SOFI - SoFi Technologies: Another Fantastic Dip Buying Opportunity

2023-05-02 08:00:11 ET

Summary

• SoFi posted a double beat on revenue and adjusted profitability in its recent earnings release. However, investors were not happy as SOFI fell more than 12% yesterday.
• Despite posting a deposit growth of almost 40% sequentially, SoFi's home loans and student loan origination fell significantly.
• As such, concentration risks of relying on personal loan originations to drive profitability have increased, intensifying SoFi's execution risks in the second half.
• We also assessed that investors could have been disappointed with SoFi's guidance for FY23, suggesting that outperformance in the second half could be more challenging.

SoFi Technologies, Inc. ( SOFI ) investors were stunned yesterday (May 1) as the leading digital finance company reported its first quarter results . Despite posting a double-beat on revenue and adjusted profitability estimates, SOFI finished yesterday's trading session down more than 12%.

Investors likely reacted to the slowdown in sequential growth . In addition, SoFi's upsized guidance for FY23 suggests that the outperformance tailwinds in H2CY2023 could moderate moving ahead.

SoFi posted adjusted net revenue growth of 43% YoY, down from FQ4's 58.4%. It also delivered an adjusted EBITDA of $75.7M, as both metrics came ahead of guidance and previous Wall Street estimates.

While guidance for FQ2 also trended ahead of consensus, its full-year guide suggests a marked deceleration in H2.

Accordingly, SoFi expects adjusted net revenue of $475M for FQ2 at the midpoint of its guidance range. As such, SoFi expects to deliver total revenue of $935.2M in H1.

However, SoFi's revised midpoint revenue outlook of $1.98B for FY23 suggests H2 revenue of $1.05B (or 53% of full-year revenue). As such, the projected revenue outperformance in H2 could have disappointed investors compared to SoFi's performance in FY22.

Accordingly, SoFi's H2FY2022 revenue accounted for more than 56% of its revenue in FY22. Hence, we assessed that market operators could have been disappointed and assessed that outperformance in H2 could be more challenging to achieve.

Moreover, SoFi's earnings commentary suggested significant momentum in personal loans, even though the growth cadence has slowed. Accordingly, SoFi posted 46% in personal loans origination growth in FQ1, down from last quarter's 50% increase.

Moreover, the concentration risks in personal loans to drive growth in H2 have increased further due to the disappointing performances of home loans and student loans.

Accordingly, student loans origination fell by 47% YoY, while home loans originations fell by 71%. While its recent Wyndham Capital Mortgage acquisition is expected to boost the company's operating performance, it's only "expected to have a more meaningful impact in 2024."

Therefore, SoFi's origination metrics took the shine off its deposits growth, which surged above $10B for the recent quarter, up nearly 40% from FQ4.

Analysts on the call were interested to know more about SoFi's longer-term deposit strategy as it increases its deposit base. The company highlighted that "44% of SoFi loans were funded by deposits as of the end of Q1 2023."

As such, it's clear that SoFi is relying on its ability to grow deposits quickly, giving it a lower cost of funding. Moreover, it's "currently lower than historical warehouse lines, giving them a competitive advantage."

Moreover, its upsized deposit insurance of $2M, covering 97% of the company's deposits, should continue to assure customers to keep their funds with SoFi and stymie unforeseen deposit flight.

With the company confident of attaining "quarterly GAAP net income profitability by the fourth quarter of 2023," SoFi remains well-placed to continue its recovery, despite yesterday's steep pullback.

With yesterday's steep selldown, SOFI has moved closer to its March lows, likely spooking some dip buyers who capitalized on its pessimism about two months ago.

We continue to hold the view that SoFi likely bottomed out in December 2022, with March 2023's lows also expected to hold robustly.

While a re-test cannot be ruled out due to the downside volatility, we view the significant dip as a solid opportunity for investors to add more exposure.

Moreover, if a potential re-test against its March lows is successful, investors can consider adding more aggressively as the market further flushes out the dip buyers from March.

Rating: Speculative Buy (Reiterated). See additional disclosure below for important notes accompanying the thesis presented.

For further details see: