SoFi, The Retail Investor Sweetheart

SoFi was founded in 2011 as a platform for financing student loans. As we skip forward 13 years, the business has expended far beyond the original product with revenues it couldn’t imagine when it was first founded. With Anthony Noto steering the ship, the business is going at slightly below full speed, as they don’t want to suffer in quality for pure growth. Many people wonder if SoFi is a bank, or a technology company but after reading this report, that will become very clear to you, now let’s just dive straight into it!

What Products/Services Does The Company Offer?

- Product Description
SoFi describes itself as the one-stop shop for financial services. Through its lending and financial services, the company allows members to borrow, save, spend, invest, and protect their money. The company calls its clients members. This is probably for retention reasons because it sounds more like they are part of a community.

SoFi started by offering solutions for student loans but has grown and expanded what they do since. Now they allow members to work their way towards financial independence through personal loans, student loans, home loans, and related servicing. They also offer various services such as SoFi Money, SoFi Credit Card, SoFi Invest, and SoFi Relay. These are value-added services that are designed to have more daily interactions with the members. The company offers SoFi work to appeal to enterprises.

The Company reports its earnings in three segments:
- Lending (personal loans, student loans, home loans and related services)
- Technology Platform (Galileo financial technologies, and Technisys cloud-based core banking services)
- Financial Services (SoFi Money, SoFi Invest, SoFi Credit Cards)

The company believes that in order to create a best-in-class offering, it needs 4 differentiators: Fast, Selection, Content, and Convenience.
Fast: SoFi aspires to have the fastest place for customers to responsibly do anything. This means applying for a loan, getting a loan funded, opening an account, buying/selling a stock, and all the other things that are possible with the platform. SoFi believes that it is crucial to be fast to satisfy the customer.
Selection: Due to the online nature of SoFi’s business, they believe it to be crucial to continuously monitor, and adjust to the needs of the customer by pushing innovation in the direction most compatible with the members’ needs. Only yesterday the company announced to partner with Zelle as this was heavily requested by its members.
Content: The personally crafted content that is shown on the home feed should provide value to each individual.
Convenience: SoFi wants to provide the best membership experience it possibly can and holds itself highly accountable for it. This comes through in customer service where they have the goal of having the most convenient customer service in the financial services industry.

So how does the company make money? For the lending segment, the company looks at the difference between the earned interest income, and the interest expense of a financial loan. They can also sell loans, but do not always do this. Favorable loans are being placed on the balance sheet with the goal of making more money from them. Due to increases in deposits, SoFi can service more and more loans through its own balance sheet, which drives down costs and therefore improves profitability.
The technology platform segment provides revenue for SoFi through the use of the platform, this can be on a per-use basis, or an overall license and maintenance fee.

- Sales Channels
As most of the expansion happens within the app, sales channels may be most compatible with acquiring new customers. To increase brand awareness, SoFi has bought the naming rights of SoFi Stadium, the stadium used by the LA Rams, and LA Chargers, both the city’s NFL teams. The stadium opened in 2020. SoFi has a 20-year deal for the naming rights, valued at 30 million per year. The stadium will be used for the 2026 FIFA World Cup, the 2027 Super Bowl, and the 2028 Olympics. When it’s not used for these massive sports events, world-famous artists perform there as the stadium facilitates slightly over 100.000 people at a time. This is massive a massive amount of brand reach.

- Main Sales Regions
The main sales region for SoFi is America, the business, however, is also operating in Latin America and Canada, largely through the Technology Platform segment. SoFi also operates in Hong Kong as an investment business.

Who Are The Executives?

- Anthony Noto, CEO
Anthony owns about 1.9% of the outstanding shares of SoFi, this represents about 19.739.194 shares by the end of 2023, or at the current price per share, about $135 million. This comes in large part through compensations for pushing the company public.

- Chris Lapointe, CFO
Lapointe joined SoFi in 2018, initially as VP Head of Business Innovation, and from 2020 onwards as Chief Financial Officer. Before starting at SoFi, Lapointe gained experience at Goldman Sachs and Uber

- Lauren Stafford Webb, CMO
Safford Webb has been with SoFi since 2019, and since joining, has held the position of Chief Marketing Officer. Before joining SoFi, Webb held the positions of Marketing Director, and Marketing Vice President at Intuit. She also worked at Proctor and Gamble, with the most notable role being Covergirl's senior brand manager.

How is the company growing?

- Growth numbers
SoFi is liked a lot by retail investors due to growth numbers and possible future growth due to an increasing focus on technology, in combination with banking services. As SoFi started with mainly student loans, the company is known as a banking company and this is quite a unique position over other fintechs.

So what is growth looking like with SoFi? Revenues have slightly more than doubled in 2023 when compared to 2021. A number of reasons can be given for this, let’s see what they were.

Increase in interest income.
With the rise in interest that started during 2022, which pushed over 4% going into 2024 was an opportunity for the smaller (neo)banks, and fintech companies to raise the interest rates on savings accounts. This resulted in companies like SoFi offering higher interest rates than the large institutional banks could. This was made possible due to the nimbleness and adaptability of their balance sheets. Interest income increased from ‘22 to ‘23 from $759.5 million to $1.95 billion, about 250%.

Non-interest income decreased slightly. This was mainly due to a decrease in “loan origination, sales, and securitizations”.

Net income, better said, net loss decreased in a minimal way, this was because the company took a $250 million impairment charge on their goodwill. They also increased R&D and S&M spending. The company was net profitable during Q4’23 and Q1’24 and has guided for each quarter of ‘24 to be net profitable.

The company did increase its diluted weighted average share count by 5% from ‘22 to ‘23.

The balance sheet has also expended by a lot. this is mainly due to a large increase in deposits, which resulted in loans held for investment on the asset side. Cash and Cash equivalents have increased a lot as well

Sales distribution

Although the company uses increasing amounts of marketing, as they say, “we continue to realize scale in our marketing spend” they have to goal to have increasing network effects. Being successful with the network effect will result in the company being able to give out loans from internal capital which allows for higher profits on the spread.

Competitors

- Robinhood
Robinhood competes with SoFi, mostly as it comes to the investment portion of the business. Robinhood is of course a very well-known broker, used by a lot of retail investors. Robinhood also offers a cash account which is a form of a bank account, and a credit card. Robinhood however doesn’t have a bank charter and does not give out personal loans.

- Upstart
Upstart offers a platform for lending that leverages AI. Upstart is in the business of providing loans, just like SoFi is. Upstart offers personal loans ranging from $1.000 to $50.000, and mostly caters to people with slightly lower credit scores than those applying at SoFi.

- Acorns
Acorns allows customers to invest through its platform, automatically sending change into the brokerage after rounding a payment to the closest whole dollar. Acorns does have the drawback of charging money for holding an account, at $3 per month, because quite something given that the average account size is $500.

Bull Argument

- Galileo allows SoFi not only to be more vertically integrated, making it more cost-efficient, but it also allows for charging money to potential competitors.
- Banking is where I currently see the value for SoFi. By offering loans, and being able to keep the more profitable ones on the balance sheet. This allows for the incremental income to keep growing at an exponential rate as more members apply for the banking part of the business. This is because SoFi will be able to offer increasingly more loans from their own pool of money, giving them higher profits from the spreads.
- New generation of customers for banks. A generation that is not afraid to store their money in a secure online bank.

Bear Argument

- Galileo is a small, money-losing part of the business. I have often seen Galileo being haled as the absolute bull case for SoFi which makes it a technology company. It is not. At least not right now. Increases in loan revenues run circles around the increases in Technology Solutions, in percentage terms that is. This makes SoFi a bank, an online bank with less overhead, but a bank. That means they compete in a very set market, having to rely on taking market share from large financial institutions.
- Will SoFi be able to keep current growth as interest rates drop? This is a question that should be seriously considered. As of now, SoFi is benefitting from being able to offer way higher interest rates on savings accounts than traditional banks can. This makes it very interesting to open accounts of course. The question is how much motivation new customers have to go to SoFi as interest rates start coming down. Just to clarify, this argument has nothing to do with slowing growth due to increased size, that is normal and should be expected.

Conclusion

SoFi is an extremely fast-growing online bank that has the potential to support and increase its margin with Galileo. As a bank, it has competitive advantages over traditional banks as they do not operate physical locations. Due to being an online banking platform, and it aiming to become the one-stop-shop for personal finance, we should consider who will be drawn into the platform, because it doesn’t really sound like a product for the typical retiree. When we think about who does fit the picture as a potential customer, is a younger person, probably under 40 years old.
As we say that SoFi is a bank, we should value it as one. But before we draw a simple conclusion on the valuation, let’s look at the prior performance of the stock.

The chart does not look all to great, but then again, the stock IPO’d in 2020 going into the 2021 Covid-Bubble. As we try to put a very basic valuation on SoFi, I have to point you towards my disclaimer, you can find it at the bottom of this analysis. But as we conclude that SoFi is a bank, we have to value it as one. This means that we have to look at book value. SoFi is currently trading at 1.28 times book value, but how does this stack up to other banks? Although flawed, let’s give a slight list below:

- JP Morgan: 1.80 times book value | 11.85 times forward earnings
- Bank of America: 1.12 times book value | 11.64 times forward earnings
- Wells Fargo: 1.29 times book value | 11.98 times forward earnings
- Ally Financial: 1.06 times book value | 13.16 times forward earnings
- Goldman Sachs: 1.33 times book value | 12.58 times forward earnings
- Morgan Stanley 1.72 times book value | 14.29 times forward earnings

So at a book value metric SoFi is trading quite in line with the large financial institution, but I sneaked the forward earnings in there as this number comes to 88.5 for the company. A number which is very high. This might also be the reason for some analysts to give low price targets, with the lowest being all the way down at $4 and the highest at $12. But the question now is, how do I view it?

On a book value metric, the stock is trading at fair value with no premium whatsoever, maybe even slightly on the undervalued side if we factor in growth. SoFi increased its book value by well over 20% in its latest earnings. If we look at the profitability metrics, those are extremely high, but then again, the business just made the flip toward profitability. According to Yahoo Finance, analysts expect SoFi to produce $0.09 of EPS in ‘24, and $0.24 in ‘25. Therefore a fair buying price for me would be around $6, to $6,50, around 25, to 27 times ‘25 earnings, or slightly above trading at 1 time book value currently.

As I can not give financial advice, I can give one other advice. Since you made it all the way down here, make sure to become a member of my newsletter so you can receive analyses like this one every week.

DISCLAIMER:

We do not give buy and sell recommendations, the value range range given is based on our analysis, but for you to have a good understanding of the business that you read about in this article, you will have to do your own analysis. The value range given in this article does not mean we will buy this stock at this price range.
Buying or selling a stock will always be your own decision and we are not liable for any decisions you make regarding this.