SoFi Technologies (SOFI, $18.39): “SoFlying into the future of banking”
By: Rishi
Kumar, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
- SoFi Technologies (NYSE:SoFi) is a digital bank which engages in offering student loans, mortgages, refinancing, credit card, and investing products through their digital platforms. They also engage in providing insurance and banking products such as checking accounts.
- SOFI had disappointing earnings in August but shares have rebounded nicely and are up 24.9% since their last call. Much of the disappointment in the company was from misunderstanding.
- SoFi’s shares shot up on October 11th, 2021, due to Morgan Stanley stating initiating a buy rating at $25 PT. Sell side analysts have stated that SOFI has a powerful revenue growth story and they expect SoFi’s users to double in the next year to 5.2 million.
- The company recently announced a proposal to issue $1.1 billion in convertible notes. The notes are due 2026 and are unsecured and have a conversion price of $22.41.
Key
points: SoFi had a disappointing earning in
August which caused share prices to plummet to $13.75. However interestingly enough
SoFi’s CEO Anthony Noto was thoroughly impressed with the performance of the company
as they recorded their fourth straight quarter of positive adjusted EBITDA and
grew every key performance measure.
Revenues
for SoFi grew 101% to $231M in Q2 beating street estimates by 6% while total
members rose 117% to 2.6 million. The financial services segment grew 608% to
$17M while the financial technologies segment represented by the Galileo platform
acquired last year grew accounts 119% to 78.9 million accounts while growing
revenues 138% to $45.3 million.
However,
despite the growth EPS came to -0.48 vs the expected -0.06 EPS causing the
street as well as investors to become weary. However, the EPS was slightly misleading
as much of it can be tied to non cash one time non-cash items. Most prominently
was a one-time non-cash cost related to deferred tax liabilities of 99.8M which
were tied the Galileo acquisition and 89M could be tied to stock based
compensation. Also, the company’s positive adjusted EBITDA and user metrics were
not considered by the street which are more relevant for an aggressively
growing financial technology company rather than an EPS figure.
Since then,
SoFi’s shares have rebounded quite nicely, going up nearly 25% since the
earnings call. Much of that outperformance can actually be tied to a sell side
initiation report published by Morgan Stanley on October 11th, 2021,
which caused share prices to climb 13.45%. According to Betsy Graseck, the
analyst at Morgan Stanley who initiated coverage, SoFi is a disruptive company that
has a “powerful growth story” and according to Graseck SoFi has two major
growth catalysts: student loan refinancing and the bank charter SoFi is actively
pursuing.
Student
loan refinancing was SoFi’s first initial claim to fame as they became famous
for having some of the lowest student loan refinancing rates among legacy
players and challengers. The student loan space is ripe for this kind of mass
refinancing, according to a study done by Andrew Latham at Supermoney[1], student loans have been the fastest growing debt
in US households since 2007 with 32x faster growth than mortgages and 3x faster
growth than auto loans. This would give SoFi a huge tailwind as student loan
deferments end at the end of January 2022 especially with a large base of potential
customers in the United States who have student loans.
SoFi
will also benefit from a second major driver according to Morgan Stanley which
is the procurement of a bank charter. A bank charter allows SoFi to underwrite
their own loans instead of using bank partners which in turn leads to margin
expansion and increased profitability. According to SoFi’s last investor presentation
a bank charter would result in adjusted EBITDA rising from $254M to $447M and
growing at a CAGR of 143% as opposed to 130% from 2021 to 2025. The lower cost
of capital and the ability to capitalize on their own deposits while also cross
selling loan products to other digital banks via the Galileo platform will
drive incremental growth in revenue and margins.
In
recent news, SoFi announced a proposal to issue $1.1 billion in unsecured convertible
notes that are due in 2026 with an interest rate of 0% and a conversion price
of $22.41. The increased liquidity will be used to build out SoFi’s platform
without the company having to incur heavy interest expenses. The initial notes
proposed were for $750M but management appended the figure to $1.1 billion to
capitalize on the low cost of debt.
What
has the stock done lately?
The
stock has had quite the pop recently as mentioned earlier due to the sell side
report and due to the gross misunderstanding of earnings by the street and
investors who grew wary by the higher than expected negative EPS. The stock
went up 13.45% on October 11th and since their last earning call
shares have risen considerably. . The next earnings call is set to take place on
November 10th, 2021.
Past Year Performance: SoFi’s SPAC merger was less than a year ago so share prices are up ~84% since the merger was announced however the stock is still down from its 52-Week high of $25.78. Overall negative sentiment towards SPAC’s and less than stellar EPS in recent quarters has brought down share prices.
My
Takeaway
With strong user and revenue growth
metrics and a business model that is sticky due to the one stop shop nature of
the business, SoFi is still in optimal position to keep growing revenues
aggressively and expand margins through the procurement of a bank charter. The
street is starting to account for the strong growth in users and consistent
positive EBITDA as evidenced by Morgan Stanley’s initiation report. SoFi’s
lower rates, rounded product lineup, and completely digitized platform gives
them a significant advantage over their big bank peers and the thesis on which SoFi
was pitched remains strong as the technology segment is still seeing 100+% growth
and consumers are flocking to SoFi’s robust platform. Due to these reasons I
believe SoFi’s stock is still undervalued and it is recommended that the AIM
small cap fund continue to hold SoFi shares in the portfolio.
