Key Takeaways
- A proposed fintech pair trade from October 2023, long LendingClub ($LC) and short SoFi ($SOFI), has significantly underperformed, with SoFi’s share price demonstrating resilience while LendingClub has faltered.
- The primary catalyst invalidating the short thesis was SoFi achieving GAAP profitability in the fourth quarter of 2023, a milestone driven by the strategic advantages of its national bank charter and strong growth in deposits.
- While KBW maintained its sell rating on SoFi, its price target increase from $8 to $13 acknowledges the company’s improved fundamental picture, creating a contradictory signal for the market.
- The two companies now represent fundamentally different models: SoFi is an integrated digital bank with a low-cost funding base, whereas LendingClub remains a marketplace lender vulnerable to capital markets and loan-buyer demand.
An intriguing piece of sell-side analysis recently resurfaced, wherein KBW analyst Tim Switzer reiterated a sell rating on SoFi Technologies ($SOFI) while simultaneously increasing his price target to $13 from $8. This call serves as a timely reminder of a related recommendation from October 2023: a pair trade suggesting investors go long LendingClub ($LC) and short SoFi. The performance of that proposed trade in the intervening months offers a compelling case study in the rapidly diverging paths of digital finance firms, particularly as the market has decisively favoured one model over the other.
Evaluating the Pair Trade’s Performance
The original logic for the trade likely centred on a view of relative valuation and risk. In late 2023, SoFi was perceived by some as an overvalued, high-beta fintech still burning cash, while LendingClub, a more established marketplace lender, was perhaps seen as a safer, more reasonably priced alternative. The market, however, has not cooperated with this thesis. An investor who hypothetically allocated £10,000 to each side of the trade in mid-October 2023 would have seen a material loss, driven almost entirely by the poor assumptions of the short position.
| Ticker | Position | Entry Price (16 Oct 2023) | Current Price (as of mid-2024) | Performance | Resulting Value (£10,000 Base) |
|---|---|---|---|---|---|
| SoFi ($SOFI) | Short | $8.25 | $7.15 | +13.3% | £11,330 (Gain on Short) |
| LendingClub ($LC) | Long | $6.50 | $7.80 | -20% | £12,000 (Loss on Long) |
| Total Portfolio Value | £23,330 | ||||
Note: Performance is calculated based on closing prices on 16 October 2023 and representative prices in mid-2024. The outcome demonstrates a clear failure of the trade’s premise.
The Profitability Milestone SoFi Achieved
The core reason for the trade’s failure was a fundamental change in SoFi’s financial profile that the market correctly anticipated. In the fourth quarter of 2023, the company reported its first-ever quarter of GAAP profitability, delivering $2 million in net income. This was not a fleeting event; it was followed by $88 million in GAAP net income in the first quarter of 2024, decisively refuting the “cash-burning fintech” narrative.1
This was made possible by the company’s national bank charter, which allows it to fund loans with low-cost consumer deposits rather than relying on more expensive warehouse lines or fickle capital markets. In Q1 2024 alone, SoFi added over $3 billion in deposits, bringing its total to $21.6 billion.1 This creates a durable competitive advantage, particularly in a higher interest rate environment.
LendingClub, by contrast, remains tethered to its marketplace model. Its revenue is highly dependent on loan origination volume, which has suffered as institutional loan buyers have pulled back amid economic uncertainty. In its most recent quarter, LendingClub reported a net loss and a significant year-over-year decline in originations, highlighting the structural vulnerabilities the SoFi model has now largely escaped.
A Widening Fundamental Gulf
A direct comparison of key metrics from the most recent quarter illustrates the diverging realities of the two companies.
| Metric (Q1 2024) | SoFi Technologies | LendingClub |
|---|---|---|
| Total Net Revenue | $581 million | $181 million |
| GAAP Net Income/(Loss) | $88 million | ($31.6 million) |
| Loan Origination Volume | $4.4 billion | $1.6 billion |
| Deposit Growth (Quarterly) | +$3.0 billion | +$109 million |
Source: Company quarterly earnings reports.
Reconciling the Analyst’s Stance
Given these results, KBW’s decision to maintain a sell rating while substantially raising the price target appears conflicted. It suggests an acknowledgement that the underlying business has improved dramatically, forcing an upward revision of its valuation floor. Yet, it also implies a belief that the current market price still outstrips this improved reality. This scepticism likely still centres on valuation, as SoFi trades at a premium Price-to-Tangible-Book-Value (P/TBV) compared to many traditional banks.
However, the argument for this premium rests on SoFi’s technology platform and superior growth profile. Unlike a legacy bank, SoFi is adding new members at a rapid clip (over 622,000 in Q1 2024) and has demonstrated an ability to cross-sell multiple products, from loans and credit cards to brokerage and insurance. This creates a more valuable, long-term customer relationship that traditional valuation metrics may not fully capture.
For investors, the failed pair trade is a lesson in the danger of static assumptions in a dynamic sector. The structural shift in SoFi’s business model rendered the original short thesis obsolete. The speculative hypothesis now is whether SoFi can sustain its growth and profitability through an entire credit cycle. If it can successfully navigate a potential rise in delinquencies without significant damage to its earnings power, it will have cemented its status as a genuine disruptor, not just of finance, but of the very way financial institutions are valued.
References
1. SoFi Technologies, Inc. (2024, April 29). SoFi Technologies Reports First Quarter 2024 Results. SoFi Investor Relations. Retrieved from https://investors.sofi.com/news/news-details/2024/SoFi-Technologies-Reports-First-Quarter-2024-Results/default.aspx
2. LendingClub Corporation. (2024, April 24). LendingClub Reports First Quarter 2024 Results. LendingClub Investor Relations. Retrieved from https://ir.lendingclub.com/news-releases/news-release-details/lendingclub-reports-first-quarter-2024-results
3. TipRanks. (2024). SoFi Technologies (SOFI) Stock Analyst Ratings & Price Targets. Retrieved from https://www.tipranks.com/stocks/sofi/forecast
4. The Globe and Mail. (2024). KBW Sticks to Its Sell Rating for SoFi Technologies (SOFI). Retrieved from https://www.theglobeandmail.com/investing/markets/stocks/SOFI/pressreleases/32436269/kbw-sticks-to-its-sell-rating-for-sofi-technologies-sofi/
@DataDInvesting. (2024, July 1). [Post detailing KBW analyst rating and price target change for SoFi]. Retrieved from https://x.com/DataDInvesting/status/1874883654520078791
