SOFIW - SoFi Approaching Critical Inflection

2023-11-06 14:15:15 ET

Summary

• SoFi Technologies, Inc. is crushing revenue expectations, but one key metric eludes the company.
• SoFi is bucking the trend in the banking sector with loan, deposit, and even margin growth.
• Financial services see a first.
• The market wants to see one thing from SoFi Technologies, Inc.

We had a high conviction call to buy SoFi Technologies, Inc. ( SOFI ) stock when shares fell under $5.00. We recall that many questioned the trade we had laid out. Fast forward a few months later and then we suggested selling the initial investment after it doubled. At this point, we are holding a house position forever and ever with the gains from that trade, and will collect any future capital gains, spinoffs, dividends etc.

While all of those possibilities are down the road, SOFI stock should remain on long-term investors' radar, while it simultaneously has been on of the best trading stocks we have come by. We think the best approach here is to sell covered calls on pops in the stock, while if you are looking to buy shares on big dips, you sell puts. This approach brings in income for the income-seeking investor, while you wait for longer-term capital gains. But what if you get called away? Well if you are at risk, you can roll the call, or, lock in the sale gains, then look to come back into the stock on the next dip. Actively managing your money far exceeds buying and holding a name like this in our experience.

Following the playbook like this can build generational wealth, so hang on to those SOFI shares, but trade around the core position. We continue to like the growth path of the fintech banking company, and although the macro situation is questionable at best the next few quarters, use weakness to accumulate shares. We believe the company is still early on its long-term journey, and yet the growth continues as evidenced in the just-reported Q3 quarter.

Let's discuss the key metrics you should be aware of and why we remain steadfast happy holders and traders of this stock.

SoFi's Q3 headline results

In the just-reported third quarter , SoFi's top line growth accelerated once again, and the company posted yet another record Q3 adjusted net revenue of $537/1 million, up 26.7% year-over-year. This was once again well above the high end of management's guidance, and it not only beat consensus estimates, the company crushed them by $22 million.

That top line strength trickled down all the way through the report despite operational expenses rising, and the adjusted EBITDA line grew, hitting a record $98 million, which once again blew out expectations. This was the 13th consecutive quarter of EBITDA growth. It was even up $22 million from the sequential Q2. We are feeling good about holding the stock, despite the short-term trading.

SoFi's Q3 earnings performance relative to our expectations

As our followers know, we extensively cover banks. This Q3, performance has been all over the map for banks. Some situations are weakening, others are seeing a near-term trough in performance, while others are growing. On the whole we have seen continued loan growth demand, despite higher rates, as well as higher costs of deposits which continue to weigh on margins. We suspected strong growth overall for SoFi but it blew us away really. The stock does not take off because the market questions how long the growth can continue, and is now looking for real earnings.

That said, we were looking for a top line of $520 million, which we arrived at assuming new member adds of 650,000-700,000, and new products of 900,000-950,000, along with a slight reduction in the pace of loan growth. The numbers crushed our expectations, which we thought were lofty to begin with. SoFi enjoyed new member adds of 717,000 along with new product adds of 1.05 million. Folks, quarter end members are up 47% from a year ago and quarter end products are up 45% from a year ago. This company is crushing it, and the stock has just disappointed given the lack of earnings.

And therein lies the short-term problem. We targeted a loss of $0.04-$0.06. SoFi reported a loss of $0.03 adjusted. Why? Despite continuing to take market share and disrupting the banking space, the company has yet to hit breakeven, but in the release management reiterated they expect to hit that market in Q4 2023. From there, we would like to see sustained profits. This comes as the company bucked the banking trend for margins. Very few banks are seeing expanding margins versus last year. But SoFi hit a record for net interest margin at 5.99%, up from 5.86% last year and up from the sequential Q2. The company is delivering.

SoFi sees strong Q3 loan and deposit growth

And yes, the company is growing loans and deposits too. Total deposits grew by $2.9 billion, up 23% in Q3 to $15.7 billion at quarter-end, Personal loan originations were also a record $3.9 billion in Q3, which was up nearly $1.1 billion, or 38%, year-over-year, and a respectable 4% increase sequentially. And student loan volume grew, and SoFi will now be benefitting from the fact that the moratorium on repayment is over, providing ongoing revenue for Q4 and into the future.

Student loan volume was $919 million in Q3. This was up $462 million, or 101%, year-over-year. This volume also rose 133% sequentially. Now, the housing market has been a headwind with high mortgage rates and low inventory. The company did buy Wyndham Capital Mortgage so that led to a 64% increase in home loan volume. Without that acquisition, we would have seen much less growth.

Overall, in Q3, the lending segment total origination volume increased 48% year-over-year. This is why we believe pullbacks in the stock should be bought. The company is growing and earnings are about to inflect from negative to breakeven, and to growth in 2024.

SoFi's tech and financial services platforms

The technology platform-enabled accounts were up 10% from last year and the segment saw revenue hit a record of $89.9 million, though growth has slowed some here. Revenue was up 6% from a year ago, while also up 3% from Q3. We believe that this platform will see a big benefit from the inclusion and adaptation of AI in the future. As of now, they have the Konecta product, an AI digital assistant for consumers. Contribution profit was up 65% from last year.

The financial services segment in Q3 saw $118.2 million of revenue. This was 142% growth from last year. We had expected this growth to continue given the new product and new member growth. It is worth noting that this segment has been a big money loser. However, this was the first quarter that it saw a positive contribution to profit, albeit that it was a small $3.3 million. This was driven by SoFi Money products jumping 371,000 while Relay products increased by over 405,000. Finally, SoFi Invest products increased by over 149,000. All of this has us bullish long-term, even if the stock has yet to really reflect this growth. The market now wants to see an inflection to real profit, not just EBITDA growth. But we are close.

Looking ahead

While the company moves toward being profitable on a GAAP basis, one bearish note is that the company expects and increase in share-based compensation and more depreciation and amortization. While the issues of the costs of share-based compensation are not unique SoFi, and rather very common in tech companies, it is a small headwind that merits mentioned. That said, management raised guidance. It sees the top line hitting $2.045 to $2.065 billion now, up from $1.974 to $2.034 billion, with EBITDA hitting $386 to $396 billion on the year, a full $53 million increase on the outlook on both ends.

Our take

If you were following the trades at our investing group, or casually following our public coverage, you likely have a house position to play with. The stock continues to struggle relatively speaking, despite all of the dazzling growth metrics. The market now wants to see real profitability. That is the next roadblock in the long-term growth path. We see SoFi Technologies, Inc. swinging to EPS positive next year. For new money, anytime shares dip below $7 it is a good time to start scaling in, while when it approaches $9-$10, it makes for a good time to trim. But if the company delivers on being earnings positive, shares will start to appreciate. Keep an eye on expenses.

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