SoFi continues to overdeliver and even a former bear turned bullish

Hey fellow investors 👋,

Market reactions don’t always make sense in the near term, and very often stocks move in the opposite direction of what most investors expect. Dynamic supply, demand, and trading algorithms make it very difficult to explain day-to-day stock moves. A recent stock reaction that doesn’t necessarily make sense is the post-earnings drop of SoFi ($SOFI) stock.

The digital bank reported virtually flawless earnings results on Monday that beat analyst forecasts across the board. The company even raised its full-year growth and profitability outlook. While the stock initially spiked, it gave up all gains during market hours on Monday for no apparent reason.

Despite the neutral post-earnings reaction, SOFI stock has risen nicely this year on continued strong top and bottom-line performance. In the most recent quarter, the company’s growth accelerated, suggesting market share gains in a very competitive market. The strong results show that SOFI is well-positioned to win in a tough industry thanks to its comprehensive and modern finance platforms. Let’s take a deeper dive.

Rising Above The Fintech Clutter

Finance is a very competitive industry with many participants fighting for market share. In the digital world, the competition in the finance space has only increased with the emergence of many different fintech companies. Standalone investing and crypto trading apps, digital wallets, lending platforms, and others are all competing for market share.

As it turns out, offering only one type of financial solution in a standalone app is a recipe for failure. Just look at PayPal ($PYPL). The fintech leader is struggling to grow as it faces fierce competition from the rapidly evolving fintech landscape. Its historical focus on a single aspect of finance – digital payments is now a competitive disadvantage. While this was a successful strategy for many years, the broader financial landscape has evolved. Consumers today expect integrated financial solutions that encompass payments, investing, lending, and more, all in one comprehensive platform. Here comes SoFi, the next-gen digital bank.

Unlike PayPal, which is no longer growing its user base, SOFI is firing on all cylinders. As you can see below, the company’s members, as it calls its customers, increased 47% y/y in Q3 to nearly 7 million, an acceleration from a 44% y/y growth in the previous quarter.

This is perhaps a sign that the company’s platform strategy works, helping it gain market share. SoFi offers a one-stop solution for a range of financial needs. Its comprehensive suite of products includes savings accounts, investment options, personal loans, student loans, and loan refinancing, among others. This wide array of offerings allows users to seamlessly transition between various financial activities, all within the same platform, creating a powerful competitive advantage.

It’s difficult for competitors to replicate its comprehensive platform for several reasons. SOFI is officially a bank, which is why it can offer this wide range of financial products. Getting a banking license is a difficult and lengthy process that creates barriers to entry. As for the legacy banks, these companies cannot compete with SOFI on product attractiveness. For example, SOFI offers a no-fee high-yield savings account with an APY of 4.60%, well above the national average APY of 0.46% for savings accounts. This is because SOFI is a digital bank, and its operating expenses are much lower than that of traditional financial institutions. The company is able to pass these savings to consumers by offering more competitive products.

Exceptional Top & Bottom Line Performance

While SOFI’s revenue growth has slowed recently, the company continues to grow rapidly. In Q2, its revenue grew 27% y/y to $537 million and easily beat analyst estimates. This was driven by the strong member growth and the increase in loan originations. Total loan originations jumped 48% y/y in Q3 to $5.1 billion. The company saw a nice rebound in student loan originations that jumped 101% y/y in Q3, as borrowers prepared to resume student loan payments in October. This was the fastest-growing loan vertical in Q3 and contributed to the revenue growth.

While most lenders are very conservative with originating new loans due to the macro uncertainty, SOFI continues to rapidly increase its loans. This is because the vast majority of its members are prime or super-prime customers. For new direct deposit accounts opened in Q3, the median FICO score was 743. With the growth in high-quality deposits, SoFi is benefiting from lower funding costs as well as from continued strong demand for loans from low-risk borrowers. The increase in loan originations and the increase in interest rates resulted in a 90% y/y jump in interest income during the quarter. But this was partially offset by a 48% reduction in revenue from loan sales as the company kept more loans on its balance sheet to benefit from the high interest rates. This makes sense given the high quality of its borrowers as well as the very rates.

SOFI also makes interest income from other products such as SOFI Money, SOFI Invest, and others. The number of customers using these products jumped 50% y/y in Q3 to 8.8 million thanks to offerings like the high-yield savings account. The increased adoption of these products resulted in a strong 231% y/y increase in interest income.

SOFI’s continued rapid growth is helping the company achieve nice operating leverage. Adding back non-cash and one-time expenses, SOFI’s Q3 adjusted income came in at $98 million, up 121% y/y. As the company grows, it becomes cheaper to attract new users thanks to increased brand awareness as well as up-sells to existing users. The increased brand awareness allowed SOFI to keep its marketing expenses relatively low y/y as S&M costs increased by only 15%, slower than the revenue growth over the same period.

What About Valuation

SOFI stock is more expensive than other financial and fintech names, but the premium can be justified by its rapid growth and strong and improving profitability. At current prices of $7.5 per share, it trades at a PS ratio of 3.8x, while JPMorgan ($JPM) trades at 2.8x and PayPal trades at 2x sales. The market clearly rewards SOFI for its rapid growth, and its current valuation seems to be fair.

What Else

SOFI stock may actually be undervalued according to a former bear who has turned bullish on the company due to its continued strong performance and has even upgraded it.

As a bank, SoFi’s stock will remain highly volatile because the company’s financials are directly affected by the overall macro environment and regulatory and political changes. Despite these uncertainties, it seems that SoFi is well-positioned to win over the long run, thanks to its attractive offerings and comprehensive platform.

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