Summary
- SOFI smashed Q4 earnings and delivered better-than-expected 2022 revenue and adjusted EBITDA numbers after several upside revisions.
- SOFI is projecting it will become GAAP profitable in Q4 of 2023, which is sooner than expected.
- I believe SOFI has the most upside potential of any stock in my portfolio.
SoFi Technologies (SOFI) just smashed expectations, and I am not surprised. 2022 was a pivotal year for SOFI as the national bank charter was granted, which opened the chess board. In my opinion, the market underestimates the long-term opportunity in SOFI and doesn't understand the technical aspect of the business. In the face of adversity, Anthony Noto and the team at SOFI pivoted and insulated themselves from the uncertainty around student loans, which will provide immense value. SOFI ended 2022 with 5.22 million members as they are just getting started taking market share from the big banks. In a way, this reminds me of Tesla ( TSLA ) because Elon Musk did what many believed was impossible as he took the fight to the legacy automakers against all odds. In Q3, SOFI guided to generate $1.52 billion of revenue and $120 million of Adjusted EBITDA on the high side and delivered $1.54 billion in revenue and $143 million of Adjusted EBITDA for the 2022 results . Since 8/18/21, Mr. Noto has made 24 insider purchases, with his personal capital ranging from $14.46 to $4.42 per share. I tore through the 2022 numbers and am more bullish than ever. I will continue to dollar cost average into SOFI as I can't predict what the market will do, but from a long-term (5-10 years) investment perspective, I feel that SOFI has the most upside potential out of any position I own.
Insiders only buy shares for one reason and it's because they believe the stock will go up and Anthony Noto has done a lot of buying
Since SOFI went public at the end of 2020, Anthony Noto has deployed $11.27 million of his own capital toward purchasing shares of SOFI. When SOFI took its 2nd trip lower in the summer of 2021, Mr. Noto purchased 28,600 shares for $403,832 over 4 purchases in August at an average price per share of $14.12. Throughout 2022, shares of SOFI crumbled and reached a low of $4.24. The 28,600 shares that Mr. Noto purchased in 2021 were just the tip of the iceberg as he deployed $10.87 million to make 20 individual purchases as shares of SOFI cratered. In 2022, Mr. Noto acquired an additional 2.15 million shares of SOFI, with his 2 largest purchases coming at the end of 2022. In December of 2022, Mr. Noto purchased 1.13 million shares when SOFI was $4.42 and another 525,000 shares at $4.59. In total, Mr. Noto has purchased 2,175,557 shares with his personal capital since SOFI went public for $11,272,863.44, bringing his price per share from $14.12 in 2021 to $5.18.
Mr. Noto has done a great deal of buying, making 20 purchases in 2022 which I see as very bullish. It's one thing to have a package where stock options are granted for hitting specific milestones, and it's a completely different thing to make ongoing purchases with personal capital. Mr. Noto is sending a signal that he is willing to put his money behind SOFI and believes shares represent an opportunity. Insiders only buy for 1 reason, and Mr. Noto has the best understanding of SOFI's future potential. Insider buying should be considered bullish, and Mr. Noto has been standing behind his conviction throughout the collapse of SOFI's share price.
SOFI is taking market share away from legacy banks with respect to deposits
SOFI received its national banking charter in Q1 of 2022 and ended 2022 with $7.34 billion in deposits. I have been tracking the deposit inflows and outflows for 25 of the largest banks in the U.S., including regionals and nationals. Some of the banks include Bank of America ( BAC ), JPMorgan Chase ( JPM ), Wells Fargo ( WFC ), and Citigroup ( C ). In the grid below, I have indicated the number of deposits each bank had at the end of Q1 2022, where they finished at the end of 2022, and the difference between the two numbers. Of the 25 banks, 5 banks have yet to report their 2022 numbers, so they are shaded in orange to indicate that those are still Q3 numbers.
SOFI has gained $6.19 billion in deposits, an increase of 535.2% over the last 9 months. This works out to $687.38 million in net deposits monthly from SOFI members. The facts are that many legacy banks are losing market share in deposits, and SOFI is gaining market share. Over the past 9 months, The Bank of New York Melon saw its deposits decline by -19.27% (-$66.6 billion), while Barclays ( BCS ) watched their deposits decline by -10.65% (-$76.87 billion). JPM couldn't escape its deposits eroding as they watched -$221.03 billion (-8.63%) disappear, while BAC's deposits declined by -6.86% (-$142.07 billion), and WFC's deposits declined by -$98.49 billion (-6.64%).
From the 25 banks I have been tracking, there has been a net outflow of deposits over the previous 9 months of -$816.3 billion. JPM, BAC, and WFC watched -$509.77 billion leave their balance sheets from deposits in this period. SOFI has continued to see strength in its membership and deposits, which I believe will continue. It will be increasingly difficult for legacy banks to compete with SOFI as cloud-based banking becomes the norm. SOFI currently offers 3.75% APY on savings and 2.5% APY on checking when members set up direct deposit. JPM is offering 0.01% APY n their savings accounts, and the largest APY that BAC offers is 0.04 %. I feel that due to the legacy bank business structure and embedded costs, they don't have the ability to compete with SOFI on interest rates and that this will hurt the legacy banks acquiring new clients going forward. SOFI is focused on tomorrow, not yesterday, and has built a banking system that benefits its members in every aspect. I think SOFI is going to win the battle, and more teenagers and young adults will gravitate toward SOFI for their banking needs than legacy banks in the future
What I loved about 2022 and showing the data in a different way than the Q4 earnings presentation
SOFI broke 5 million members , and the growth since the bank charter was granted has been immense. The bank charter became official in Q1, and over the previous 9 months, SOFI has added 1.36 million members (35.03%). In Q4, SOFI added its 2nd largest amount of new members, with 480,000 people. SOFI's YoY annual membership growth rate was 51%, as they added 1.76 million new members in 2022.
SOFI has been ramping up its deposits, and as I indicated in the previous section, SOFI has added $7.34 billion in deposits since it became an official bank in Q1. While this is very impressive, I am looking to see if the average member deposit is growing, and it is. In Q3, SOFI's average member deposit was $1,060.85, and this grew 32.51% QoQ to $1,405.76 in Q4. Over the previous 9-months, SOFI's average member deposit has increased by 370.41%.
In Q4, SOFI added 696,000 new lending and financial service products bringing the combined total to 7,895,000 products. SOFI's Q4 2022 revenue grew to $443.42 million. SOFI's revenue per member in Q4 was $84.90, staying in line with its previous results. SOFI is averaging $56.16 of revenue per product in Q4, which is also in line with its previous numbers. One of the nice things that I am seeing is that as SOFI is growing, these metrics are not grossly deteriorating.
Some may disagree with me, but I am happy that SOFI faced tremendous adversity with its student loan business. This became a make-or-break moment, and SOFI rose to the challenge and reinvested its business from the ground up. Sometimes great things occur when your back is against the wall, and you have no choice but to figure out a way to succeed. We will never know if SOFI would be where it is today if the student loan debacle didn't occur, but SOFI's business is stronger because of it.
In 2022 we witnessed one of the quickest increases to the fed funds rates, which impacted lending across the board. When interest rates are high, investors can generate large amounts of yield from CD's bank accounts if you bank with SOFI, or from T-bills, but if you're a borrower, rates are much higher. We have seen mortgage rates more than double inside of a year. Considering the student loan business is operating at half mass, and mortgage rates impacted SOFI's home lending business, some may have thought that total loan originations wouldn't have exceeded their 2021 levels.
Student loan and home loan originations are nowhere near where they were, but SOFI has done a great job at generating personal loan originations. SOFI increased its total loan originations YoY by $326.7 million or 2.58% in a time when student loan originations were -80.1% less in Q4 2022 compared to Q1 of 2020 prior to the moratorium, the student loan originations operated at -54.42% compared to 2020, and home loan originations fell -67.55% YoY. I am not optimistic about these segments coming back to life until 2024, but what will occur when the moratorium has ended, student loan repayments begin again, and the Fed pivots and starts to cut rates? As SOFI's membership grows in 2023, I think we will have a strong setup for 2024 because this should be the year that these 3 loan segments operate without any roadblocks.
SOFI is delivering and GAAP profitability is around the corner
SOFI beat its high-end guidance for 2022 and delivered $1.54 billion of revenue and $143 million in Adjusted EBITDA. SOFI beat Q4 estimates on the top and bottom line as they generated $0.04 better EPS than expected and an additional $17.58 million in revenue compared to analyst estimates. In Q4, Adjusted EBITDA came in at $70 million, which is almost equal to the share-based compensation expense of $71 million, which is critical for GAAP profitability on a net income level. On the SOFI conference call , Mr. Noto specifically stated that they expect SOFI to become net income positive on a GAAP level in Q4 of 2023. SOFI is well capitalized, and if you look at their balance sheet, long-term debt is non-existent, and SOFI has $1.42 billion of cash on the books with another $396.8 million in long-term investments. SOFI isn't in danger by any means, and with the net income loss narrowing QoQ to -$40 million in Q4 2022, SOFI will utilize a small portion of its cash to get to profitability.
So what happens next? SOFI has provided beat after beat and revised their earnings to the upside in 2022 several times. SOFI has forecasted $2 billion of revenue and $280 million of Adjusted EBITDA on the high side of their 2023 projection. Based on their previous results, I wouldn't be surprised to see SOFI generate $2.1 billion of revenue and $310 million of Adjusted EBITDA. SOFI is just getting started, and I think 2023 will be a critical building year for SOFI and we will see true performance unlocked in 2024 and 2025.
Conclusion
I think SOFI has the largest amount of potential for capital appreciation out of all the equities I am invested in over the next 5-10 years. We have yet to see all of SOFI's businesses operate in unison, and all these quarterly beats have come through adversity and had to overcome major external obstacles. If Mr. Noto says they will be net income profitable in Q4 of 2023, I believe him. The question becomes, what will SOFI accomplish in 2023 and 2024 when synergies between Galileo and Technisys are recognized, student loan originations are back to normal, and the Fed Funds rate is lower, which will make purchasing homes more attractive? I continue to acquire shares, and I believe SOFI can become a top financial institution this decade. Unless something drastically changes, I believe Mr. Noto will deliver large amounts of capital appreciation for long-term investors, and shares are inexpensive relative to what their future earnings power will be.
For further details see:
SoFi Technologies Q4 Smash, Strong 2023 Guidance, Tremendous Upside Potential