SOFI - SoFi's SoftBank Gift

• SoftBank has started selling sizable amounts of SoFi to raise funds.
• The investment fund still owns 83 million shares or 9% of the outstanding shares of SoFi.
• The stock has a gap down to $6.63, providing the ideal point to purchase SoFi.
• The business continues to improve with a shift away from lending products, while digital bank deposits provide the funding source unavailable at the likes of Upstart.

When a great company is sold for a reason outside of the performance of the valuation of the stock, an investor is provided a gift. The market finds SoFi Technologies ( SOFI ) in this exact situation with SoftBank Group ( SFTBY , SFTBF ) somewhat forced to sell shares. My investment thesis remains ultra Bullish on SoFi, especially if the stock closes the recent gap into the $6s.

SoftBank Selling

The SoftBank Vision Fund posted a $22 billion loss for Q2 necessitating sales of public stocks to raise money. In addition, Masayoshi Son wants to sell shares to raise money for new investments in startups.

In addition to SoFi, the fund has sold shares in Uber ( UBER ), Opendoor Technologies ( OPEN ) and Alibaba ( BABA ), raising $5.6 billion. SoftBank still controls over 83 million shares of SoFi after selling a combined 12 million shares over the prior two trading days to push the position down to only 9% of the outstanding shares of the fintech.

The filing suggests SoftBank might sell some or all of their holdings, but price appears a determining factor in timing of share sales. SoftBank is notably selling shares after the rally to $8. CEO Anthony Noto bought shares regularly at a similar price over the last few months. Noto recently bought shares on June 16 at $5.58 to increase his ownership to 3.6 million shares.

The stock recently soared from $6 to $8 in just one trading day following solid Q2'22 earnings. A gap was created in the chart at $6.63 and further "forced" selling by SoftBank is highly likely to cause this gap to close with traders pulling back from buying shares until the gap closes less than $1 away, but 10% below the current price.

De-Risked Story

The best part here is that new investors likely will get to purchase SoFi at the same price as ones going into the quarter taking the risk the fintech cuts guidance for the year. The company having a digital bank has allowed SoFi to separate from other fintechs like Upstart Holdings ( UPST ) down another 10% due to lacking the funds and capital to hold loans as the market dries up.

Upstart reported that Q3'22 revenues are set to fall nearly 50% from the Q1 levels of $310 million. Bank partners only originated 321K loans for $3.3 billion in Q2, down from 466K and $4.5 billion in Q1 due primarily to reducing conversion rates to just 13%

SoFi saw deposits surge $1.6 billion to $2.7 billion at the end of Q2'22. The fintech has far more funding now and isn't as reliant on bank partners to purchase loans in order to originate new loans during the recessionary environment.

The biggest problem facing other fintechs is the reduction of loan funding during weak economic periods. SoFi should see more funding with the digital bank recently hiking the APY to 1.8% in July attracting deposits at 100 basis points below warehouse loan costs.

Per CEO Anthony Noto on the Q2'22 earnings call , the digital bank deposits will contribute to even higher NIM in the coming quarters:

...as a result of this growth in high-quality deposits, we've been able to benefit from a lower cost of funding for loans while being able to pass on higher rates in our loans. In Q2 alone, the difference in our deposit cost of funding and warehouse cost of funding was approximately 100 basis points, and that delta will continue to grow in a rising rate environment. And third, deposit funding increases flexibility to capture more NIM and optimize returns, a critical advantage in light of notable macro uncertainty. We don't have to access sales channels in the face of suboptimal conditions, such as those we've witnessed more broadly in the asset-backed security market over the last few quarters.

The company is actually lowering costs while reducing dependence on outside funding sources. The stock is trading 70% below the 52-week highs up at $24.65 despite the impressive business prospects.

The fintech continues to shift the business away from a complete reliance on Lending Products. SoFi now has far more members utilizing various Financial Services Products with such products growing at a 100% clip to reach 5,362K compared to only 1,202K using Lending Products.

Revenues are still skewed towards lending, but SoFi is quickly shifting away from the issues cratering other fintechs. The business model is no longer highly reliant on bank partners financing loan growth to only pullback during tough economic environments.

Takeaway

The key investor takeaway is that SoftBank selling so many shares is set to pressure the stock here in a gift to new shareholders. SoFi should still be rallying on the strong outlook for the year, but the stock is likely heading towards a gap close back into the mid-$6s. Such a move provides a near perfect opportunity to buy a de-risked stock after having just raised guidance for the year while the shares fall to a technical level where buying is preferred.

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