The fintech company we review in this report just announced quarterly results and they were impressive. Specifically, the company reported record revenue, increasing profitability and robust member and product growth. In this report, we highlight a few strong reasons why you might want to consider investing in this opportunity, including its strong financial performance, diversified revenue streams, strategic growth initiatives, large market opportunity and its valuation. We are currently long the shares in our Blue Harbinger Disciplined Growth Portfolio.
SoFi Technologies (SOFI)
SoFi is an online personal finance company and online bank. Based in San Francisco, it provides financial products including student and auto loan refinancing, mortgages, personal loans, credit card, investing, and banking through both mobile app and desktop interfaces. The company is led by CEO Anthony Noto. According to SoFi’s website:
SoFi's mission is to help people reach financial independence to realize their ambitions. Financial independence doesn't just mean being rich; it means getting to a point where your money works for the life you want to live. Everything we do is geared toward helping our members get their money right. We're constantly innovating and building ways to give our members what they need to make that happen. We were founded in 2011 and have developed a comprehensive suite of products that offers the speed, selection, content and convenience that only an integrated digital platform can provide.
Record-Breaking Financial Performance
SoFi announced record performance in its newly released second quarter earnings report. Specifically, the company achieved its ninth consecutive quarter of record revenue and fourth consecutive quarter of record adjusted EBITDA. Adjusted net revenue reached an impressive $489 million, representing a substantial 37% year-over-year growth. Equally impressive was the record adjusted EBITDA of nearly $77 million, signifying a 43% incremental margin and a 16% consolidated margin. The company's financial strength is further evident in its growing deposit base, which increased by $2.7 billion sequentially to a total of nearly $12.7 billion.
Additionally, SoFi's lending segment displayed solid growth with adjusted net revenue of $322 million, a 29% year-over-year increase. And importantly, SoFi maintained strict credit standards, resulting in lower delinquency rates and charge-offs than industry averages (a testament to its commitment to quality). SoFi's focus on customer acquisition efficiency and improved unit economics drove an impressive $20 million improvement in the contribution loss of its Financial Services segment, which is now well on its way to achieving a positive contribution profit. These Q2 achievements show SoFi's ability to adapt and thrive in a rapidly evolving financial services industry.
The company provide updated forward-looking numbers (they raised guidance) and expect to be GAAP profitable in Q4 of this year.
Diversified Revenue Streams
One of the most significant strengths of SoFi is its diversified revenue streams. The company operates across three segments: (1) Lending, (2) Technology Platform, and (3) Financial Services. This diversification allows SoFi to benefit from multiple high-growth sources of revenue and reduces exposure to volatility in any particular sector.
The Lending segment demonstrated impressive growth, with personal loan originations reaching a record $3.7 billion, a 51% year-over-year increase. The company's focus on high-quality credit and its underwriting model contributed to dependable loan performance, evidenced by a lower quarter-over-quarter annualized net charge-off rate of 2.94% (particularly impressive in the current macro environment). SoFi also ventured into new markets, nearly tripling its home loan originations with the introduction of VA loans, further expanding its product offerings.
The Technology Platform segment achieved record net revenues of $88 million, with strong account growth for Galileo. New client signings across the platform demonstrated the company's ability to capitalize on existing customer bases and drive revenue growth.
The Financial Services segment experienced exponential revenue growth, more than tripling year-over-year to $98 million. This growth was driven by strong member expansion, cross-buying among existing customers, and enhanced monetization. The segment's impressive $50 revenue per product indicates its potential to further improve profitability.
Strategic Growth Initiatives
SoFi's impressive financial performance and diversified revenue streams are underpinned by its relentless focus on strategic growth initiatives. The company's "one-stop-shop" vision for all financial needs is supported by continuous product iteration, high levels of customer engagement, and innovative marketing campaigns.
SoFi actively drives customer acquisition through marketing efforts like the "Changing the Face of Finance" campaign, which garnered over 72 million impressions in just five weeks. This type of marketing not only attracts new investment members and increases assets under management (AUM) but also enhances brand awareness and promotes member growth across the entire platform.
Moreover, SoFi's focus on product differentiation is evident in the continuous expansion of offerings and improved product uptake. The company's recent partnership with Expedia to launch "SoFi Travel" offers member discounts and cashback rewards, showcasing SoFi's ability to diversify its services and attract customers seeking more than just traditional financial products.
Valuation:
SoFi is not yet GAAP profitable, but (as mentioned) the company expects to be GAAP profitable in Q4. Instead of valuation SoFi with traditional valuation metrics, such as Price-to-Earnings ratio (which has little value at this point because SoFi does not yet have any earnings, and the company is focused on long-term growth), a better approach is to consider the company’s total addressable market opportunity (or “TAM”) which is truly enormous considering financial technology has the potential to disrupt the entire financial services sector (such as personal loans, student loans, home loans and SoFi’s payment processing application, Galileo).
And as SoFi grows it gains competitive advantages (versus other Fin Techs) in terms of economies of scale, but especially lowering its customer acquisition costs (because once they have a customer for one product, it’s easier to get them to use another product). Lowering customer acquisition costs by expanding product offerings is a major component of SoFi’s business strategy, and it will help improve profitability down the road.
As such, SoFi has been rapidly growing revenues (as shown earlier), and the company price-to-sales valuation multiple has come down significantly (versus the pandemic bubble time period). SoFi trades at a reasonable 6.1x sales multiple, which is compelling considering the company’s high revenue growth rate and large total addressable market.
Risks
Investors should also be careful to consider the significant risk factors that SoFi currently faces. For example:
Interest Rate Risk: Chris Lapointe (“CFO”) mentioned that non-interest income declined sequentially due to fair market value write-downs caused by increases in interest rates. This risk could impact the company's net interest margin and the fair value of its loan portfolio.
Market Environment Volatility: SoFi's strategy involves holding loans for longer periods of time to generate net interest income, but the market environment can be unpredictable. Changes in interest rates, credit conditions, or economic factors may impact the value of their loan portfolio and overall profitability.
Competition in Deposit Growth: While SoFi has experienced impressive deposit growth, there's a risk of increased competition from other financial institutions offering similarly high APYs on savings accounts. Maintaining a high level of APY might require careful balancing between product offerings and deposit growth strategies.
Share Price Volatility: Finally, not to be overlooked, SoFi shares are volatile, as is often the case for young disruptive growth companies. Investors should be aware of the price volatility (see earlier price chart) and focused on the long-term (instead of day-to-day, or even quarter-to-quarter, price moves). Long-term, these shares have tremendous upside potential for patient investors.
To address these risks, SoFi is working to remain well-capitalized and have access to substantial warehouse lines, allowing them flexibility in maximizing returns on loans. Additionally, they are focused on building their native brand awareness and leveraging their competitive advantages to maintain high-quality deposit growth and drive cross-buying of various financial products. As for interest rate risk, they plan to take a conservative approach and manage their net interest margin effectively, while continuing to optimize their customer acquisition cost and scale their member and product growth.
Conclusion
SoFi currently presents an attractive opportunity to benefit from a financial technology company that continues to deliver record-breaking results. Specifically, with its strong financial performance, diversified revenue streams, and strategic growth initiatives, SoFi has shown its resilience in navigating market volatility and industry disruption. The company's relentless pursuit of innovation and customer-focused approach positions it for continued success and sustained growth.
Long-term Investors with a high tolerance for near-term volatility may want to consider investing in SoFi (especially as an attractive way to gain exposure to a dynamic, forward-thinking financial technology company). The company's solid financials, impressive revenue growth, and strategic vision make it a compelling choice. We are currently long shares of SoFi in our Blue Harbinger Disciplined Growth Portfolio.