SOFI

Big Insider Buying at SoFi: Should You Follow?

Investors seem to be pricing in a recession before it has occurred, so financial stocks have sold off hard. Hit even harder? Newer fintech stocks, which have come onto the public markets within the past five years.

That's because fintechs don't have a long track record to make investors comfortable. After all, it's hard to know how good a lender's underwriting is until after the fact.

Still, many new fintechs do have innovative technology and businesses models, and several operate on the prime end of the credit spectrum, contrary to popular belief.

SoFi (NASDAQ: SOFI) is one of those stocks, and both its CEO and one director have been buying lots of stock over the past month on the open market. With the stock down 62.5% year to date and 80% from its all-time highs, could this mark a bottom for SoFi?

Consistent buys over the past month

Starting on May 13, CEO Anthony Noto began buying SoFi shares, adding to his stake on dips, for a cumulative addition of more than 350,000 shares over the past month for more than $2 million, increasing his stake by more than 11%.

Also between those dates, board member Harvey Schwartz bought just under $400,000 worth of stock, a 24.1% increase to his stake, with most of it coming on Monday, June 13.

Insider buying is certainly a show of CEO confidence and could be a bullish sign -- especially with the stock down so much. Moreover, these buys mark a significant amount of money, even by CEO standards.

However, CEOs can also have blind spots about the macroeconomic picture and aren't always right. After all, many technology software CEOs made large insider buys back in December, only to see unfortunate large declines in their stocks since that time.

SoFi's business model could get it through a difficult economy

When assessing fintech stocks, investors need to know the segment of the population it's targeting. Fortunately, SoFi is targeting a fairly secure segment of the market. Since the company started as a student loan provider and refinancer, it has targeted mostly highly educated people in promising fields, and then cross-selling these well-off consumers with other products such as home loans, personal loans, brokerage and trading, and debit and credit cards. In February, the company received a bank charter, allowing it to collect low-cost deposits and reduce regulatory costs.

SoFi's student loan customers now make an average of $160,000, with a FICO score of 746. The average salary for its personal loans was $170,000, with an average FICO score of 775. And as of the company's last earnings report, its charge-off rates remained very low.

This could, of course, change if the economy goes into a recession; however, given the prime customer base, it's likely SoFi will be able to weather a downturn and make it to the other side.

SoFi is still a growth stock

While SoFi is looking more and more like a bank after receiving its charter, unlike most mature banks, it's growing fast but also losing money. Last quarter, SoFi grew revenue by 49% on an adjusted basis to $321 million, with adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) just above breakeven at $8.7 million. On a GAAP basis, net losses did improve from $177 million to $110 million, but are obviously still negative.

Still, SoFi's business saw a steady uptake in membership, with its third highest quarter ever of customer acquisition, resulting in more members using more products. While the company is still losing money, the lending and technology segments are all contributing positively, with the company's fast-growing financial products segment operating at a contribution loss.

Apparently, there is quite a lot of investment that needs to happen in the financial products segment before revenue flows in. These products include checking and savings accounts, credit cards, and an investing brokerage. However, the financial products segment grew revenue 264% off a small base, while costs grew only 74%. So margins should improve as these offerings scale.

Moreover, since SoFi got its bank charter in February and began offering a 1.25% interest rate on its new accounts, it has attracted a lot of deposits at a rapid rate, totaling $1.2 billion at the end of the first quarter, up to $1.5 billion as of the early Mayearnings call and growing about $100 million per week.

With the bank now live, SoFi could see very strong growth through this year, at least in deposits and new customers. That bodes very well for customer acquisition. Still, SoFi still makes most of its revenue and the vast majority of its contribution profit from lending. Thus, it will have to lend its money well to the new customers coming in, even as the macroeconomic picture remains cloudy.

Is it a buy?

Normally, one wouldn't want to see a bank that's still losing money ramping up its underwriting into an economic downturn. However, there are a few things to consider. One, it's not a certainty we are going to have a recession. Two, SoFi's borrower base, at least on the surface, seems as if it can handle a bout of inflation and perhaps a mild recession, given its high incomes and FICO scores.

Third, the stock has gotten quite cheap by some metrics. It currently trades around a $5.5 billion market cap, just about at book value.

For a stock growing its top line near 50%, trading near book value seems awfully cheap. Yet since the company is sub-scale at the moment, with high stock compensation and other costs, investors are uncertain about SoFi's ultimate level of profitability.

As with many beaten-down growth stocks that don't make profits today, a lot of the SoFi thesis comes down to belief in its business model, predicated on acquiring well-off grad students and then cross-selling them more products over the long term. It also requires a belief in CEO Anthony Noto and his team's ability to underwrite prudently.

Clearly, Noto and members of his team believe in that opportunity and have put their own dollars to work behind that vision at this valuation. Yet as is the case with many high-growth yet profitless tech and financial stocks, an investment takes a certain leap of faith.

It's a risky proposition, but it could pay off big if SoFi underwrites prudently and innovates through this period. SoFi stock is a candidate for the high-risk, high-upside portion of your portfolio, but be careful in your allocation if investing with the CEO. Even if he's betting big on his stock, it's no guarantee of future results, as we've seen earlier this year.

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Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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