SoFi: Halted Trading, Earnings Beat, Q2 Outlook, And Increased 2022 Guidance

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The FinTech sector has been decimated, and not a single stock has been safe. Last night Upstart Holdings (UPST) provided weak 2022 guidance, and shares dropped -56.42% today as shares declined by -$43.52 to $33.61. One can argue that UPST brought the sector down, but the sector has been a falling knife in the aggregate for some time. FinTech royalty hasn’t been able to find its footing as PayPal (PYPL) has declined by -67.68% over the past year while Block Inc (SQ) has declined by -61.01% over the past year. The Nasdaq is officially in a bear market as its declined -25.86% YTD, while the S&P 500 is just -3.41% away from entering a bear market YTD. 2022 hasn’t been kind to the market, and then there was SoFi Technologies (NASDAQ:SOFI) which has lost -76.82% over the previous year.

Today was certainly interesting as SOFI traded lower in the morning following the crushing blow the markets dealt to UPST; then, Q1 earnings were “leaked,” and trading was halted for several hours. SOFI released a powerful quarter, Q2 guidance that the market didn’t like, and increased 2022 guidance. My largest pet peeve with investing is that so many investors jump to conclusions without understanding a business or reading through the 10Ks, and quarterly information. Some people still classify SOFI as a student loan company and assume the business is being crushed by the never-ending moratorium, which couldn’t be further from the truth. SOFI was approved for a national banking charter by the Office of the Comptroller of the Currency (OCC), which doesn’t come easily. The OCC isn’t just handing out banking charters as companies have to undergo a stringent process to be approved. SOFI’s chart reads as if they’re on life support and in danger of going under. I highly doubt the OCC’s licensing division would approve a national banking charter for SOFI if their compliance practices were sub-par or in danger of going under.

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SOFI raised 2022’s guidance from their recent guidance cut due to the moratorium extension

When SOFI released their 2021 earnings back in March, they guided for $1.57 billion of revenue in 2022 with $180 million in Adjusted EBITDA based on the student loan moratorium ending in May. On 4/6, SOFI revised guidance based on an extension on the student loan moratorium as President Biden extended the moratorium from 5/1 to 8/31. SOFI got ahead of a possible future extension and reduced full-year 2022 guidance to $1.47 billion of revenue and $100 million in Adjusted EBITDA and baked into this projection that the moratorium would be extended into 2022 instead of ending on 8/31. Today SOFI raised its guidance from $1.47 billion in revenue to $1.5 – $1.51 billion of revenue and $100-$105 million of Adjusted EBITDA from $100 million.

Prior to the pandemic, SOFI’s student loan refinancing business had an average student loan that was $70,000. SOFI was doing over $2 billion of quarterly refinancing. Since the moratorium, this segment has operated at 50% or below except in Q4 2021 as there was an increase to refinance as people thought the moratorium was going to end. This point is critical; anyone that has refinanced with SOFI will not be eligible for student loan forgiveness if that’s what the Biden Administration passes, as they now have private loans through SOFI. President Biden has been clear that $50,000 or wiping out federal student loan debt in its entirety is off the table, and he is looking at a lesser number. He campaigned on $10,000 of forgiveness for those who had a need but didn’t specify what would classify as the level. The news coming out of DC has been $10,000 for individuals making less than $75,000 and the $125,000 threshold.

Student loan forgiveness of $10,000 isn’t bad for SOFI. SOFI is growing and producing financial records, with its student loan business operating at 50% or less. Using their average student loan refinance level of $70,000, if President Biden was to forgive $10,000 across the board, there would still be $60,000 left on the loan. There will be an influx of people refinancing as the moratorium will end, and with interest rates rising, I don’t think individuals will push off refinancing due to the influx of rate hikes. Regardless of whether a decision is made in the next several weeks, August, or early 2023, the moratorium will end, and SOFI’s refinancing business will see a significant increase. I think there is a huge misconception about what student debt forgiveness means for SOFI, and the stock is almost acting as if the federal loans SOFI refinanced will disappear.

SOFI

SOFI continues its exponential growth into 2022

SOFI continues to gain hundreds of thousands of new members each quarter. In Q1, SOFI’s member base increased to 3.87 million members as they added 408,000 members. SOFI has added an average of 396,750 members per quarter over the previous 4 quarters. This includes what now looks to be a low quarterly add of 279,000 in Q2 of 2021. At the current average, this would put SOFI at 5.06 million members at the end of 2022. Now that SOFI has its banking charter, 2022 could become its largest member growth year to date as potential members will feel more comfortable storing their capital with SOFI knowing they are an officially recognized bank by the OCC and Federal Reserve. We live in a digital world, and to think that the generation of young adults who will never know life without a smartphone, tablet, or the internet will bank in the same traditional fashion that I do is not realistic.

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In Q1 2022, SOFI added 689,000 new products for its members, bringing the grand total to 5.86 million. This is one of the major differentiators between SOFI and other FinTech companies. SOFI can’t be placed in a box as its dynamic product mix overlaps the entire financial services spectrum. On the lending side, SOFI has 1.14 million types of products, and in financial services, SOFI offers 4.72 million products to provide its members with a one-stop shop for personal finance. With just over 5.86 million products available to its members, it’s becoming a safe assumption that if you can’t find what you’re looking for with SOFI, there is a chance it doesn’t exist.

SOFI

The combination of member growth and product growth creates an elevated opportunity level for cross-selling products. The SOFI platform has transcended into a complete ecosystem that provides a 360 approach to personal finance. SOFI’s overall goal is to build trust on the first product a member engages with to forge a relationship. When a member is successful, and that relationship with SOFI is forged, it can open up a revolving door where the 1st product’s success drives the utilization of future products for future life events. This approach creates lifetime value among each member with low customer acquisition costs because the member is already engaged with SOFI.

SOFI

SOFI posted a Q1 Revenue beat, EPS in-line with estimates, and the financials are getting better

If you can’t get excited about Q1 for SOFI, I am not sure what this young company needs to do? SOFI reported net revenue of $330 million, an increase of 69% YoY, and $322 million recorded adjusted net revenue, which was an increase of 49% YoY. This marks the 7th consecutive quarter that SOFI has posted positive Adjusted EBITDA and is starting 2022 in a strong position. SOFI is starting the year in a position of strength as they added $106 million to their Q1 Adjusted Net Revenue and $5 million to their Adjusted EBITDA.

Unlike other FinTech companies, SOFI’s products overlap the entire personal finance sector and cover lending, technology, and financial services. The lending segment generated $244.37 million in adjusted net revenue, up 45% YoY. Their larger loan balances and yields drove growth in net interest income across both personal and student loans and record personal loan originations. The Lending segment Q1 contribution profit of $133 million increased 51% from $87.7 million YoY. In Q1, the lending segment’s total origination volume increased 30% YoY, validating strength in the personal loan segment. SOFI recorded record personal loan originations of more than $2 billion in Q1, which was an increase of $1.2 billion (151%) YoY.

The second pillar is SOFI’s technology segment, which generated $61 million in net revenue, increasing 32% YoY. Galileo generated the majority, and Technisys contributed a small margin. As I have explained in previous articles, I am extremely excited about the technology segment’s future. SOFI’s intention is to invest heavily across this segment to reduce internal operating costs and create internal and external growth opportunities while creating a vertically integrated platform. The combination of Galileo and Technisys positions SOFI ahead of the competition as they unlock the synergies of creating the only end-to-end vertically integrated banking technology stack. This will allow SOFI to build every product on 1 unified core to offer a best-in-class product for their members and clients. No other FinTech company has this capability, and owning the entire backend becomes an incredible differentiator in the future.

SOFI

SOFI’s financial services segment is their third pillar which generated $23.5 million of net revenue in Q1, an increase of 264% YoY. Financial services expanded its contribution loss to -$49.5 million due to building out current expected credit loss (CECL) reserves from a growing credit card business compared to one that had just been launched last year. These losses are expected to increase as the business continues to grow and scale. I am expecting this segment to see continuous growth going forward as SOFI is now officially operating with a national bank charter. Their Checking and Savings accounts have no minimum balance requirement, many free features, a unique rewards program, and an increased interest rate of 1.25%. All future deposits will allow SOFI to hold these deposits in the SOFI Bank and use them to fund SOFI loans at a lower cost of capital.

Why I continue to become more bullish on SOFI

There are several sectors that are critical, and behind food, water, shelter, and energy come personal finance. Every adult doesn’t need a streaming subscription or luxury automobiles, but everyone needs to interact with personal finance segments to some degree. Personal finance is a lifelong event for adults, whether it’s checking and savings, credit cards, personal loans, student loans, obtaining a mortgage, refinancing or planning for retirement. At the very least, adults have paychecks deposited and pay bills monthly, while others have other needs depending on their stage of life. Many of life’s major events revolve around finance, and that’s not going to change.

Every adult needs personal finance solutions, and SOFI is disrupting this sector, creating an inviting and enticing ecosystem for the next generation of adults. SOFI’s membership growth indicates that current members value their financial products and the QoQ growth continues to compound. There is no shortage of teenagers getting their first job, opening a checking or savings account, applying for credit cards or student loans, or transitioning to adulthood. Year after year, more teenagers and young adults enter the world of personal finance, and as they age, their needs evolve. I am not just looking at how many customers SOFI can convert from legacy banking systems but how many clients they can gain at the beginning of their financial journey.

SOFI has become a household name, and the banking charter provides a level of legitimacy that other FinTech companies don’t have. SOFI is still in its hypergrowth phase, and the company hasn’t come close to finishing its blitz scaling. We’re years away from recognizing the full effects of the foundation that’s been created. The cost of running SOFI’s business will decrease as its products are vertically integrated, SOFI will be able to launch new products to serve their clients quicker, and they will be able to pivot and build at a moment’s notice while the competition tries to source the components, and a new sector will be created after the vertical stack is perfected. SOFI has the ability to power the backend for legacy banks in the regional and local sectors while being the backend and bank sponsor to neo and challenger banks in the digital space. Banking as a Service ((BaaS)) is in its infancy, and SOFI is going to be the only provider of the entire back end, including the digital cyberbank platform, payment processing, card issuing, and bank sponsoring.

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Conclusion

It’s been a rough road, and just about everyone, including myself, is in the red on SOFI. I went into this investment with eyes wide open and a long-time horizon. Did I think SOFI would trade under $6? No, I certainly didn’t, I didn’t think we would see single digits, and I was wrong. SOFI has been taken to the woodshed during the correction and re-rating of equities. It’s always amazed me that investors are so quick to buy on the way up because they don’t want to miss out but are hesitant to buy on the way down if the investment thesis doesn’t change. I am not comparing SOFI to Amazon (AMZN) but think about how shareholders of AMZN felt when AMZN went from $106 to $6 during the dot com bubble.

This is a much different scenario; SOFI has real revenue, real Adjusted EBITA, improving financials, proven growth trends, and was issued a national banking charter. SOFI is being priced for destruction, and I don’t believe that’s realistic. Don’t forget that the student loan moratorium will end eventually, and this will jumpstart SOFI’s refinancing business. We may not have reached the bottom in the markets or in SOFI, but I am adding. I added to my SOFI position last week, I added today, and I am probably adding next week. My current PPS is $12.73, and I am looking at this as an opportunity to get my average into the high single digits. My investment thesis hasn’t changed, and while this investment is underwater now, I am not uncertain that this will be a multi-bagger for me in the future.