The Bull Case For SoFi

The market reaction to SoFi’s latest second quarter earnings results was brutal.

The company lost more than 14% of its value overnight, with investors spooked by a $165 million net loss and a subsequent failure by management to revise its own full year guidance.

But the bulk of the earnings report was fairly positive, and the maverick FinTech firm saw growing usage metrics resulting in revenues up 74% year-on-year. 

With the company’s share price as low as it is, is this the right time to buy SoFi stock – or is the fledgling industry disruptor now in terminal decline?

SoFi Is The Only FinTech Company That…

SoFi Technologies, Inc. (NASDAQ:SOFI) has three main core business segments, each ensuring a diverse revenue mix with plenty of potential for growth. The three segments break down as follows:

• Lending – personal loans, homes loans and student finance;
• Financial Services – savings, investments, credit and debit cards, SoFi Money and cryptocurrencies;
• Financial technology – infrastructure solutions via the recently acquired Galileo platform.

Through the use of its personal finance platform, the company has ambitions to be a one-stop for all things digital banking.

Indeed, SoFi (SOFI) began as a specialist in the student loan refinancing space, with the intention being to capture a young clientele base and cross-sell them a variety of banking and financial products over the course of their patronage.

SoFi is the only FinTech company that provides all of its services in one centralized application.

In addition to consolidating the Zoomer and Millennial markets, SoFi’s CEO Anthony Noto has said that he wishes also to go after the 500 million accounts that are still operated by legacy FDIC institutions. 

SoFi’s lending business continues to grow by double digits, with $166.3 million in revenue representing a 73% year-on-year increase.

The segment grew profits by 80% as it contributed $89.2 million of earnings to the firm, and this was done in an environment where student loan originations were depressed relative to pre-pandemic levels. Despite this, the shortfall was made up with an increase in personal loans of 188% and home loans of 49%.

It’s in the company’s Financial Services wing where SoFi (SOFI) experiences the most potential for expansion.

This quarter saw its Financial Services revenue shoot up from $2.4 million in Q2’20 to $17.0 million, with the SoFi Invest business being the largest driver of those revenues.

The number of Financial Services products more than tripled to 2.7 million in the past year, as the company rolled out a host of new investment options such as a weekly dividend paying ETF, as well as a new SoFi Credit Card business and fractional share and crypto trading instruments.

Galileo Is A High Potential Vertical Integration Play

However, it’s SoFi’s Galileo platform that is perhaps its most interesting offering. Galileo is an on-premise and Cloud technology infrastructure provider that is used by both SoFi and a growing number of outside clients.

SoFi integrates Galileo into its SoFi Money and SoFi credit card products, saving money on payment processing costs since they own the technology. Other companies such as Robinhood, MoneyLion and Chime also use the platform to power their own products, and over the last year Galileo doubled its account numbers through new and existing customers from 36 million to almost 79 million.

With its continued vertical integration into SoFi’s own business, Galileo saves the company from having to contract with third party firms to run those services. Furthermore, SoFi is developing more business-to-business and enterprise clients, taking the platform from just a consumer-facing technology to one that is increasingly becoming a powerhouse for the entire FinTech industry.

It’s not unrealistic to imagine Galileo becoming the Amazon Web Services of the financial sector, and funneling huge revenues to SoFi in the process.

SoFi Quarterly Earnings Results

SoFi’s recent financial results were the first to be published since the company went public in June, and despite the deep sell-off following the news, the numbers contained within it weren’t so bad.

The firm’s net revenue of $237.2 million was a company record, and beat expectations by $18.6 million, but bottom line earnings of -$0.48 missed Wall Street forecasts by $0.42.

However, that miss originated from a onetime deferred tax liability, and was about the worst that things got for SoFi this quarter.

In fact, the rest of the report reflected a company executing well on its long-term ambitions, and should have been much more reassuring to investors than was initially received.

Customer count continued to explode this quarter, with the company registering 279,000 new members in Q2. The firm also witnessed its 8th consecutive quarter of year-on-year growth, bringing in a total membership of 2.56 million. 

The company’s adjusted EBITDA for the last twelve months was positive for the first time in four years, with a profit of $61 million from revenues of $852 million.

Its Q2 profit was up $35 million year-on-year, and up sequentially from $4 million to $11 million. SoFi also has direct access to $462 million of cash, and debt of $2.3 billion.

SoFi Banking Charter Absent… But Not For Long?

From the outside, SoFi might look like a bank and operate like one too, but the company does not have a banking charter, depriving it of certain privileges and abilities that official banks possess.

The firm is in the process of applying for a charter, however, and received conditional approval late last year, having bought out Golden Pacific Bank in March 2021 in a bid to further move the decision along. 

There are many benefits of acquiring a charter, including the ability to lower the cost of capital and increase the net interest margin from holding loans for longer.

Holding a charter also makes an institution more durable, and facilitates growth in lending over the long-term. Should SoFi fail in its bid to impress regulators and not get its charter, the repercussions would be severe and could seriously harm the business.

SoFi Could Be Seriously Undervalued

SoFi is a bit of a puzzle from a value position because the company is so well diversified. Its range of products is unlike any other financial business, and the potential of its Galileo platform could be so large that it would be easy to underestimate it by a few orders of magnitude. 

That said, SoFi can still be classed as a FinTech growth stock, and can be measured up against other similar companies in the field.

Taking as a yardstick the trailing twelve month price-to-sales ratio (P/S) of two early stage FinTech firms, Lemonade (LMND) and Upstart (UPST) – with P/S multiples of 45 and 20 respectively – we can see that SoFi’s ratio of just 18 makes the company a bargain. 

SoFi’s gross profit margin of 72% is also good compared to the Financials sector median of 63%, and the growth breakdown of its individual segments is enough to make any business in any industry jealous.

Is SoFi A Buy?

Investors looking to add exposure to this stock couldn’t pick a better time to enter to fray than now, as the recent sell-off has the company trading at a discount of 41% to its yearly high of $23.89.

Ignore the negative reaction to what was actually a stellar quarter, and expect SoFi shares to return to pre-earnings levels.

Analyst Peter N. Ackerson believes SoFi “should be proud” of its performance so far, while Sean Horgan sees the company hitting the $30 mark soon. Buy now and wait for the inevitable correction to come.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.