SoFi: Emerging From The Ashes

Sep. 19, 2022 5:59 PM ETSoFi Technologies, Inc. (SOFI), SOFIW33 Comments


  • Q2 loans, revenues, and gross margins expanded heavily despite a bad environment.
  • Technology is the future of banking and customer acquisition.
  • Outlook is strong but dilution is an issue.
  • Student loan issue resolved.
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SoFi Technologies (NASDAQ:SOFI) has really become a battleground stock. It feels like it has been in the process of bottoming for months now. Despite all of the macro chaos in rates and the threat of a slowing economy, SOFI stock has kind of held its bottom pretty well over the last few weeks and months. This comes despite the overall market being hammered. In our opinion, with rising rates, the thought that student loan repayments will finally begin at the end of the year, and a still robust economy despite the Fed's actions, that business will only continue to improve from here. We think the stock is a buy here on any continued market weakness that pushes the stock back under $6 per share.

The stock has been pounded, but the company is operationally pretty strong. This is a fintech and one that is a leader in the space that it operates in. The company has evolved over the last decade. We have seen ongoing insider buying, a landscape that is questionable, performance that continues to improve, and now, real answers on student loan relief in the amount of $10,000 in forgiveness, a little more if you meet certain qualifications. The recent results were fine, and, commentary indicates more growth is expected.

Recent results show growth remains strong even in a slowing macro environment

In the recently-reported quarter, SoFi top line growth expanded as SoFi saw record adjusted net revenue of $356 million, up 500% year-over-year from the same prior-year period. Pretty stellar, and this exceeded the high end of management's guidance, and it beat consensus estimates.

On top of that, adjusted EBITDA of $20 million came in at the high end of expectations.

In the face of rising rates and crimped loan demand from 'rate shock' in the spring, this was the eighth consecutive quarter of EBITDA growth. All eyes were on loan results to see if the rate shock for borrowers manifested as a result of inflationary pressures. Housing data is weakening, so operationally a bottom may be approaching to come H1 2023, when recession could peak.

The company did see some pressure on operating margins. This led to weak earnings per share. We figured a loss of $0.11 to $0.01 or $0.06 at midpoint was likely. Unfortunately, SoFi came in at the low end of our range and missed consensus by a penny.

But every year the company seems to take more market share. It expands loans. It innovates. And it is paying off.

SoFi's Q2 loans and margins expanded heavily despite a bad environment

Folks, the company is still in mega growth mode. Sure, there could be a temporary slowdown for a couple of quarters if the Fed tanks the economy, but, this is a stock we want to be buying. In Q2, growth accelerated across all three reporting segments. There were also strong personal loan originations, a record of $2.5 billion of loans, up 91% from last year. Lending products as a whole were up 22%. Overall, the years of investing in technology and customer acquisition and cross-selling have paid off in our opinion.

Technology is the future of banking and customer acquisition

SoFi's tech platform is growing and is a great source of future revenues. In Q2, revenue was $84 million, rising 85% from last year. This was even up over $2o million from just Q1 2022. While the degree of a slowdown, if any, is unclear, we anticipate a similar or higher rate of growth in Q3 year-over-year for this platform. You see, for years, SoFi has been buying up companies and technology to expand its business. Their acquisitions will continue to generate some strong cost-saving synergies. We think that these synergies will result in margin expansion longer-term. This is because the technological synergies will start to be recognized after the initial ramp-up.

And frankly, it has already begun. For example, Galileo in Q2 saw a 39% year-over-year increase in revenue. Solid. They also have over 117 million accounts. Now expenses are of course high and that weighs some as the platform is built out. In Q2, profit was $22 million on 26% margins which fell from last year which saw 34% margins, and down from 30% in the sequential Q1. We see margins bottoming out in the next quarter or two here as the synergies are fully recognized.

It is not all good news though

It is not all growth, however. We did like that the financial services segment in Q2 saw $30.4 million rising 78% from last year, but only up 7% from Q1, and the company surpassed our expectations here. The company SoFi grew total Financial Services products by approximately 2.7 million, which doubled year-over-year, and now there are nearly 5.4 million products. But the growth has come at a cost.

This segment is still losing a ton of money. In fact, it saw a cash burn of $53.7 million, much of this from credit card losses as well as building up their current expected credit loss reserves. We think in a recession these losses could continue, so that is a risk. The amount of reserves will continue to grow, as will losses near term.

Outlook is strong

The company raised guidance after Q2, which is not something a lot of companies can say in this environment. The company indicated that full-year revenue will now be $1.508-1.513 billion, which was up from $1.505-1.510 billion previously guided. On top of that, adjusted EBITDA will be $104-109 million, an increase from the prior guidance of $100-105 million.

But dilution is an issue

Make no mistake, the company is delivering on its growth plans. The path to EPS profitability remains elusive. This is because the company has massive operating expenses. In addition, there is a constant share-based compensation issue. That continues to make positive EPS further out of reach quarter after quarter.

Student loan issue resolved

One of the largest headaches has been the delay in student loans being repaid. For over two years, these loans have not had to have been paid back. In addition, the Biden administration finally came to terms on a forgiveness of just $10,000 per student, more for some qualified borrowers. Student loans will begin to repay this New Year, and it will immediately feed the top line. We think you need to own shares ahead of this catalyst.

Take home

We think if shares pull back below $6 you have to be buying. Despite a weak market, SoFi stock has held its bottom from the spring. Operations are improving. Technology is driving some gains. Student loans, which were a huge issue, are now a catalyst for revenue in a few months. We like buying this innovative name right here.

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Disclosure: I/we have a beneficial long position in the shares of SOFI either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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