SoFi Technologies: Sell-Off After Double Beat, Guidance Hike, Another Opportunity

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SoFi Technologies shares dropped over 10% after Q1 earnings, despite beating revenue and EPS expectations and increasing 2024 guidance.The market is focused on Q2 guidance, which indicates a decline ...

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ALFSnaiper/iStock Editorial via Getty Images Unlike many previous quarters, SoFi Technologies (NASDAQ:SOFI) shares skipped the massive pop before selling off after earnings. On Monday, 4/29, SOFI released a triple beat pre-market as its adjusted revenue beat by $21.12 million, GAAP EPS beat by $0.01, and management increased 2024 guidance across the board. Rather than the shares jumping higher, they went directly to the selloff phase, dropping by more than 10% on Monday and then by another 4% on Tuesday, as shares couldn't hold the $7 level. There was a lot of excitement going into Q1 earnings as shares made a run past $8 in the after-hours heading into the weekend, but once again, Mr. Market had other plans for SOFI. It seems as if the street and the shorts are focused on Q2 guidance, which indicates a QoQ decline in SOFI's top and bottom line rather than management increasing guidance for their 2024 fiscal year and delivering on their objectives. At this point, you either believe that SOFI isn't just a bank and can deliver on its critical success factors, or you view it as just a bank. There was nothing in the earnings report that made me less bullish than before because all the pieces for SOFI's long-term plan are coming together. It may take longer than many would have liked for shares of SOFI to get back into the double digits, and I believe that the market is missing the bigger picture when it comes to SOFI.   Seeking Alpha Following up on my previous article about SOFI While we have been in this position before, I certainly didn't think shares would be under $7 after Q1 earnings. Since my last article was published on 1/30/24 (can be read here) shares of SOFI started to rally but have ultimately declined by -17.62% while the S&P 500 has appreciated by 1.9%. In that article, I discussed SOFI's Q4 report and why I was bullish on SOFI for 2024. This isn't the start I had hoped for, but it's given me an opportunity to add to my position, as I do not see any reason to believe that my investment thesis is at risk. In this article, I am going to go through Q1 earnings, discuss why I think Mr. Market is wrong, and outline the critical success factors that are being overlooked.   Seeking Alpha Risk to investing in SOFI While I am bullish on SOFI, there are significant risk factors to take into consideration. SOFI faces stiff competition from industry juggernauts such as JPMorgan Chase (JPM), Bank of America (BAC), and Wells Fargo (WFC). Many of SOFI's competitors have the means to compete for the younger generation and tailor products that align with their needs. The allure of SOFI's products hinges on everything working seamlessly together and providing a better user experience than their competitors. If SOFI doesn't innovate quickly enough, or if a competitor deploys a better product with an enhanced user experience and more enticing rewards, then SOFI could see its member growth slow or even decline. SOFI also runs the risk of being too loose when it comes to its risk models and could see an increased number of defaults in its lending segment, which could lead to larger charge-off rates. There is also the risk that SOFI's banking platform doesn't win a single large financial institution from the RFPs they are competing in and that the street continues to value them as a bank rather than a Fintech organization. SOFI could be dead money, or shares could continue to decline just like they did last year. When investing in individual equities rather than an index fund, the risk factors significantly increase, and opportunity cost becomes a real threat. Investors should consider the risk factors as Mr. Market is still looking for SOFI to prove itself. Engagement across SOFI's ecosystem continues to expand, which is broadening its foundation Anthony Noto (SOFI CEO), myself, or the analyst community can offer a bullish or bearish opinion on SOFI, but engagement across the ecosystem matters. Anyone can form an opinion, but what makes or breaks a company are its clients. If SOFI isn't providing value to its customers, there are other competitors that are ready to offer banking solutions at a moment's notice. Prior to getting into the numbers, it's important to look at engagement because this is the best metric to gauge if SOFI's members are happy with the user experience SOFI provides them. If the ecosystem wasn't strong, we would see the numbers go down and to the right, but that's not what's occurring.   SOFI SOFI just posted its 2nd largest quarter of member growth as they took in 622,000 new members. This is a growth rate of 44% from YoY, and SOFI's membership has more than doubled in the past 2-years. From Q1 2021 through Q1 2023, there was only 1 quarter where SOFI exceeded 500,000 new members, and over the past 4 quarters, SOFI hasn't brought in less than 500,000 members in any given quarter. While SOFI continues to not only retain but expand its member base while growing their deposits QoQ. In Q1 2024, SOFI set a new record as its deposits expanded by $2.98 billion. On the conference call, Anthony Noto indicated that over 90% of SOFI's deposits come from its direct deposit members. This is very bullish because when an individual establishes a direct deposit account with a financial institution, it becomes much harder for them to leave because that entity is intermingled with many different facets of the customer's life. The number of products being used by SOFI members hit 11.83 million at the end of Q1, as the average member is using 1.45 products.   Steven Fiorillo, SOFI SOFI's membership is expanding as the amount of deposits on its balance sheet and the number of products its members are utilizing increase. If the product experience or ecosystem wasn't desirable, we wouldn't see this type of engagement from SOFI's cliental. SOFI continues to grow its deposits quicker than any of the banks I follow, as well as other cloud financial solutions such as Ally Financial (ALLY). While SOFI has many critical success factors, engagement could be the most important. SOFI isn't just acquiring new members by advertising; they are growing on recommendations from their membership. SOFI's business is much different from that of someone signing up for a Costco (COST) membership. SOFI has a tremendous amount of data on its members and can utilize its internal algorithms to identify what products may be a good match for its members and then push notifications about these opportunities to them. When I look at the products per member and the ability to cross-sell, SOFI is sitting on a treasure trove of actionable information. As SOFI's member base expands and more life events occur, SOFI has a solution from lending to investing. Below is a list of the deposit inflows and outflows for all the banks I follow. The ones in yellow haven't reported yet.   Steven Fiorillo, Seeking Alpha SOFI delivered a strong start to 2024 regardless if Mr. Market didn't agree I believe this is a classic case of being short-sighted rather than actually looking at the current progress and determining if the long-term vision will be accomplished or even exceeded. This was the first quarter from going public that SOFI's adjusted net revenue declined QoQ, and they guided for $555 - $565 million of adjusted net revenue for Q2 2024. If SOFI comes in on the high end of their estimates, it would mark the 2nd QoQ decline in adjusted net revenue. On a profitability level, SOFI has guided for $115 - $125 million in adjusted EBITDA, which would also mark the 2nd QoQ decline in their preferred profitability metric. My opinion is that the street isn't thrilled with the short-term guidance, especially as the membership continues to expand.   SOFI Too many people are focused on instant gratification and are looking 3 months in advance, rather than at the longer-term guidance management has provided. Throughout 2023, SOFI continued to deliver earnings beats and guidance revisions to the upside. They are executing on a plan that is allowing them to increase their top and bottom line quicker than anticipated. Some look at this as Anthony Noto sandbagging the numbers, rather than delivering on the vision. On the previous earnings call, Anthony Noto didn't just provide 2024 guidance, he said that SOFI is on track to generate $0.55 - $0.80 of GAAP EPS in 2026. Maybe the street wasn't taking this seriously, but in Q1 2024, we got our first guidance increase from SOFI. On the high end, which I believe will continue to increase throughout the year, SOFI is expected to generate $2.43 billion in revenue at a 17% growth rate, $600 million of adjusted EBITDA at a 25% growth rate, and $175 million in net income which would work out to $0.09 of diluted EPS per share. Not only is SOFI's profitability trending in the right direction, its adjusted EBITDA margin continues to expand and is expected to be 25%. This probably won't be the last guidance revision in 2024, and I expect SOFI to continue delivering its vision while rolling out new products and executing on its critical success factors.   SOFI There used to be a question about SOFI's ability to sell loans, and in Q1, SOFI recognized strong demand for over $1.9 billion in loans. SOFI has been taking a conservative approach to originations, given the economic landscape and uncertainty regarding rates. Personal loans remained their largest origination segment at $3.3 billion, which was an 11% YoY decline. With the student loan moratorium concluding, originations grew to $752 million in Q1, which was a 43% YoY increase. The high-rate environment is still in full effect as the Fed has kept rates over 5% over the past several meetings, and it was unclear when a pivot would occur. The organization levels for home loans have increased by 274% YoY to $336 million, but with rates over 5%, the true potential is yet to be unlocked. SOFI remains well capitalized as they have $3.69 billion in cash on the balance sheet with another $973 million in long-term investments. SOFI took the opportunity to execute 2 transactions to strengthen its balance sheet by issuing $862.5 million in convertible notes due in 2029, and SOFI exchanged $600 million in convertible notes due in 2026 for shares of SOFI. Issuing the convertible notes with a 1.25% coupon allowed SOFI to redeem $320 million of preferred stock, which SOFI had to pay a 12.5% dividend, which was set to increase to 15% in May. The move is reducing SOFI's financing expenses by $40 $60 million annually. The 2nd transaction allowed SOFI to generate $59 million in Q1 in addition to reducing their 2026 maturities. The team at SOFI is very well-equipped to handle different financial landscapes, and I am not worried about them overextending themselves on the lending front. SOFI is taking a conservative approach to lending, and has made strong financial decisions to strengthen its balance sheet.   Steven Fiorillo, SOFI Why SOFI isn't just a bank and deserves a hybrid multiple  SOFI continues to deliver on its guidance, but there is a tug of war over how to value the company. Some want to value it as a bank, some as a tech company, and others are somewhere in the middle. What differentiates SOFI from traditional banking institutions is SOFI's tech platform and being vertically integrated. Over the past several years, SOFI has acquired Galileo and Technisys while obtaining a national banking charter. Galileo provides APIs to financial instruments, allowing different platforms to interact with each other. Through Galileo's protocols, companies can offer debit or credit cards, ACH transfers or transaction processing. SOFI acquired Galileo so they could build out their product suite on their timeline without having to wait for features to be deployed on a roadmap. Technisys is a cloud-based banking platform that SOFI also acquired so it could move its entire platform to cloud-native architecture on a single core that can support a range of financial products. SOFI owns the entire backend when it comes to the underlying technology banks operate on and is building out banking as a service (BaaS). Recently, SOFI expanded its services by launching an expense management solution with Mastercard (MA) that provides B2B clients tools that provide insights into their corporate spends. Recently, Anthony Noto discussed how SOFI enhanced its partnership with Bancorp by allowing new use cases for B2B and B2C clients through real-time payments and making improvements to their money movement hub. For several quarters, Anthony Noto has discussed SOFI's participation in RFPs for cloud banking solutions. He had previously stated that a large regional bank would be implementing SOFI's cloud banking architecture and that they were in a proof of concept stage with a large financial institution. On the recent conference call, Mr. Noto reiterated that the RFP process is not a quick endeavor and can take several quarters, if not years. Recently, SOFI launched a small business financing card program and is working on onboarding more partners. In 2024, SOFI expects that the tech platform's revenue will grow by 20% compared to 2023, but keep in mind that many of the RFPs in which SOFI participates are still ongoing. We learned that of the RFPs that SOFI was asked to participate in they have not lost, and they have been down-selected in some RFPs where Mr. Noto said big institutions have gone from a wide group to several select partners. This typically means that SOFI has made it into the late stages as the vendors who couldn't handle the potential client's needs have been thanked for their time but would not be invited to participate in the next round. With Mr. Noto using the words, big institutions, it makes me think that they may be in the later stages of an RFP with not only the large financial institution they are in the proof of concept stage with but several others. The technology platform is real, and not every financial institution has the ability to develop proprietary platforms. Galileo's accounts are at an all-time high, and the technology platform generated $94.37 million in revenue and $30.74 million in contribution profit for Q1 2024. The technology platform is operating at a 38.3% contribution profit margin, and SOFI is just getting started as Galileo and Technisys were acquired in 2020 and 2022. I believe SOFI deserves a hybrid multiple between a traditional finance and technology company because it's generating revenue and profits from its underlying architecture in addition to its financial services. As SOFI wins RFPs and finishes the implementation process, it will likely gain customers for decades, not years. SOFI has put itself in a position to streamline its own products and reduce their operating costs because they own the backend platform, but they are also driving recurring revenue and profits from licensing it to its competitors. This is a scalable business, and as regulations and cyber-attacks become more complex, financial institutions will need to deploy cloud-based architecture that complies with the latest standards. Over the next 5-10 years, SOFI could scale this into a large SaaS business by offering BaaS. This is why SOFI isn't just a bank and why a hybrid multiple is justified.   SOFI Conclusion  There is so much potential for SOFI in the future, and it feels like they are just getting started. SOFI's customer base continues to expand, bringing billions in additional deposits each quarter. SOFI continues to strengthen its company by eliminating more than $2 billion in debt from its balance sheet to offering new products for its customers. I think Mr. Market is being short-sighted and focusing on a potential QoQ revenue decline rather than on the actual 2024 fiscal year guidance. I expect this won't be the only guidance increase that Mr. Noto delivers throughout 2024, and based on the midpoint of his 2026 guidance, shares of SOFI are trading around 10 times 2026 earnings. SOFI has many levers it can pull, including entering small and medium business banking, building out its asset management division, implementing 401k and 403b custodian services, and pioneering the BaaS space through its tech platform. While the street is down on SOFI, I am very bullish as I see the path senior leadership is paving and believe they will continue to grow earnings well past 2026.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":3,"commentSize":0,"repostSize":0,"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":"4.22.4","shortVersion":"4.22.4","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/2432974789"}