AFRM - SoFi Technologies: Managing Investor Enthusiasm

2023-11-13 14:01:59 ET

Summary

• Despite SoFi Technologies, Inc.'s anticipated GAAP profitability in Q4 and the positive trajectory for 2024, the stock has not garnered widespread investor enthusiasm.
• A comparative analysis with peers such as MoneyLion, Akamai Technologies, and Affirm suggests that SoFi has lagged the group.
• The stock's forward non-GAAP EPS multiple, standing at 70x, raises questions about whether SoFi's rapid improvements in profitability align with investor expectations.

Investment Thesis

SoFi Technologies, Inc.'s ( SOFI ) Q4 guidance points towards a company that is going to turn GAAP profitable, with the expectations of increased profitability in 2024. So, why isn't the stock getting much love from investors?

I argue that although SoFi continues to deliver terrific improvements in profitability, even then, the stock is simply too richly valued for new investors to come in, with fresh capital and find this a rewarding investment.

Indeed, I believe there are better investment opportunities elsewhere.

Quick Recap,

Prior to SoFi's Q3 earnings results , I had stated in a neutral analysis that,

SoFi is a battleground stock. This means that there are both bears and bulls on either side of the stock. And both sides put across ferocious arguments. Whilst I have a bearish tilt when it comes to SoFi, I can also recognize some aspects where SoFi is delivering strong prospects, particularly when it comes to its adoption curve.

However, while many have been quick to argue that SoFi is a cheaply valued stock, that's where I draw the line. I don't believe that SoFi Technologies, Inc. stock is particularly undervalued. In fact, I find that its peers are significantly cheaper-priced

Indeed, I've found that in the past several months the market has become more discerning. It's no longer the case that the ''fintech tide'' lifts all boats, as you can see below.

Indeed, since I've recommended MoneyLion Inc. ( ML ), this stock has done well. But it's not only stock in the peer group to do well. Above I highlight Akamai Technologies (AKAM) and Affirm ( AFRM ) as two stocks that have also delivered positive returns.

That being said, it should be noted, that SoFi hasn't been the worst performer in this period. Upstart Holdings ( UPST ) once again finds itself in the penalty box, unable to gain investor confidence.

Here I'll describe both the positive and negative elements of an investment in SoFi, starting with the positive aspects.

SoFi's Near-Term Prospects

SoFi stands as a comprehensive fintech enterprise, dedicated to offering a range of financial products and services such as student and personal loans, mortgages, and more. Its objective is to serve as an all-encompassing and tailored financial platform for individuals, or members.

SoFi's near-term prospects seem promising, driven by several key factors. Firstly, the company has demonstrated robust revenue growth, with a notable increase in non-lending businesses contributing to a significant portion of the growth.

More specifically, SoFi's diversified revenue streams, particularly from the Technology Platform and Financial Services segments, position SoFi well for sustained expansion.

Moreover, the company's ability to maintain strong marketing efficiencies and capitalize on its growing unaided brand awareness bodes well for customer acquisition and retention.

The positive trends in member growth and product adoption, as evidenced by record-breaking numbers in the latest quarter, underscore the resonance of SoFi's offerings with consumers.

And the bull case has more going for it too.

Revenue Growth Rates Remain Strong

As you can see above, SoFi's revenue growth rates continue to deliver nearly 30% CAGR.

That being said, SoFi is not without its challenges. One immediate concern lies in the potential impact of interest rate dynamics. Even though SoFi has adapted well to the current higher-for-longer scenario, this continues to be a highly interest-rate-sensitive company. Accordingly, changes in interest rates will influence SoFi's lending businesses, especially in personal loans.

But now let's get to the heart of the matter, particularly when it comes to the bear case.

Profitability Profile Discussed

On the one hand, SoFi' is expected to deliver GAAP profitability in Q4, when taken together with its commitment to sustained profitability in 2024 this is undoubtedly positive.

On the other hand, in the absolute best-case scenario, SoFi will deliver about $0.10 of non-GAAP EPS in 2024. This leaves this stock priced at 70x forward non-GAAP EPS.

Even if I recognize that SoFi is very rapidly delivering improvements to its profitability, it's nearly as if SoFi has to deliver those dramatic improvements in profitability simply to match investors' expectations.

I'm sticking to the sidelines here. There are better investments in fintech.

The Bottom Line

In conclusion, I find SoFi's current valuation to be a source of uncertainty among investors, despite the positive outlook for the company's near-term prospects.

The anticipation of achieving GAAP profitability in Q4 and an expected increase in profitability in 2024 should, in theory, garner a more favorable response from the stock market.

While I acknowledge SoFi's robust adoption curve and diversified revenue streams, I am skeptical about the perception that the stock is undervalued.

The uncertainty surrounding the company's valuation is further underscored by discussions on profitability. I question whether SoFi Technologies, Inc.'s rapid improvements in this area are sufficient to meet investors' high expectations, particularly given the relatively high forward non-GAAP EPS multiple. Consequently, I'm sticking to the sidelines.

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