DIS - SoFi: Why I'm Buying Here

2023-09-22 11:02:03 ET

Summary

• SoFi's involvement in Instacart's IPO marks a significant achievement in transitioning from a fintech startup to a major player in the financial industry.
• SoFi's expansion into IPO underwriting opens a new revenue stream and enhances its reputation as a serious player in the financial sector.
• SoFi stands to earn substantial fees from its role as an underwriter in the Instacart IPO, potentially accelerating its timeline to profitability.
• SoFi's ability to attract and retain customers is evident in its record-breaking new members and new products in Q2 2023.
• The positive sentiment among institutional investors supports the bullish outlook.

Investment Thesis

SoFi Technologies' ( SOFI ) meteoric rise from a humble fintech startup to a key player in the IPO underwriting game has been awe-inspiring. But when we talk about game-changing moves, SoFi's role in Instacart's blockbuster $616M IPO is a seismic shift that warrants attention. The Instacart IPO venture, combined with its financial strengths and burgeoning member base, paints a promising picture. For investors, the tale of SoFi is laced with opportunities, beckoning them to be a part of this growth journey.

Our previous estimate for investors to wait for a better entry point was met, and SoFi's stock faced a correction of over 15% from previous levels. The stock has approached our $7.70 lower limit target, and it's time to upgrade to a buy rating for the foreseeable future, but not an overweight rating yet.

A Game-Changing Move: Tapping Into the $616M Instacart IPO

SoFi's involvement in the Instacart IPO Maplebear ( CART ) marks a significant fundamental attainment in the company's transition from a fintech startup to a leading player in the financial industry.

SoFi's historical focus on online lending has been lucrative, but it also means that the company's fortunes are closely tied to the lending market's performance. By expanding into IPO underwriting, SoFi opens up a new revenue stream (similar to large-scale banks).

The Instacart IPO, with its potential to raise $616 million , offers a concrete example of how this diversification can benefit the company financially. Therefore, SoFi's participation in the Instacart IPO is just the beginning. The company can leverage its IPO underwriting move to secure roles in other high-profile listings.

Establishing a solid reputation in the financial industry is crucial for attracting clients and partners. Successful participation in high-profile IPOs can significantly enhance SoFi's credibility. SoFi's involvement in the Instacart IPO, considered one of the most high-profile US listings of the year, enhances its reputation as a serious player in the financial sector. SoFi's long-term vision is to become a top-tier full-service financial institution, and its participation in the Instacart IPO signals a broader scope of operations.

Specifically, SoFi stands to earn substantial fees from its role as an underwriter in the Instacart IPO. While exact fee structures can vary, it's common for underwriters to receive fees ranging from 2% to 7% of the total funds raised in an IPO. If the Instacart IPO raises the maximum amount of $616 million, SoFi's underwriting fees could range from $12.3 million to $43.1 million, depending on the fee percentage negotiated. The fees earned from IPO underwriting contribute directly to SoFi's bottom line, potentially accelerating its timeline to profitability.

In recent market trends, such as the meme-stock mania. SoFi's access to retail investors can be a valuable asset, allowing it to offer IPO shares to its clients. Retail investors, particularly millennials, have become a driving force in the financial markets. SoFi's considerable access to these investors can yield significant long-term benefits. Finally, engaged clients are more likely to utilize SoFi's other financial products and services, contributing to higher revenues and long-term loyalty.

Navigating Market Tides with Resilient Growth and Expanding Horizons

SoFi's long-term growth is fundamentally grounded in its ability to generate revenue from diverse sources. The company's strong performance in Q2 2023, with a record increase of 37% YoY in adjusted net revenue, reflects its resilience against market volatility by not relying solely on one revenue stream.

In this context, SoFi's lending segment has been a fundamental pillar. In Q2, lending adjusted net revenue reached a 29% YoY increase. The company's underwriting model and focus on high-quality credit have resulted in dependable loan performance and low charge-off rates.

Further, SoFi's robust growth in the financial services segment is another crucial driver. With net revenue tripling YoY, this segment capitalizes on member growth, cross-buying behavior, and improved monetization, with revenue per financial services product doubling YoY. Importantly, with the contribution loss consistently narrowing, this segment diversifies SoFi's income sources and enhances its revenue potential over the long haul.

Next is SoFi's technology platform, Galileo and Technisys, another vital component of its long-term strategy. Achieving record net revenue of $88 million (+4% YoY) in Q2. The company has signed new clients and continues to expand its product offerings. Notably, 100% of the newly signed clients have existing customer bases, accelerating revenue generation. The anticipated acceleration in YoY growth (in Q4) further solidifies its contribution to SoFi's financial position.

Remarkably, the impressive growth in members and products is a fundamental indicator of SoFi's long-term appeal. Specifically, adding a record 584,000 new members in Q2 2023 (bringing the total member count to 6.2 million with a 44% YoY enhancement) and introducing 847,000 new products (totaling 9.4 million products with a 43% YoY increase) demonstrates its ability to attract and retain customers.

Therefore, the increasing word-of-mouth and brand awareness among consumers, fueled by initiatives like the " Changing the Face of Finance " campaign, position SoFi for continuous member and product growth, ensuring a solid customer base. Lastly, SoFi's financial strength is evidenced by high-quality deposits and a robust balance sheet, as the company maintains over 90% of consumer deposits from direct deposit members and nearly 98% insured.

Hedge Funds Rally: A Surge in Institutional Interest Signifies a Bullish Outlook

Institutional investor flow, especially hedge funds, is a vital measure to evaluate the valuation prospects for investment in SoFi's stock. During Q2, the number of hedge funds holding SoFi increased by 5.5% , whereas those with 0.5%–5% (of the fund's portfolio) stakes in SoFi grew by 12.5%.

Notably, the number of SoFi's shares held by hedge funds increased by 18.7% during the quarter. There was a considerable position shift from other stocks to SOFI, including Apple ( AAPL ), NVIDIA ( NVDA ), and Disney ( DIS ). Similarly, BlackRock and State Street increased their long positions in SoFi by 6.4% and 12.9%, respectively. However, funds like Point72 (Steven Cohen) exited their positions during Q2.

Navigating Between Support and Resistance Amid Market Uncertainties

Technically, SoFi's stock has tested the weekly support level of $8.08 and may soon test the weekly resistance level of $10.25. However, suppose any significant adversity hits the market, like resurrecting the inflation pace (3.7% in August from 3.2% in July). In that case, that may push the Federal Reserve for further rate hikes, and a higher rate for a longer-term scenario may lead to a recession that may collectively hit other banks and SoFi.

In such a case, $5.45 may serve as short-term support. Whereas in a bullish scenario, in the short run, $14.05 may serve as a key resistance (based on Fibonacci retracement/expansion). Price levels near weekly support and below serve as an ideal buying range. However, short-term resistance is a target level for partially booking profits on existing long positions.

Takeaway

In conclusion, SoFi's strategic move in the Instacart IPO is emblematic of its transformation from a fintech startup to a formidable player in the financial industry. With a record-breaking increase in members and products, SoFi has demonstrated its capacity to attract and retain customers, while its robust financial position and institutional investor interest further strengthen its prospects, supporting the bullish stance on the stock.

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