I was wrong about SoFi Technologies (NASDAQ:SOFI) stock. After three years of waiting for a return on my investment, I sold my shares recently, at a loss.
The stock currently sells at about $7/share. If you got in a year ago, when it traded near $5, you’re in great shape. But I’d still recommend you sell it.
Here’s why.
SoFi Stock and Consumer Banking
SoFi has evolved into a consumer bank. Its main business is taking deposits and making loans, for houses, for education, and for other life expenses.
This can be a good business. It’s certainly growing for SoFi. SoFi revenues last year passed $2.1 billion. They were $1.57 billion in 2022, and under $1 billion the year before that.
The problem is that SoFi continues to lose money, because SoFi wants to be much more than a consumer bank.
As I wrote last November, it offers banking software through Technisys, banking services through Galileo, and automates risk management through Konecta.
It competes with Robinhood Markets (NASDAQ:HOOD) in brokerage. CEO Anthony Noto talks of it becoming a “10-bagger,” delivering 10-for-1 returns to investors.
I bought this hook, line, and sinker. I defended the company after bad earnings last year, when it fell from $10/share to $8.
But it’s still just a bank. Banks are defined by their “yield spread,” the difference between what they pay for money and what they rent it for.
But SoFi’s spread is narrower than the big banks it competes with. That’s because it’s paying depositors 4.5% for their money, with no account fees.
Banking Breaking Bad
I wasn’t just wrong on SoFi. I was wrong about the whole banking sector.
I figured that once money started costing money, as it does now, selling money should be a great business. But banks are leveraged. They compete with private equity companies that aren’t.
Banks face regulation private lenders don’t. They also hold reserves against deposits, whose return could be lower than what’s needed to run the business. Watch those maturities!
Against this backdrop, SoFi is also taking low-quality credits. I love millennials and have two of my own. But lending to low net-worth borrowers carries risk. SoFi reported 4.8% of its loans were in default at the end of March.
SoFi keeps seeking new niches that might offer a greater return. Buying Wyndham Capital last year got it into home loans, but it hasn’t expanded that niche. Its growth in the March quarter was still in personal loans.
That’s why professional money managers have soured on SoFi. Tipranks now has just as many buyers as sellers, 4, with eight on the fence.
Traders at Stocktwits remain bullish, copying Noto’s statements like he’s Warren Buffett of Berkshire-Hathaway (NYSE:BRK-A) (NYSE:BRK-B). He’s not.
This doesn’t mean you can’t make money in SoFi stock right now. The stock might even go up from here. The question is how much you might make and whether that is worth your time.
The Bottom Line
Watching TV analyst Jim Cramer’s contortions over the Starbucks (NASDAQ:SBUX) quarter, I was reminded of an old investment aphorism. Not all good companies are good investments.
SoFi is a good company. Noto is a good operator. In the present economic cycle, it’s just not a great investment.
There’s always an opportunity cost in what you own. I decided my money could be doing something else. I could own Amazon. Com (NASDAQ:AMZN), or Nvidia (NASDAQ:NVDA).
If you insist on owning banks, buy JPMorgan Chase (NYSE:JPM). If you really need diversification, PepsiCo (NYSE:PEP) isn’t a bad bet.
But you learn to pull the plug on what doesn’t work. Selling is the hardest lesson investors learn. Not everything works. SoFi didn’t.
As of this writing, Dana Blankenhorn had a LONG position in AMZN, NVDA, and PEP. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
