SOFI - Dave Vs. SoFi: Goliath The Likely Winner

2023-03-27 04:16:28 ET

Summary

• Dave and SoFi are both fintech companies that set out to challenge traditional banks and that went public via SPACs.
• Both offer checking accounts but SoFi offers materially more financial products. This drove an 11.9x difference in revenue per member versus Dave for the fourth quarter.
• Dave's trailing 12-month PS ratio at 0.34x comes in at a material difference to SoFi's 3.28x multiple. This gap closing would form the basis of positive returns for Dave's shareholders.
• Whilst both are loss making, SoFi is a significantly more profitable company and had a net income margin of -9% versus -36% for Dave.

Dave ( DAVE ) and SoFi ( SOFI ) both went public via blank check firms during the 2021 - 2022 SPAC boom and bust. Both have fallen markedly below their initial $10 SPAC reference price in a more than year-long rout of fintechs. I don't think this downtrend will be reversed this year as the Feds funds rate remains elevated according to comments from Powell and is likely set for one further 25 basis point hike. Which fintech stands to perform better through 2023?

SoFi has a materially larger product range from banking, loans, credit cards, mortgages, and auto insurance. Dave offers mobile banking through its app and also allows its members to take out a cash advance. It's important to note that Dave does not own an FDIC-regulated bank like SoFi with its deposits managed through a partnership with Evolve Bank & Trust.

Performance for Dave over the last year has been dire with the common shares down 97.4% versus a decline of 36.3% for SoFi. Dave also recently initiated a 1-for-32 reverse stock split after its falling below the Nasdaq minimum listing requirement. Both are fundamentally different companies with Dave being a neobank and SoFi owning a traditional bank. They're also both inherent fintech disruptors, part of CNBC's 2020 Disruptor 50 list and are based in California. Dave in West Hollywood and SoFi in San Francisco.

Revenue, New Products And Profitability

Dave currently sports a $71 million market cap, 7.5x smaller than SoFi's $5.36 billion market cap. The Mark Cuban-backed neobank went public at a $4 billion valuation versus the go-public valuation of $8.7 billion for SoFi. Hence, the performance dichotomy between both fintechs has been stark with the gap between both being extended on the back of a dearth of cheap liquidity sparked by a hawkish Fed.

Crucially, the gap between both is exacerbated by a 10x difference in their price-to-sales multiple. To be clear here, if Dave's trailing 12-month PS ratio at 0.34x was to change to SoFi's 3.28x multiple, it would trade on a roughly $700 million market cap. But why should both companies trade on the same valuation? This is dictated by sentiment and SoFi is a fundamentally safer and more diversified entity with a product flywheel that has positioned it well for what could soon stand to be profitable growth.

However, growth rates between both are strong. Dave's fiscal 2022 fourth quarter saw revenue come in at $59.6 million , an increase of 44% over the year-ago quarter but a small miss by $370,000 on consensus estimates. Revenue is being driven by a $1 subscription fee for its checking account as well as interchange fees from its Mastercard (MA) based Dave debit card. SoFi's fiscal 2022 fourth quarter saw adjusted net revenue of $443.42 million , growth of 58.4% over its year-ago comp and a beat by $17.58 million on consensus estimates. Both companies are pushing new products as a pillar of growth with SoFi recently throwing its hat into the crowded buy now pay later market with Pay in 4 . Dave focused on an expansion of Side Hustle, a job-finding tool that allows its members to apply and work at gig economy businesses like Uber and DoorDash.

Dave added 543,000 net new members during the fourth quarter to increase total members to 8.3 million. This was a 7% sequential increase and a growth of 37% over its year-ago comp. SoFi's membership increased to 5.2 million, a 51% increase over its year-ago quarter on the back of 480,000 new members added during the fourth quarter. SoFi's new products also rose 53% year-over-year with 695,000 new products added in the fourth quarter.

SoFi is able to drive significantly more revenue per member on the back of its large flywheel which sees new members offered a significant amount of products across most strata of their financial lives. Essentially, Dave would have to increase its total members 11.9x to 98.5 million to realize SoFi's current revenue rate. The impact on margins of this scale cannot be overstated with SoFi's net income margin at -9% for the fourth quarter versus -36% for Dave.

SoFi realized an adjusted EBITDA profit of $70 million, up sequentially from $44 million in the third quarter versus an adjusted EBITDA loss of $11.8 million for Dave. Dave's adjusted EBITDA improved from a loss of $28.5 million in the third quarter on the back of management efforts to control costs including a reduction in marketing expenses.

Liquidity And Projected Returns Through 2023 As The Fed Remains Hawkish

SoFi held fourth quarter cash and equivalents of $1.42 billion, an increase from $935.2 million in the third quarter. Dave's cash burn from operations as of the end of its fourth quarter was $3.9 million , a decline versus $14.3 million in the prior quarter. This meant cash and equivalents as of the end of the fourth quarter stood at $192 million, down sequentially from $223.9 in the third quarter. Its management has stated that they believe this is enough runway until their target to reach breakeven sometime in 2024. Indeed, the current rate of quarterly burn against their liquidity position should provide a cash runway of more than five years. This will obviously change if cash burn spikes in future quarters.

I sold my SoFi position on the back of what I expect will be lacklustre returns in 2023. This could come on the back of the inflation and interest rate hike dynamic that has driven the negative year-long returns for both stocks. As this will remain dominant through 2023 it's hard to recommend either stock as a buy. SoFi is the better company here though with its product flywheel forming a distinctive competitive edge over its smaller fintech rival. Dave, whose name is an abbreviation of David from the biblical story that chronicles the underdog's ultimate victory over the larger Goliath, faces a more difficult task against SoFi from an investability perspective. In this financial retelling of the story, the larger rival is likely to win.

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