2023-11-03 08:45:00 ET
Summary
- Morgan Stanley upgrades SoFi Technologies from underweight to equalweight after impressive Q3 earnings and raised guidance.
- SoFi's deposits continue to grow at a staggering pace, outperforming other banks in the industry.
- SoFi's ability to sell loans from its balance sheet and its strong growth in lending segments prove bear cases wrong.
After another impressive quarter, some of the big firms on the street are changing their tune as Morgan Stanley ( MS ) upgraded shares of SoFi Technologies ( SOFI ) from underweight to equalweight. SOFI delivered another triple beat after beating the consensus estimates for non-GAAP EPS by $0.06 as they lost -$0.03, generating $537.2 million in revenue, which was $21.64 million over the consensus and raising their 2023 guidance for the 2nd time. I believe Q3 2023 will go down as a pivotal quarter as SOFI delivered record numbers across the board in its quest to become a household name and a top-10 financial institution in the United States. This was the first quarter since Q3 2021 where originations in student personal and their home lending segments grew QoQ in unison, and each segment generated a contribution profit. SOFI also announced that they agreed to place a $375 million personal loan securitization with BlackRock ( BLK ), as this further differentiates SOFI's sources of capital. SOFI is still experiencing exceptional growth, and with GAAP profitability expected in Q4, I think more upgrades are coming and that SOFI could finish in the double digits for 2023 and potentially get back to their all-time highs in 2024.
Following up on my previous article about SOFI
I recently wrote an article on SOFI ( can be read here ) covering their sponsorship of the TGL Golf League. SOFI Stadium has been a major success, and SOFI announced a multi-year partnership with TMRW Sports to develop a tech-forward golf league led by two of golf's biggest stars, Tiger Woods and Rory McIlroy. I discussed how golf is a growing sport, especially among young adults, and the partnership with TGL Golf could provide excellent exposure to SOFI's target demographic of Gen Z. From its product offerings to strategic partnerships, SOFI is becoming a household name. In Q3, SOFI added its largest amount of members on a QoQ basis with 717,000 new members and finished Q3 with just under 7 million members. This was the 2nd quarter of QoQ from a member count basis, and the YoY growth rate grew on a percentage basis QoQ. SOFI is in the driver's seat, and we are seeing exceptional growth on all fronts. As a shareholder and contributor about SOFI, I am more excited than ever for SOFI's future and will outline why I think the best is yet to come with this follow-up article about Q3 earnings and what it could mean for SOFI's future.
SOFI is making its mark on the banking sector as deposits continue to increase
Ultimately the free market will decide if SOFI is providing value to its members, not myself, or anyone else. In the United States there is no shortage of banking options from community banks to the large money centers. The proof is in the numbers and SOFI continues to see its deposits grow at a staggering pace. In Q3, SOFI reported that they had grown their QoQ deposits by $2.93 billion. I have been tracking the deposits every quarter for 25 banking institutions, including regionals, communities, large money centers, and FinTech's. In Q3, SOFI saw its deposits grow QoQ by 23.01%, while the majority of the banks I track saw declining deposits. New York Community Bancorp ( NYCB ) is the only one that I track that hasn't reported yet, that's why their deposits remain unchanged from Q2.
When I go back and look at the amount of deposits these 25 banks had on their balance sheets to start 2023 and where they are now, SOFI is one of four banks that has exceeded single-digit growth. Over the past three quarters, SOFI has grown their deposits by 113.45% ($8.33 billion) while JPMorgan Chase ( JPM ) is the only large money center that has seen positive deposit growth with 1.68%. Wells Fargo ( WFC ), Bank of America ( BAC ), and Citigroup ( C ) have seen outflows reaching -6.77% over the past nine months.
While SOFI is still in its early stages, their relevancy continues to grow. Their deposits of $15.67 billion may not seem like a lot when many of these banks have over $100 billion in deposits on their balance sheet, but each quarter, more capital is finding its way into SOFI accounts. On the Q3 conference call , Anthony Noto (SOFI CEO) discussed how more than 90% of SOFI's consumer deposits are from direct deposit customers, and 98% of deposits are insured. This creates a sticky environment where a larger percentage of incoming members are direct deposit users. This allows SOFI to be their primary banking institution, and as the member base grows, I am expecting to see SOFI's balance sheet to continue growing QoQ.
The bear cases continue to be proved wrong and SOFI is starting to fire on all cylinders.
One of the most discussed bear cases earlier in the year was SOFI's inability to sell loans from its balance sheet. After Q1 2023 earnings, David Chiaverini from Wedbush downgraded SOFI from outperform to neutral and lowered his price target from $8 to $5. The same week he doubled down and downgraded SOFI again to an underperform rating and cut his price target in half to $2.50. His thesis had become that SOFI was unable to sell loans on the open market:
We fear that if SOFI were to sell loans, it may not achieve the same level of gain on sale margins that were generated in 3Q and 4Q of 104 cents on the dollar."
We expect regulatory scrutiny on capital ratios and stress testing to intensify
Mr. Noto had previously discussed that SOFI would pick and choose what provided more value to shareholders, and if they felt more value was created by holding loans on the balance sheet rather than selling them, then that is what they would do. In Q3 2023, SOFI sold portions of its personal loan and home loan portfolio. SOFI sold personal loans at a 105.1% execution level and home loans at an average execution level of 100.2%. In Q4, a continuation of this occurred as SOFI executed a $100 million sale of personal loans at 105.1% to the same partner as in Q3. SOFI and this partner, which wasn't named, also agreed on terms for a $2 billion forward flow agreement at similar execution levels. This indicates that there is a significant runway for future selling and that the bear case regarding SOFI's inability to sell loans is not accurate. In fact, SOFI and BLK agreed to a $375 million personal loan securitization, which broadens their customer base.
This was the first quarter since Q1 of 2021, where each of SOFI's lending segments grew in unison. On a QoQ basis, student loan originations grew 132.3% ($523.96 million), personal loans grew 3.88% ($144.97 million), and home originations grew 46.3% ($112.58 million). This was the first time SOFI exceeded $5 billion in originations across these segments in a single quarter, as there was 17.85% origination growth QoQ from SOFI's lending businesses.
While these segments all experienced QoQ growth, what could be more important is that the Financial Services segment achieved positive contribution profit for the first time. All three segments reported contribution profits while SOFI continues to invest aggressively with the goal of achieving high levels of compounding in the years to come. Financial Services net revenue grew 142% year-over-year and 21% sequentially to $118 million and achieved a $3.3 million contribution profit while investing across the money, credit card, and invest segments. SOFI reached 8.9 million Financial Services products, an increase of 50% YoY, and expects to grow the contribution profit being generated in this segment when Q4 results are announced.
Everything that SOFI has accomplished has led them to the point where growth continues to be delivered. This was a record quarter where growth accelerated on a QoQ basis. SOFI delivered $531 million of revenue in Q3 which was a 27% YoY increase and $98 million in Adjusted EBITDA which was a 121.29% increase. In Q2 SOFI's revenue increased by 6.23% QoQ and its Adjusted EBITDA increased 1.49% QoQ. In Q3 these growth rates increased as revenue grew 8.57% QoQ and Adjusted EBITDA grew 27.61% QoQ. The growth train is far from over and SOFI could have a long runway of revenue and Adjusted EBITDA growth ahead of itself.
The third leg of the triple beat was raised guidance and I will speculate on what I see on the horizon
SOFI didn't just beat the consensus estimates, they raised guidance for the 2nd time in every category. SOFI started the year out guiding for $2 billion revenue, 30% annual growth, and $280 million in Adjusted EBITDA with a 14% margin for its high-end estimates. SOFI is now taking these numbers higher for the 2nd time to $2.07 billion of revenue, 34% annual growth, and $396 million in Adjusted EBITDA with a 19% margin. This is exactly what we want to see and eventually the growth rates the margins, and the numbers will drive the share value higher.
I have been bullish on SOFI and I do believe that it has the potential to deliver the most Alpha in my portfolio over the next several years. SOFI is seeing an acceleration in growth within its technology platform and the pipeline was described as the most robust and viable that Anthony Noto has seen on the earnings call. He stated that SOFI is in the RFP process with a number of large financial institutions and that they won a regional bank deal, which will come online over the next 18024 months. The pipeline that Mr. Noto was talking about includes financial institutions, incumbent banks, and non-financial institutions, as well as B2B. There is a specific quote that is relevant to the tech platform in which Mr. Noto said:
the growth prospects that we're expecting there really started to come through in a much bigger way as many institutions are under pressure to upgrade their technology and to go after new growth opportunities.
The technology platform is why I am exceptionally bullish on SOFI, as they are much more than a bank. They have the ability to become one of the largest financial institutions while being a large-scale SaaS company. The combination of Galileo and Technisys created a unique opportunity because SOFI controls the entire backend of digital banking, from the processing to the actual cyberbank platform. SOFI isn't paying outside vendors to host and build features; everything is done in-house, and SOFI can monetize this by offering banking as a service to its peers/competitors. SOFI is the only banking institution that I know of that has this ability, and the commentary we received on this segment is strong. SOFI won a regional bank deal and is in the RFP process with several large financial institutions. As SOFI wins more clients, it will become more of a viable option for the banking industry as a whole, and SOFI will own and operate the underlying platform that a portion of the banking sector runs on. This creates a unique value proposition because SOFI could be valued more as a technology company rather than a financial institution.
After one month of Q4 in the books, SOFI's management team has clearly indicated that SOFI will be profitable in Q4. This has been the other aspect that people were bearish on. SOFI chose to invest heavily upfront as that would give them the best path to long-term success, and profitability is upon us. If SOFI becomes profitable in Q4, then the clock starts for inclusion in several indexes, especially the S&P 500. If SOFI becomes profitable and maintains profitability after a year, then it could be on the fast track to inclusion in the S&P 500, depending on where its market cap is.
Conclusion
I am expecting profitability to occur in Q4, SOFI to finish 2023 in the double-digits, and strong guidance incoming for 2024. Shareholders have lived through a period where something always went wrong due to factors beyond SOFI's control. Management has done a remarkable job navigating unprecedented times over the past three years, and SOFI's members are speaking loud and clear as deposits, members, revenue, and Adjusted EBITDA all continue to increase. This is a testament to SOFI's products and management creating a sticky environment that services its member's needs. I think more companies will follow Morgan Stanley in upgrading SOFI in the coming weeks, and SOFI will continue its growth trajectory.
There is a lot to be excited about, including profitability, TGL Golf, winning RFPs, a less restrictive Fed, and member growth. I think 2024 is going to be a banner year with student loans unlocked and SOFI gaining exposure to additional segments of the economy. SOFI has an ace in the hole that they haven't talked about, and I won't be surprised if they develop a business banking segment in Q4 and start going after small and medium-sized businesses that the large money centers have traditionally underserved. I had previously said I thought SOFI would get to $10 in 2023, and it did, despite being short-lived. I do think SOFI can still make a run on $15 if the market rallies into the end of the year, and if SOFI continues on this trajectory, we may see SOFI approach the $20 level in 2024. I look forward to seeing SOFI ending 2023 in the black and learning about its goals for 2024 as it continues to make its mark on the financial sector.
For further details see:
SoFi Technologies Delivers A Triple Beat And Is Upgraded By Morgan Stanley After Q3