers and the continued low delinquency rates, concerns that Sofi’s personal loan products will default on a large scale may be exaggerated.
Finance
Many investors consider Sofi to be very risky, especially in the current macroeconomic environment. However, given its strong balance sheet, rapidly improving financials, and expected net cash plus operations in 2023.
First, Sofi’s balance sheet is very strong. The company has approximately $700 million in cash, or approximately 16% of its total market capitalization, in cash, and a total debt-to-asset ratio of approximately 56.5%. In addition, the company’s losses have improved significantly. Sofi reported a loss of 26 cents per share in the second quarter of 2021, while in the second quarter of 2022 he improved to 12 cents per share. These levels are expected to turn positive in the coming months of 2023. Of Sofi’s three main businesses – lending, technology and financial services – financial services is the only unprofitable one, citing marketing for growth and loss leader products to lead the company’s losses. rice field. Through optimization and growth, the company also expects this business segment to be profitable by the end of 2023. Therefore, given the company’s financial health and the expected improvement in the company’s operations, I don’t think the company’s current losses are significant. It interferes with Sofi’s future growth and vision.
Overview
Expect Sofi to surprise you with its Q3 2022 earnings, which are scheduled for November 1st. Personal loans, which have been strong over the past few years, remain strong as consumers seek debt consolidation and easily accessible debt. As Sofi has proven it can take advantage of this opportunity by increasing its personal loan debt originations faster than ever before. Given the market’s growth, we think Sofi will surprise investors with its upcoming earnings report. Therefore, I think Sophie is a buy.
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