SoFi Is Still A Sell On Macro Headwinds

Introduction

In my previous article written in July, I had a sell rating on SoFi (NASDAQ:SOFI). At the time, I believed that the company was facing or was expected to face significant headwinds going forward due to the macroeconomic conditions while receiving a premium valuation. Thus, I believed that the company was too expensive. Today, even after about 17% decline in the stock price at the time of writing, I still stand by my sell rating. In fact, I continue to believe that SoFi's valuation is too expensive today as there has been more evidence of macroeconomic conditions that could create potential headwinds for SoFi. Therefore, as more concrete evidence of negative macroeconomic headwinds arises for SoFi, including continuing delinquency and waning demand for new loans, I believe SoFi is a sell, especially considering the company's premium valuation.

Worsening Macroeconomic Trends

In my previous article, I pointed out the rising delinquency rates in consumer loans as an early sign of weakening consumers' overall financial health. Today, the delinquency rates have further worsened, clearly showing the market trajectory.

As the picture below from the St. Louis Federal Reserve shows, since the trough during the pandemic, delinquency rates on all consumer loans have been increasing with no clear signs of ending likely signaling that consumer financial health is getting weaker.

Personal savings rate data further supports this claim. As the chart below shows, the personal savings rate has been in decline throughout the past few months signaling that consumers' financial health is far from an optimal position as it is in decline.

(Chart created by author using St. Louis Federal Reserve data)

This could pose a significant risk to SoFi, although the company continues to say that its customers have high income and credit scores. In any economic condition, financially weaker consumers are affected first. I believe that the continuation of the increasing delinquency rates in the market shows that the pain is continuing to spread, which could eventually affect SoFi's more well-off customers. In other words, as the overall delinquency continues to increase with no signs of slowing, it is inevitable that even higher-income individuals will be affected over time.

This negative view against SoFi, in my opinion, is further backed by other macroeconomic data suggesting a slowdown in personal loan demand. Today, the US economy continues to be strong in terms of GDP growth according to the U.S. Bureau of Economic Analysis as the organization revised the US GDP growth upward to 2.2% from 2%. However, the combination of a strong economy and high inflation rates have resulted in the federal funds rate being at 5.5% causing pain to borrowers as it became significantly more expensive to get a loan. This trend has likely led to a slowdown in demand for personal loans.

Looking at data from TransUnion (TRU) released on September 14th, 2023, the year-over-year change in personal loan's total balance was up about 21%; however, the origination of new personal loans declined by 15.5%. Regarding this data, TransUnion said that the consumers are using "credit products as a way to get by," which is explained by "the continued growth in balances in existing accounts." Further, "at the same time, a consistent trend of rising interest rates over the last year has led many of those same consumers to avoid originating new loans and lines of credit in favor of leveraging existing ones they already have."

With high interest rates, it is likely for consumers to shy away from originating new loans, but unfortunately, as SoFi relies on continued strength in demand for personal loans for growth, I believe the current state of the market could negatively affect the company. During 2023Q2, personal loans represented 85.4% of the company's total loan originations, including student loans and home loans. Thus, a slowdown in personal loans could be impactful for SoFi, which may be the case as personal loan originations are showing signs of slowing due to current economic conditions.

Overall, consumer loan delinquencies are rising, signaling that consumers' financial health is not in an optimal position, which could impact SoFi. This claim is further supported by the continuing decline of personal savings data for the past few months. Finally, likely due to higher interest rates, the demand for personal loans has started to show signs of decline. These macroeconomic conditions, in my opinion, will likely hurt SoFi as the company is exposed to consumer loans while heavily relying on personal loan originations for its growth.

Concerning Valuation

While I view macroeconomic conditions to be a headwind for SoFi, the company enjoys a premium valuation. Today, the company has a market capitalization of about $7 billion with a 2024 forward price-to-earnings ratio of about 230 followed by a 2025 forward price-to-earnings ratio of about 35. The valuation multiples are indeed high due to the company's expectation to reach profitability this year, which is a monumental achievement; however, even then, I believe SoFi is priced to perfection in a market where headwinds are forming as the company is currently valued at about 35 times fiscal 2025 earnings.

It may be reasonable to argue that SoFi deserves the valuation premium due to the strong growth rate. For fiscal 2023, the company is expected to grow its revenue by about 31% followed by a 24.3% increase for fiscal 2024. However, it is the case that the company's revenue has shown a declining trend for the past few years as the chart below shows.

(Chart created by author using Source 1 and Source 2)

It is natural for a company's revenue growth to slow as the size of the company grows. However, given that SoFi has a 2025 forward price-to-earnings multiple of 35 even while the revenue growth is slowing and macroeconomic conditions are weakening, in my opinion, raises a concern.

Risk to Thesis

The biggest risk to my bearish thesis could come from SoFi outperforming negative expectations backed by strong demand for personal loans. Personal loans are commonly used to consolidate debt or fund projects such as home renovation, weddings, honeymoons, etc. Starting with consolidating debt, if an individual has a credit card debt, one might be incentivized to take out a personal loan to consolidate the debt as credit card debts often carry higher interest rates. Further, as mentioned above, the US economy is still strongly reflected by the GDP growth, and because honeymoon, home renovation, or other projects are mostly discretionary and show of confidence by the consumers, strong US GDP growth could aid these projects creating demand for personal loans despite higher interest rate environment. Therefore, investors should closely monitor the company's results in the upcoming earnings report on October 30th.

Summary

The market conditions, in my opinion, are not favorable for SoFi today. The macroeconomic environment is creating a headwind. Delinquency rates on consumer loans are continuing to rise with no clear signs of slowing down while the high interest-rate environment is dampening the demand for new loan originations, which could be impactful to SoFi. Further, while this is the case, SoFi enjoys a premium valuation. Therefore, considering the potential macroeconomic headwind and SoFi's premium valuation, I believe SoFi is a sell.