2023-11-11 10:00:00 ET
Summary
- SOFI continues to generate impressive numbers across all of its segments, further aided by the returning student loan refinancing as the US federal student loan repayment starts from October 2023.
- The growing deposits also allow most of its loans to be funded internally as a low-cost funding, further boosting its bottom-line performance.
- Interestingly, SOFI announced its loan securitization deal with BlackRock in the recent earnings call, eliciting mixed responses as the stock popped initially but sold off afterwards.
- Investors need not fret, since it remains a well-diversified fintech company, with lending products only comprising 15.2% of its overall offerings.
- However, due to the uncertain macroeconomic outlook and normalizing charge-offs, we believe that the SOFI stock may continue trading sideways until a reversal in sentiments occur.
We previously covered SoFi Technologies ( SOFI ) in August 2023, discussing its excellent prospects, as the elevated interest rate environment boosted the SoFi Bank's net interest income/ margin. The growing deposits also allowed the fintech to fund most of its loans internally, without having to rely on expensive capital funding and debt.
In this article, we will be discussing SOFI's excellent results across multiple segments, allowing the fintech to moderately raise its FY2023 guidance for the third time. While Mr. Market appears to be uncertain about the securitization of its personal loans, we are not concerned, given its robust liquidity sources.
We shall discuss further.
The SOFI Investment Thesis Remains Robust
Recently, SOFI reported a double beat for FQ3'23 earnings results , with revenues of $537.21M (+7.8% QoQ/ +26.7% YoY) and adj EPS of -$0.03 (up QoQ from -$0.06/ up YoY from -$0.09).
SOFI's Detailed Segment Performances
Much of this outperformance is attributed to the robust consumer demand for SOFI's offerings across three different segments, with the Financial Services Segment also finally recording positive contribution profit.
Its student loan origination has also jumped drastically to $919.33M (+132.5% QoQ/ +101% YoY), with things likely to further expand in FQ4'23 as the US federal student loan repayment restarts from October 2023 onwards.
With its increased cross selling and improved marketing efficiencies, we may see its top and bottom line growth accelerate from current levels. This has already been reflected by its raised FY2023 net revenue guidance to $2.055B (+33.4% YoY) and adj EBITDA guidance to $391M (+127.7% YoY) at the midpoint, up by +2.7% and +15.6% from its previous guidance, respectively.
Interestingly, SOFI announced its loan securitization deal with BlackRock ( BLK ) in the recent earnings call, eliciting mixed responses as the stock popped at first but sold off afterwards, despite the excellent FQ3'23 results.
We believe that the sale in personal loans is merely one of the ways that the management is looking to calibrate its balance sheet's risk exposure to the uncertain macroeconomic outlook, while also originating more loans and maintaining healthy total ratios.
Furthermore, SOFI has nothing to lose from the deal, with BLK paying a premium of 105.1% for the personal loans, above the book value of 104%, implying the former's ability to securitize its loan portfolio whenever necessary.
For now, it is unsurprising that the fintech has chosen to hold most of its loan portfolios on the balance sheet, since they continue to generate robust Net Interest Income of $344.96M ( +18.4% QoQ / +118.5% YoY) and Net Interest Margin of 5.99% (+0.25 points QoQ/ +0.13 YoY) in the latest quarter.
Most importantly, SOFI continues to be well-funded, thanks to the growing deposits of $15.7B ( +23.6% QoQ / +214% YoY ), allowing over 65% (+15 points QoQ) of its loans to be funded internally with low cost funding.
This is on top of its robust overall lending capacity of $27B from multiple sources, implying that the fintech has more than sufficient capital to fund its growth moving forward.
The fintech continues to meet the regulatory Common Equity Tier 1 minimum requirement of 7% as well, with 14.3% reported as of September 2023.
While things may change if/when the Fed pivots, potentially impacting its ability to generate a similarly robust net interest income, we want to remind readers that SOFI remains a well-diversified fintech company, with lending products only comprising 15.2% of its overall offerings.
Most importantly, its non-lending businesses continue to be the fintech's top-line driver, comprising "67% of its absolute growth in adjusted net revenue dollars" by the latest quarter.
As a result of these promising developments, we remain convinced of SOFI's near-and long-term prospects, as long as the management continues to execute strategically as they have going forward.
So, Is SOFI Stock A Buy , Sell, or Hold?
SOFI Valuations
Since SOFI has yet to achieve GAAP profitability, the only metric that we may use to measure its valuation is the FWD Price/ Sales of 3.44x, which suggests its premium over the sector median of 2.25x.
Then again, the management has guided FY2023 adj EBITDA of $391M at the midpoint (+172.7% YoY), with GAAP profitability from FQ4'23 onwards, implying that its reversal may be near indeed.
The Consensus Forward Estimates
Perhaps Mr. Market has awarded the SOFI stock with the baked-in premium, thanks to the optimistic consensus forward estimates. The fintech is expected to generate an impressive top and bottom line CAGR of +25.3% and +75.5% through FY2025, building upon its hyper-pandemic top-line growth CAGR of +50.84%.
These numbers suggest that the fintech may very well generate profitable growth moving forward, with the added benefit from the student loan refinancing and the expanded interest income from the Fed's rate hikes thus far.
SOFI 2Y Stock Price
However, while we are encouraged the sale of the personal loans, as discussed above, it is evident that market sentiments are mixed, with the SOFI stock also failing to break out of its critical resistance levels in the $8s after the earnings call.
With it charting lower lows and lower highs since the August 2023 peak, the stock is likely to retest its critical support levels of $7 in the near term as well.
Fintech 3M Stock Performance
However, SOFI investors need not fret, since the same pessimism has also been observed with multiple fintech stocks over the past three months, aside for Affirm ( AFRM ).
Even the big US banks are not spared, with the headwinds likely attributed to the overly sticky inflationary pressures, as the gap between the last hike in July 2023 and the pivot is likely to occur much later than the average of eight months .
While SOFI has yet to be overly impacted by the uncertain macroeconomics outlook, with only 1.8% of its loans delinquent thanks to its focus on higher FICO scores, it is apparent that the fintech is not spared from the normalizing charge-offs as well.
FQ3'23 has already brought forth growing net charge-offs of $136.93M (+32.4% QoQ/ +324.5% YoY) and a net charge-off ratio of 2.72% (+0.39 points QoQ/ +1.31 YoY).
Investors may also want to note that SOFI's ratio is notably higher than multiple US big banks, such as Bank of America ( BAC ) at 0.7% ( +0.04 points QoQ / +0.29 YoY) and JPMorgan Chase ( JPM ) at 0.47% (inline QoQ/ +0.2 points YoY) in the latest quarter.
While the SOFI management has been highly competent during the pandemic, the fintech has yet to demonstrate its proof of concept through a (likely) recession, which means that it may still face two more years of volatile economic events before its eventual upward rerating.
As a result of the uncertainty, we believe that the stock may continue trading sideways at these levels until a reversal in sentiments occur.
While we may rate the SOFI stock as a Buy here, the rating is only appropriate for long-term investors, whom are looking to lower their dollar cost averages. They should also size their portfolios according to their risk appetite, since it is uncertain when the pivot may occur.
For further details see:
SoFi: A Contrarian Investment Play