SOFI - SoFi Technologies Has To Be Better

2023-05-01 12:00:36 ET

Summary

• SoFi Technologies, Inc. Q1 earnings are out, and the stock has had an initial positive reaction but is starting to come down, let it fall from $6.40.
• Some reduction in the technology accounts were noted.
• SoFi Technologies is still looking to profit by year's end, along with increased guidance.
• We have levels where you can enter with confidence.

One comment today from one of our members borderline floored me. They told me that SoFi Technologies, Inc. ( SOFI ) has to do better. Now look, we have had mixed ratings on SOFI stock as traders, going both long and short and profiting on both sides. But how much better can the company do in this climate? Truly?

This market has been incredible the last few months, while SoFi simply has not seen its stock perform all that well (despite another massive run off the lows). In terms of stock performance, sure, it could be better. Given the tremendous uncertainty in banks, and we have covered this in depth elsewhere, we are not sure how much more SoFi could have done to perform "better" than it did in its just-reported Q1 quarter this morning. Sure the stock is selling off, and there were some mixed key metrics, but in the long-term we believe SoFi Technologies, Inc. is a market disruptor and continues to take market share to position itself as a winner.

Let's discuss the key metrics you should be aware of.

SoFi's Q1 headline results mixed

In the just-reported first quarter , SoFi's top line growth accelerated once again, and the company posted record Q1 adjusted net revenue of $460 million, up 43% year-over-year. This also was well above the high end of management's guidance, and it beat consensus estimates by $23 million.

The strength in the top line was maintained through the report despite operational expenses rising, and the adjusted EBITDA line grew, hitting $76 million, which once again blew out expectations, and this was the 11th consecutive quarter of SoFi EBITDA growth. To be clear, this even blew away our bullish expectations for the stock.

SoFi's Q1 results relative to our expectations

Consider what we had seen with our extensive banking coverage, we saw continued loan growth demand as likely projecting a sharp increase in the cost of deposits. We suspected strong growth overall, but SoFi was really impressive. We believed that, based on current 2023 trends along with management forecasts, if loan growth slowed some, they would still grow, just at a lower rate.

We were looking for a top line of $450 million, which we arrived at assuming new member adds of 400,000-420,000, and new products of 600,000-750,000, along with a slight reduction in the pace of loan growth. Well, we came in well above our expectations. Far above it. Not sure how much "better" it can get.

While we though margins would be pressured due to a higher cost of funds, we did expect SoFi to lose money on a per-share basis, but continue to work toward approaching breakeven, which the company had previously forecasted the possibility of Q4 2023 GAAP profitability. We targeted a loss of $0.06-$0.08. SoFi reported a loss of $0.05, and this beat our expectation and the consensus, which expected losses of $0.08.

That said, the company still continues to take market share and disrupt the banking space. They are moving more into credit cards and other innovative products and are masters of cross-selling.

SoFi's Q1 loans driven by personal loan growth

So, with rates at or near highs, and the fears of an economic recession, we just are not seeing that weakness in SoFi Technologies, Inc.'s Q1. In fact, when we look at the spectrum of performance, we see strength overall in three reporting segments.

Ongoing strong personal loan originations continued in Q1 and drove total lending products to increase by 24%. Personal loan originations were $2.9 billion in Q1, which was up nearly $1.5 billion, or 46%, year-over-year. This also was a 20% increase sequentially. However, student loan and home loan originations were down 50% and 71%, respectively. The student loan moratorium, however, will be ending in August, barring more action, and that bodes very well for SoFi as almost a bonus at this point, whilst the housing loans mimic the overall sector. One could argue SoFi needs to do better on home loans as the housing sector is not nearly as weak as down 71% in loans would have you believe, but it has softened.

SoFi's tech platform showing signs of slowing?

We want to remind you that one of the characteristics that we like about SoFi Technologies, Inc. is that it has advanced technological capabilities that it employs to attract customers. They are among the best in the business, and really across other businesses, at cross-selling products. The synergy of Technisys and Galileo has led to tremendous growth, but that growth is now slowing. The technology platform-enabled accounts were up by 15% year-over-year to 126.3 million, though that appears to have declined from 130.7 million last quarter. This could be part of the selling today. In this segment, Q1 revenue was $77.9 million in the quarter, which was up 28% from last year, but down from Q4.

SoFi Financial services

The financial services segment in Q1 saw $81.1 million of revenue. The revenues are still growing for the financial services, with 244% growth from last year. We had expected this growth to continue given the new product and new member growth, but see sequential growth as slowing some. But sequentially, we still had 65% growth from the sequential Q4.

SoFi Invest and SoFi Money products have driven growth. Total financial services products grew by approximately 2.4 million, or 51%, year-over-year, up to 7.1 million. This was also a 0.5 million increase from the sequential Q4. SoFi Money saw another 218,000 products added, and SoFi Invest products increased by over 52,000. Finally, SoFi Relay products were 284,000 higher than last year. With all of this new account growth, it suggests SoFi Technologies, Inc. is still continuing to grab market share and deposit dollars.

While the member growth is strong, the company is paying up to attract members, offering up to an incredible 4.2% APY on deposits, as well as a rewards program. They are smart offering this rate with requiring direct deposit, as it keeps cash coming in to lend. However, margins have peaked for now with these high savings rates being paid.

Outlook

It was a pretty strong guidance. In Q2, SoFi Technologies, Inc. management expects to generate $470 to $480 million of revenue up 32% to 35% year-over-year, and $50 to $60 million of adjusted EBITDA. For the year the company raised guidance:

For the full year 2023, management expects adjusted net revenue of $1.955 to $2.02 billion, up from its prior guidance of $1.925 to $2.0 billion, and full-year adjusted EBITDA of $268 to $288 million, up from its prior guidance of $260 to $280 million, representing a 30% incremental adjusted EBITDA margin. Management expects to reach quarterly GAAP net income profitability by the fourth quarter of 2023, with GAAP net income incremental margins for the full year of 20%.

So there you have it. Not sure how much better it can get. You are talking about 30% increase in revenues. You are also looking at EBITDA almost doubling from 2022. Being profitable on a GAAP basis is huge as well.

Our take

So the next trade? We do not love SoFi Technologies, Inc. here at $6.40. We would love to see shares retrace to the $5.50 area before doing some buying. We would not SELL the mid $6 level, either, so since our hand is forced here we would say it's a "hold." However, in reality, we are bullish on SoFi Technologies, Inc., its just that we would start trading again long under $5.50. Our next SoFi Technologies, Inc. entry levels and our exit plans are reserved for members of BAD BEAT Investing, and we profit on the long and short end. But, generally speaking, a buy under those levels is a quality buy. Let SoFi Technologies, Inc. fall from $6.40.

For further details see: