SoFi Technologies Inc. (SOFI)
Is $SOFI Down for the Count or Cue the Theme from Rocky?
SoFi Technologies Inc. (SOFI) is a MID-CAP company founded in 2011 and began publicly trading on the Nasdaq in June 2021. In their own words from numerous SoFi press releases:
“SoFi (NASDAQ: SOFI) is a member-centric, one-stop shop for digital financial services on a mission to help people achieve financial independence to realize their ambitions. The company’s full suite of financial products and services helps its more than 7 million SoFi members borrow, save, spend, invest, and protect their money better by giving them fast access to the tools they need to get their money right, all in one app.” https://www.sofi.com/press/
Clint’s Take:
When Phil and I planned out this week's posts, we had SOFI initially scheduled for Wednesday, January 3rd. That coincidently was the same day investment banking firm Keefe, Bruyette & Woods (KBW) downgraded SOFI to "underperform." Then, in what is usually the self-fulfilling prophecy of analyst reports (don't get me started), the stock was down 13.5% on the day. Since it's hard to highlight the merits of a stock while it's in a nosedive, we waited a couple of days, reassessed, and took in the KBW write-up and the price fallout. After some ranting, raving, and wild conspiracy theories, I finally took a breath and thought about how to account for the KBW hatchet job in this Spotlight. Short answer. "Thank you, KBW".
As we have said before, when you are prepared and your research is solid, a price drop should look like a "bargain," not a "bust." On January 2nd, the day before the downgrade, I liked SOFI. The day after, I loved it! Q3’2023;
+24% Year over Year Lending Products in a constrained interest environment
+50% Year over Year Financial Services Products growth
Record +717K new members additions (+47% Year over Year) for 6.9mm total members
December 2023 SOFI comes in at $7.83 and rides high to a +31.8% before the end of 2023. All speculative dependent movement on talks of SOFI posting first profits in Q4 and the Fed signaling an end of rate hikes, which the Market took as imminent cuts. A week into 2024 trading by missing the Santa Claus Rally we can now call the end of December 2023 'Twas the Night Before Rally. SOFI was looking good to me. I loved the model. I saw the growth. Then KBW comes in and trips up what should have been a victory lap leading to the Q4 results.
FinTech generally gets a bad rap when we hold them up against traditional banks. Low rates, as we saw during lockdowns, FinTech wins. High rates traditional banks win because of asset-backed lending. SOFI has started to bridge that gap. We can use all the cool half-word combos we want, but, in the end, SOFI is an FDIC-insured bank, and to compete with the likes of Bank of America (BAC) and Citigroup (C), you need to be innovative, which they are. To succeed long-term, you must move more to the traditional model which they've shown. Targeting younger, higher earners, new member growth, student loan refinance (which most thought would be a considerable obstacle for SOFI when payments resumed), home mortgages, investments, financial planning… SOFI is becoming the bank you bank with for life. If the experts want to beat them up because they aren't JP Morgan Chase (JPM), they should also know SOFI doesn't offer calendars and toasters when opening a new account like in the old days. It is 2024.
Now, SOFI has shortcomings. Begrudgingly, KBW has a point on SOFI's ability to keep up with lending demand in a widening borrowing environment. There is also the idea that because rates obviously will come down for all lenders, competition in the Market will increase. Both of these factors have ALWAYS been true. While SOFI continues to carve out its market share in member growth to address competition, the traditional banks will undoubtedly have the edge on demand pacing. In a perfect world, I would like to see a more extensive commercial lending footprint for SOFI to broaden accessibility. Y'know, like one of those companies with their name on a sports stadium? Now, this may be a room-to-run point as well. The growth in mortgage lending corresponds with acquisitions of other mortgage lenders (i.e., Wyndham Capital Mortgage). [SPECULATION] When lending becomes cheaper, SOFI may already have a plan for entry-to-business lending similar to how they broadened personal loans with BlackRock (BLK). SOFI already has an impressive small business solutions platform (SoFi at Work) to build off of. Ultimately, neither competition nor lending demand, which all banks will have to contend with when monetary policy shifts, are deal breakers for me on long-term profitability for SOFI.
I believe 2024 to be THE year of SOFI. Drop the "alt" and start writing FinTech out as Financial Technologies in fancy calligraphy. SOFI is taking significant strides forward this year. Profit posting for Q4'2023. Poised to further expand lending at a sustainable, not limited, rate. Addressing customer needs with incentives for retirement planning and more. And the KBW fallout? Again, "thank you". My only hesitation was that the stock was running hot and a little pricey. This $8.23-$8.30 range is a better fit for me and probably for many retail investors looking to hold.
Phil’s Take:
As someone paying back their student loans, SOFI needs no introduction. On a very basic level, SOFI operates through three segments: lending, which includes student, personal, and home loans; financial services; and a technology platform. Their financial services ($118.2m) and technology ($89.9m) segments both posted promising results in Q3’2023. SOFI’s impressive customer growth may have a limit in such a crowded market but sustained growth is a promising sign of a solid product. My big questions come from how their lending segment ($342.5m) will perform in 2024. Traditionally, interest rates have a positive correlation with bank stocks. Interest rates go up, bank profits go up, bank stocks go up. With interest rates expected to fall this year, it makes sense to ask if SOFI’s stock price will do the same. The KBW downgrade pointed out that the way SOFI values its current loans could be negatively impacted by a rate cut. They estimated that every quarter-point reduction could lead directly to a $50 million drag on revenue, or $.05 of earnings per share. $.05 per share for a company that has estimated earnings of $.06 for all of 2024.
My biggest concern got partially addressed in the last week as SOFI stock dropped more than 10% off its late December high of $10.32. That $10.32 price point was outpacing the financial technology sector by roughly 10%. I understand that looking at valuation can be a bit deceiving when dealing with a company that has yet to post a profit, but I think it's still instructive here. Before the price drop it was trading at nearly 28x its projected earnings for 2024 compared to the rest of the sector which trades at roughly 13x and comparable companies like Enova (ENVA) which trades at 9.17x or Ally (ALLY) at 9.47x. Clint is right that SOFI is well positioned to bounce back but my big concern is that the broader economic climate of 2024 is going to weigh them down.
Moving Forward:
(This post’s Moving Forward has been updated below.)
As uncertainty continues to be the running theme of 2024 so far, I shall bottle my SOFI enthusiasm for a bit. Phil is right about the projected earnings multiple within the sector. If the downgrade fallout was a blessing for cooling off the price, then logic would dictate that an overreaching multiple going forward would have the same imbalanced trajectory. For that reason, we are placing SOFI in the "Prove It to Me" watchlist. While we agree on the framework, we would like to see some indication that SOFI can run a marathon in 2024 and beyond rather than a sprint here and there. How SOFI's price responds to this current selling pressure from the downgrade and overall market sentiment this year will give some indication. Another downgrade may pop up, and if it starts to pile on, SOFI will either drop below a level that makes the report of profits less impactful or slim down and can catch some momentum in January. Either way, the entry price becomes more of a value in either dollars or insight. We'll adjust as needed as we move closer to the January 29, 2024, earnings call.
01/26/24
On 18JAN24 SOFI announced:
“SoFi (NASDAQ: SOFI), the digital personal finance company, announced today the expansion of its new small business marketplace within the SoFi product experience. With this addition, SoFi will now be able to better support millions of American small business owners’ financing needs by connecting them to SoFi’s network of providers.”
You can read the complete press release here:
https://www.sofi.com/press/sofi-launches-small-business-financing-marketplace/
This move speaks to shortcomings and speculation we made in the original SOFI Spotlight (see below) after the Keefe, Bruyette & Woods (KBW) downgrade and fallout. One of the criticisms of the KBW assessment was SOFI’s ability to keep pace in a widening borrowing environment. Since then (01/03/24), we have seen more evidence that an eased interest rate atmosphere may be later than expected in December, giving SOFI more time to prepare. While this marketplace initiative doesn’t make SOFI a direct lender, more of a go-between, it does put them in the mix with business loans and a broadening out we speculated about it the first SOFI profile. We will need more time to see the benefits of this expansion as it relates from their actual lending partners (OnDeck and LendKey, among those confirmed) to SOFI directly.
Moving Forward:
(This post’s Moving Forward has been updated below)
Now, we find ourselves in a tricky spot with SOFI. On this Friday (01/26/24), the last trading session before the Monday pre-market earnings report, SOFI price movement this past week has seemed eerily calm. We think that nearer to today’s close; we will see an uptick in volume and price from the 37.7M / $7.56 we are seeing now (as of 1 pm). Therefore, we are UPGRADING SOFI to the “Checking My Math” watchlist, looking for specific criteria today. Some signals we are looking for are:
A significant volume increase beyond the average of 42.7M before 3 pm
A price increase of at least +5% from the $7.69 open
With high expectations for SOFI reporting of its first breakeven EPS, this may be a perfect time to build a position before “good news,” and momentum pushes it out of reach, but it is a tight window. As always, we will follow up and give you our takes on the earning call.
01/31/24
On 29JAN24 SoFi Technologies Inc. (SOFI) reported their Q4 and Fiscal Year 2023 earnings. Some metrics of note:
Member Growth: +585K (Totaling 7.5M) +44% Year over Year
Products Growth: +695K +41% Year over Year
Galileo Accounts Growth: Increased to 145M +11% Year over Year
Lending: +24% Year over Year (1.6M)
Financial Services Products: +45% Year over Year (9.4M)
You can see the complete presentation here:
https://investors.sofi.com/events-and-presentations/default.aspx
The real headline of course being that SOFI reported its first profit and a positive +$0.02 EPS, beating most estimates of a breakeven $0.00. Forward looking statements set ambitious goals including a 50% increase in Tech and Financial Services, an adjusted EBITDA of $580-590M, and further EPS gains of +$0.07-0.08. All in all, the report was slightly better than expected, followed by +20-22% price increases through the intraday trading session following the call (01/29/24).
Also, on 29JAN24 SOFI announced a broadening out of their investment platform products.
“SoFi Invest members will now be able to invest in select alternative investment funds, mutual funds, and money market funds. With the launch of alternative investments, SoFi is granting everyday investors access to the power to build and protect their wealth through investment opportunities traditionally reserved for the ultra wealthy.”
You can read the complete press release here:
This move seems to directly address what CEO Anthony Noto had said in the conference call and on the various financial news outlets throughout the day. SOFI is positioning itself to gain market share and profitability outside the confines of lending alone.
Moving Forward: “Checking My Math”
It appears we timed this one just right. Phil had cautioned against being too early in the original Spotlight (see link below) and since then selling pressure persisted on SOFI. Nearing the earnings report we re-evaluated, saw that it had slimmed down and was primed for gains hence the upgrade on Friday (see below). Monday after the call SOFI saw a +20.21% movement, with resistance getting past a $9.45 high. We think that is a good sign long term. We had prepared to possibly downgrade SOFI if the boost saw the stock price nearer to the $10.20-$11 range. At that price we believe it would have been “too heavy to hold”. This more moderate $8.20-$9.05 range seems sustainable going forward. For that reason, we are keeping SOFI in the “Checking My Math” watchlist. The announcements that have been dwarfed in all this positive earnings news, the Small Business Loan Marketplace (see below) and the Alternative Investment options, shows SOFI’s broadening out and growth potential. Bears continue to grade SOFI only as a bank opposed to a tech company when it serves their thesis. Keeping in mind that SOFI’s lending growth continues in a restrictive interest rate environment (banking side) and that the Galileo acquisition keeps showing new account growth for a company with no customer branches (tech side) we believe they are well balanced enough for profitability.
Our long-term consideration now is with a positive EPS of $0.02 how much of a tightrope does SOFI have to walk in a hazy future economic climate to maintain and grow through the coming quarters?
In the short term, with some insight on the Fed’s intent with rate cuts just a few hours away and SOFI still seeing increased volatility (due to short sellers), when can we expect a true trend line develop?
Thanks for reading! We'd love to hear from you with any questions or comments you have to share in the discussion below or on whatever platform you found us on. We tend to “chat around.”
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