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The Big Red Flag That Spells Trouble for SOFI Stock Investors - Stock Market Latest

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On the surface, SoFi’s (NASDAQ:SOFI) first-quarter results looked quite good. In fact, the company delivered beat-and-raise earnings which tend to thrill investors. But since the lender reported the results on May 1, the shares have tumbled 18%. There appears to be a specific reason for the decline, and the issue could be a huge red flag for SoFi and SOFI stock.

A Greater Reliance on Personal Loans

Responding to the student loan moratorium, SoFi has relied to a greater extent than usual on personal loans. Indeed, it now reportedly generates over $3 billion quarterly of such loans, and it holds more than $9.5 billion of the transactions.

SoFi regularly sells these loans after short periods in order to avoid taking “any meaningful provision for credit losses.” However, it did not unload any of its personal loans marked available for sale last quarter.

Why Many of the Loans Could Be Problematic

The fact that SoFi was not able to sell its personal loans raises a number of red flags.

That’s particularly the case since the company’s core business is providing student loans, so most of its  client base likely consists of individuals who have obtained student loans in the past.

As is well-known, many individuals who have taken large amounts of student loans find it very difficult to pay them back and face tremendous financial pressures. Consequently, many of the consumers who may have taken personal loans from SoFi could be in very tough straits financially and have trouble paying back the loans.

Add in higher interest rates and elevated inflation, and there are many reasons to believe that many of the individuals to whom SoFi provided loans could have trouble repaying them.

And the institutions that usually buy SoFi’s personal loans may have discovered such a problem, explaining why the company was not able to sell any of its personal loans last quarter.

Another Bad Sign and a Balance Sheet Issue

In my previous column on SOFI stock, I noted that the company had in March sued President Joe Biden’s administration over the student loan moratorium. Since the moratorium is slated to end in August, I found it odd that the company took the step of antagonizing the administration over the seemingly rather trivial $6 million of profits that it claimed it would lose as a result of the latest extension of the payment freeze.

But if SoFi is in hot water because of problematic personal loans, the lawsuit would make sense, since, in a crisis, even $6 million could be crucial for the lender.

As far as the company’s balance sheet is concerned, the loans could become very problematic for the company and for SOFI stock. If the company, for example, takes a 20% loss on those loans, that will amount to $1.9 billion.

As of the end of March, SOFI had $2.49 billion of cash on its balance sheet and it already had $6.26 billion of debt. So one can see how the company could get into rather deep trouble if its personal loans do perform badly in the future.

The Bottom Line on SOFI Stock

As I pointed out in my previous column, SoFi does have other issues, including potential problems with regulators over its crypto operations and a possible, upcoming forgiveness of a large amount of student loans.

Given the company’s huge, potential challenges, investors should sell their SOFI stock at this point.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been PLUG, XOM and solar stocks. You can reach him on Stocktwits at @larryramer.

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