SOFI - SoFi: Surprise Crypto Exit

2023-12-05 07:30:00 ET

Summary

• SoFi Technologies, a fintech company, has decided to exit the cryptocurrency business in a surprise move.
• The company's revenue growth rate remains strong, and profitability is improving.
• While the valuation is still high and profitability has not been achieved, SoFi's attractiveness as an investment has increased.

Article Thesis

SoFi Technologies ( SOFI ) is a fast-growing fintech company that has, so far, been offering cryptocurrency-related services but that has decided to exit this business in a surprise move. In the current crypto bull run, this move came as a surprise -- but it does not have to be a bad idea. While SoFi is not yet profitable, the growth story continues and the valuation has become more reasonable.

Past Coverage

I last covered SoFi Technologies in June, in an article in which I rated SOFI a Hold/Neutral, advising against a buy due to the share price rally being overdone at the time. Since then, shares have moved down slightly (by 3% at the time of writing), suggesting that the company was, indeed, not an opportune investment at the time.

Since half a year has passed and since the company has grown meaningfully, while also announcing a surprise cryptocurrency business exit, I thought that updating my views on the company and its stock made sense.

SOFI's Crypto Exit During A Crypto Bull Run

Cryptocurrencies are notoriously volatile, with huge bull runs and major bear markets taking turns. While cryptocurrencies, led by Bitcoin, rallied massively during the initial phase of the pandemic on the back of massive fiscal and monetary stimulus, excitement eventually started to wane, and Bitcoin dropped from almost $70,000 to below $20,000 as interest rates rose, making more traditional assets such as treasuries and CDs more attractive.

But over the last two months, cryptos saw a major boost in investor demand, which also fueled hefty price gains: Bitcoin rose from less than $30,000 to more than $40,000, with hopes for a Fed pivot likely playing a major role for the improving sentiment.

With enthusiasm for cryptocurrencies rising meaningfully, and with cryptocurrency trading volume exploding upwards on exchanges such as Robinhood Markets ( HOOD ), a recent SoFi Technologies announcement was quite surprising:

A couple of days ago, the company stated that it would discontinue its cryptocurrency services by the end of the year. No new crypto trading accounts can be opened, and current holders can choose between migrating their assets to Blockchain.com or liquidating their positions with any charges being reimbursed.

That looks like a fair offer for current crypto trading account users to me, although it will likely cost SOFI some money, especially since they will reimburse all trading costs for those that liquidate their positions, e.g. due to not wanting to use Blockchain.com.

While the company did not really get concrete when it comes to the reasons for the crypto business exit, I believe that it is one of the following two -- or a combination of both:

- SoFi Technologies' crypto business was not profitable. The space is competitive and there are many competitors, some of them likely with better cost structures, e.g. due to being domiciled in countries with less regulation, lower wages, and so on. If SOFI's crypto business was structurally unprofitable and if they saw no good way towards profitability, closing this business makes sense.

- SoFi Technologies wants to focus on other business areas where it sees more long-term growth potential or where it feels the company has a stronger edge, or where its position is advantaged due to any other reason. While being active in different areas can make sense, it does not make sense if being active in non-core areas hurts the growth potential in core areas, e.g. due to resources being spread too thin. In that case, closing down a non-core business to free up resources (cash, personnel, management capacity, and so on) for more important/core businesses makes sense.

It is possible that the true reasoning for the crypto business exit was a different one, but those two seem rather logical and realistic to me -- but I'd be very interested in hearing from you about what you think about this and whether you agree or not.

Since SOFI talked about investments in its traditional investment business (IRAs, brokerage accounts), the second potential explanation of them wanting to focus on core products seems quite likely to me. This would be a good thing, I think, as doubling down on the businesses the company deems most important seems like a winning strategy compared to trying to be active in many different areas without being great in any of them.

SOFI's Business Continues To Grow

During the most recent quarter , SoFi Technologies experienced a revenue growth rate of 27%. That was lower compared to the previous two quarters, when revenue growth came in at 37% and 43%, respectively.

That being said, a high 20s revenue growth rate is still pretty strong, and the comparison was rather tough, as the third quarter of 2022 had been significantly stronger compared to the previous two quarters.

The most recent quarter, Q3 of 2023, also set a new revenue record: Sales were around 8% higher compared to the second quarter of the current year, which had previously been the best quarter revenue-wise.

Revenue growth was largely driven by a big increase in SOFI's member count, which rose from 4.7 million to 7.0 million. That's an excellent performance, although it should be noted that SOFI's revenue per member declined compared to the previous year's period, as revenue growth came in below the member count growth rate.

This revenue growth went hand in hand with profitability improvements, as SoFi Technologies saw its adjusted EBITDA expand by a hefty 120% compared to the previous year's period. Profit growth being significantly higher than revenue growth makes sense when we are looking at a financial tech company. After all, many expenses are more or less fixed, e.g. product development costs. When revenues rise, expenses do not climb as much, hence margins expand, which makes profits grow quicker compared to the revenue growth rate.

While SOFI is not yet profitable on a net profit basis, things are moving in the right direction profit-wise -- if SOFI keeps growing at a meaningful pace while also continuing to keep costs from blowing up, then the company will generate positive net profits in the not-too-distant future.

Based on current analyst estimates, SoFi Technologies could report positive earnings per share in 2024 already, although the consensus estimate of $0.06 is still pretty close to zero. That being said, SOFI has a positive track record when it comes to beating estimates (6 beats, 2 misses, 2 hits over the last 10 quarters), thus actual results might come in ahead of estimates.

Of course, compared to a share price of $8, a $0.06 profit is far from meaningful. But if SOFI is profitable next year, even if only slightly, that would still represent an important milestone for the company.

Is SOFI A Good Investment?

Since my last article half a year ago, SoFi Technologies has become more attractive, I believe. The share price went down slightly while business growth continued and while the company has gotten closer to hitting profitability. While the crypto exit is surprising, I assume that management knows what it is doing and that there is a good reason for this move -- e.g. lack of profits or the crypto business being a distraction from more important business units.

That being said, SOFI is still not a bargain today -- the company trades for around 130x next year's expected net profits, and even when we look at 2025, SOFI trades at close to 40x net profits, with there being no guarantee that the expected profit growth will materialize.

In the fintech space, there are some pretty inexpensive stocks available, such as PayPal Holdings ( PYPL ), trading for just 12x this year's net profits, albeit PYPL is growing at a slower rate.

Also, investors should note that dilution remains a headwind at SOFI: Over the last year, the company's share count has increased by around 35 million, or 4%. That's not dramatic, but the constant dilution reduces each share's portion of the pie over time -- at PayPal, the opposite is true, thanks to the company's buybacks.

I am not yet ready to buy SOFI due to the fact that profitability has not yet been hit and since the valuation is still far from low, but I believe that SOFI's attractiveness has increased. If that trend continues, SOFI will become a nice higher-growth investment choice in the not-too-distant future.

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