SoFi Technologies: Pessimism Is Justified

seekingalpha03-18

SummaryThe potential decline in interest rates could negatively impact SoFi's net interest income.Consumers' weakening financial health may lead to higher delinquency rates and limit SOFI's future ...

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Comments

Thalos
03-18
Thalos
Why sell when it already tanks? Just another article. At what price was SoFi when the article is about halfway being penned down? Somebody now happily buying more at the low when those lovers react to the article to sell
JD88
03-18
JD88
This is pure bull s!!
Aivern
03-18
Aivern
Talking about the company purely via macroeconomic factors is kinda lame tbh. Then using PE for a company that has just reported profitability is also extremely shallow. How the heck do writers get away with this crap

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In both of the articles, my primary argument for a sell thesis was the potential macroeconomic headwind. At the time, I believed that the slowly declining consumers' financial health could create a headwind for the company going forward. Today, I continue to stand by my reasoning from the previous articles. SoFi's stock has declined about 5% since the publication of my previous article compared to a 20% increase in the S&P 500 during this time. Further, I believe the macroeconomic conditions have significantly worsened with initial signs of weakness in the market leading to the continuation of my negative view of the company. Thus, I believe my bearish case on SoFi strengthened in the past few months. Consumers' financial conditions are weakening, which will likely affect SoFi's bottom line and also pressure the company to expand more conservatively. Finally, with the expectation of a declining federal funds rate in 2024, SoFi's net interest income, NII, could be negatively affected. Therefore, I am maintaining my sell thesis on SoFi.Declining Interest RateSoFi had a great calendar year in 2023. The company's top and bottom-line growth was extremely strong. In the 2023Q4 earnings report, SoFi reported a net interest income of $389.6 million which was up 87% from the prior-year period. The company was able to report such exceptional NII growth as a result of increasing interest rates on interest earnings assets by 3 basis points sequentially and 8 basis points year-over-year. Considering that the company's total revenue for the quarter was $615 million, I believe it is reasonable to say SoFi, being a fintech company, is heavily reliant on interest income.Unfortunately, SoFi's interest income could be challenged in 2024. During the last FOMC meeting of 2023 held in December, the Federal Reserve Chair Jerome Powell indicated that the organization may cut the federal funds rate 3 times in 2024 effectively lowering the market interest rate. Some economists including Goldman Sachs (GS) are expecting the Fed to cut rates by 5 times, which is far more aggressive than the Fed estimates.The lowering of the interest rate will likely impact SoFi's interest income on its loans as the interest rate on the loans declines. The magnitude of the impact will ultimately depend on the pace at which the Federal Reserve utilizes in lowering the federal funds rate, but as the market suggests, I believe it is highly likely that SoFi's net interest income to be pressured going into 2024.The initial example of the potentially lower interest rates impacting banks came from JPMorgan Chase (JPM) during their earnings call on January 12th. The company said that the \"lower interest rates will decrease NII\". As such, it is highly likely for SoFi to see the impact of the macroeconomic conditions in 2024.Consumers' Financial HealthOn top of the potential headwind forming from the interest rate environment for SoFi, consumers' weakening financial health will also likely pressure the company. Weakening financial health could not only increase the delinquency rates, but it could also pressure the company to be more conservative in its underwriting limiting future growth.As the chart below shows, according to the St. Louis Federal Reserve, delinquency rates on all consumer loans have continued to increase for the past several quarters. In the most recent quarter, 2023Q3, the loan delinquency rates reached 2.53%, which was 6.75% growth quarter-over-quarter. Beyond the delinquency rate that is higher than pre-pandemic levels, the rate at which the rate is continually increasing is alarming. From 2023Q1 to 2023Q2 and from 2022Q4 to 2023Q1, the delinquency rate rose 6.76% and 7.25% quarter-over-quarter, respectively, which means that there was no slowdown in the increase of the delinquency rate for the past few quarters. As such, with no meaningful slowdowns, it could be likely for the consumers' financial health to worsen going forward.Consumer Loan Delinquency Rate ChartSt. Louis Federal ReserveIn addition to the historical data provided by the Federal Reserve, JP Morgan's earnings report, as mentioned earlier, has hinted at continually increasing consumer delinquency rates. The company is expecting the charge-off rates to hit 3.5% compared to 2.79% in 2023.Overall, I believe it is likely for the consumers' financial health to continue declining, and because the majority of SoFi's bottom line comes from its lending business, there will likely be a significant impact on SoFi's business if the consumers' financial health continues to deteriorate.Management Team's ViewSoFi reported a stellar 2023Q4 earnings report. Everything from top to bottom-line results were strong as the revenue grew 35% year-over-year and the company reached GAAP profitability on expanding margins. However, the continuation of these positive results is unlikely in 2024.In addition to my view of the macroeconomic conditions involving consumers' financial health and the interest rate environment, SoFi's management team also provided a sour 2024 outlook. During the earnings call, the company's management team said that the company is \" taking a conservative and pragmatic approach toward [the] Lending segment revenue, expecting to largely maintain it, given our concerns about the 2024 macro environment as it relates to uncertainty on rates, the economy, and industry liquidity.\" As a result, SoFi is expecting \"the Lending segment revenue to be 92% to 95% of 2023 lending revenue,\" hinting at a decline in the company's highest margin business segment. In the fourth quarter, the lending segment's contribution profit was $226 million compared to the financial services and technology platform's $25 and $30 million, respectively. As such, the macroeconomic conditions are expected to have a profound effect on SoFi throughout 2024.One may argue that SoFi's diversification process could offset these macroeconomic risks in 2024. The management team said that financial services and technology platforms will drive growth in 2024 increasing the percentage of adjusted revenue to 50% from 38% in 2023. While diversification is certainly a positive factor in the long-term, I do not see this fully offsetting the slowdown and risks in the lending segment business as the profit margins on these segments, as of now, are significantly lower than lending segments. The lending segment's contribution profit to revenue margin was 65.25% compared to 23.58% for financial services and technology platforms. Therefore, I believe there are significant headwinds to SoFi's growth potential in 2024 due to macroeconomic conditions.ValuationSome investors bullish on SoFi's prospects may argue that the company's strong growth and expected profitability in 2024 and onwards constitute a bullish outlook along with a premium valuation. However, even when considering the company's past strong growth and expected profitability, I believe SoFi's valuation is too expensive today.The company, at the time of writing, has a market capitalization of $6.89 billion today with a 2024 forward price-to-earnings of 96.67. 2024 is the first year SoFi is expected to report profitability, so one may say that the price-to-earnings ratio is high. Thus, looking at 2025, SoFi has a forward price-to-earnings ratio of 27.78.For the current valuation to be reasonable where investors could expect a valuation appreciation, at the absolute minimum, 2025 forward price-to-earnings multiple should be undervalued leaving room for valuation appreciation throughout 2024. However, considering the current macroeconomic condition, I do not believe there is much upside potential at this level. Not only will bonds be more attractive even after 3 rate cuts at the target federal funds rate of 4.5 to 4.75%, but the macroeconomic conditions will weigh on the company's growth expectations. For example, the company's 2025 forward price-to-earnings ratio is 27.78, which means that the investors are paying 27.78 times the company's earnings for a single share. Not taking intensive growth into account, this means that the annual return an investor could expect on investment is about 3.6% (1/27.78) compared to the treasury bond return of about 4.5%. Investors pay a premium on the stock over bonds because of an upside potential justifying high valuation, but if the market environment does not allow this, I do not think a premium valuation should be rewarded as it is too risky. Therefore, it is likely that there are more risks than reward potential in SoFi's current valuation.Risk to ThesisMy bearish thesis relies on souring macroeconomic conditions. However, if it is the case that the macroeconomic conditions do not worsen in 2024, my thesis could be at risk. SoFi's management team, during the 2023Q4 earnings call, mentioned that their outlook is conservative. As such, if it is the case that the management's initial 2024 outlook is too conservative due to the economic slowdown's magnitude being shallow, my bearish thesis could be at riskSummaryGoing into 2024, I believe the risks to reward potentially are unfavorable for SoFi as the macroeconomic risks are expected to create strong headwinds for the company. The Federal Reserve is expected to lower the federal funds rate likely pressuring the company's net interest income and margin. Further, as the consumers' financial health continues to deteriorate, the company may experience higher levels of delinquency rates or be pressured to be more conservative in its loan underwriting. Finally, given the massive macroeconomic headwinds in the upcoming quarters, I believe the current valuation is too expensive. Therefore, SoFi is a sell.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[{"id":285638686081088,"gmtCreate":1710770701021,"gmtModify":1710770704668,"author":{"id":"4101955883486630","authorId":"4101955883486630","name":"Thalos","avatar":"https://community-static.tradeup.com/news/55ba87139db7cd8dd783879dbd6ed4c5","vip":1,"crmLevel":9,"crmLevelSwitch":1,"idStr":"4101955883486630","authorIdStr":"4101955883486630"},"htmlText":"Why sell when it already tanks? Just another article. At what price was SoFi when the article is about halfway being penned down? Somebody now happily buying more at the low when those lovers react to the article to sell","listText":"Why sell when it already tanks? Just another article. At what price was SoFi when the article is about halfway being penned down? Somebody now happily buying more at the low when those lovers react to the article to sell","text":"Why sell when it already tanks? Just another article. At what price was SoFi when the article is about halfway being penned down? Somebody now happily buying more at the low when those lovers react to the article to sell","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/285638686081088","repostId":1168982126,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":285633092669592,"gmtCreate":1710769440558,"gmtModify":1710769444175,"author":{"id":"3574241875611006","authorId":"3574241875611006","name":"JD88","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"hat":"https://static.tigerbbs.com/0a8758340a08196056f8bc1e54805193","crmLevel":8,"crmLevelSwitch":1,"idStr":"3574241875611006","authorIdStr":"3574241875611006"},"htmlText":"This is pure bull s!!&nbsp;","listText":"This is pure bull s!!&nbsp;","text":"This is pure bull s!!","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/285633092669592","repostId":1168982126,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":285688667406456,"gmtCreate":1710754293911,"gmtModify":1710754297489,"author":{"id":"4097767435236930","authorId":"4097767435236930","name":"Aivern","avatar":"https://static.tigerbbs.com/3827d6c7271c872fcc616eaa9b4f7f54","vip":1,"crmLevel":4,"crmLevelSwitch":1,"idStr":"4097767435236930","authorIdStr":"4097767435236930"},"htmlText":"Talking about the company purely via macroeconomic factors is kinda lame tbh. Then using PE for a company that has just reported profitability is also extremely shallow. How the heck do writers get away with this crap","listText":"Talking about the company purely via macroeconomic factors is kinda lame tbh. Then using PE for a company that has just reported profitability is also extremely shallow. How the heck do writers get away with this crap","text":"Talking about the company purely via macroeconomic factors is kinda lame tbh. Then using PE for a company that has just reported profitability is also extremely shallow. How the heck do writers get away with this crap","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":3,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/285688667406456","repostId":1168982126,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":7,"commentSize":3,"repostSize":4,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1168982126"}