SoFi: Pessimism Didn't Pay Off

seekingalpha11-21

SoFi Technologies, Inc. stock has significantly outperformed the S&P 500 and its financial sector peers, proving its doubters wrong.SoFi's diversification into fee-based revenue streams is expected to...

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The stock has also beaten its financial sector peers (XLF) since August 2024, as investors returned to a risk-on environment, benefiting growth-oriented stocks like SOFI.In my previous SoFi Technologies article, I urged investors to temper their optimism, as the market likely reflected a solid Q3 report. However, the Anthony Noto-led company has delivered another quarter of robust outperformance, surpassing Wall Street's estimates. SoFi management also lifted its outlook, as the company benefited from a more constructive environment for lending and financial services.As a result, bullish investors could argue that I've been incorrect with my cautious stance on the stock. However, it's critical to note that I'm not bearish on SOFI, given its remarkable buying sentiments (“A+” momentum grade), which have bolstered its recent performance.However, questions must still be asked whether SoFi's transformation into a more fee-based and capital-light model can be sustained. There were concerns about the need to buttress SoFi's balance sheet, considering more significant opportunities to partake in potentially improved lending activities. The strength and resilience of the US economy have provided critical valuation support to the financial industry, maintaining the upcycle. In addition, the Fed has maintained its stance on lowering interest rates, although the pace of reduction remains uncertain. Despite that, I assess that the lending environment broadly supports more robust origination volumes for SoFi as we move closer to 2025.SoFi: Lending Segment Remains PivotalSoFi lending revenue (FinChat)Notwithstanding my optimism about its lending revenue, investors must note that the segment still accounted for about 57% of its total revenue base in Q3. Therefore, it is imperative for the company to transition with more urgency and resolve into a more diversified company with a more robust fee-based segment.The market is likely increasingly confident of the company's ability to transform its business model. Accordingly, SoFi delivered a surge in fee-based revenue of $174M, up 65% year over year. Consequently, fee-based revenue accounted for about 25% of its adjusted net revenue profile, indicating an annualized run rate of about $700M.The critical growth drivers underpinning its fee-based model are predicated on its evolving loan platform business. As a result, it has allowed SoFi to be less reliant on the usual origination activities, potentially lowering the cyclical and balance sheet risks inherent in such models. Given the growth premium embedded in SOFI stock, management must demonstrate its ability to continue lifting its fee-based business to justify the market's optimism.Hence, the diversification thesis will be increasingly pivotal in driving a further valuation re-rating in SOFI stock. The main growth anchor in its strategy is its ability to cross-sell more products to its members in the financial services segment. Accordingly, the company added 35% more new members in Q3, demonstrating the effectiveness of its strategy. In addition, existing members cross-sell seems effective, as these members were responsible for opening 32% of new products.Furthermore, SoFi's improved profitability trajectory in its financial services business has likely bolstered the market's confidence as the segment scales. Accordingly, the segment's revenue more than doubled year over year in Q3, as annualized revenue per product rose to $81, up from $53 in the previous year.As a result, I assess that the constructive market environment has spurred the improvement in SoFi's ability to deliver an improved earnings profile, as the company notched its fourth consecutive quarter of GAAP profitability. Therefore, it should lower the company's execution risks, as the recession risks have been markedly lowered.Furthermore, the incoming Trump administration is expected to be less stringent on regulatory controls on the financial industry. As a result, the deregulation theme taking shape on Wall Street is now expected to be a structural tailwind for growth companies like SoFi. With that in mind, I assess that SOFI seems well-poised to deliver a solid performance through 2025, although its valuation might be increasingly challenging to justify.SoFi's Ability To Drive Operating Leverage Is KeySoFi estimates (TIKR)As seen above, even the upgraded Wall Street estimates suggest SoFi is not expected to continue its breathtaking growth cadence through 2026. Hence, the company must demonstrate its capabilities to continue lifting its operating leverage as it scales its financial services business.I assess that management is keenly aware of these imperatives, given the company's recognition of driving faster growth in fee-based revenue streams. Therefore, I urge investors to pay close attention to developments in its capital-light model, which is pivotal to helping the company scale faster. In addition, the increased membership base could provide the fuel needed to lift the contribution margins in its financial services business, benefiting from improved cross-selling momentum.SOFI Valuation Grade (Seeking Alpha)Notwithstanding the market's confidence in SOFI's thesis, does it make sense for the stock to be valued at an adjusted forward earnings multiple of more than 100x? Investors shouldn't understate the macroeconomic challenges underpinning a potentially more inflationary scenario under Trump. Given the policy uncertainties moving ahead, even the Fed has faced challenges in determining the appropriate neutral rate. Since SoFi's lending segment is expected to remain the key revenue driver in the near term, I assess that the market seems to have gotten ahead of itself.Furthermore, the company operates in a highly competitive market where SoFi has yet to demonstrate its ability to sustain its economic moat. Although SoFi's execution has been exemplary (“A” earnings revision grade), a business model transformation into lucrative fee-based opportunities could carry higher execution risks. As the company's topline is anticipated to decelerate through 2026, the market will likely focus more on its ability to drive improved operating leverage. Hence, the need for SoFi to justify its expensive valuation has heightened, requiring its financial services segment to continue outperforming robustly.Is SOFI Stock A Buy, Sell, Or Hold?SOFI price chart (weekly, medium-term) (TradingView)SOFI's price action underscores the significance of its recent breakout, as demonstrated by its “A” momentum grade. As a result, the surge has retaken two critical resistance zones under the $12 level. A marked reduction in SOFI's short-interest ratio at the end of October suggests short-sellers likely covered their positions rapidly, further driving its momentum.Given the lack of bearish reversal signals, I assess that it doesn't make sense for investors to turn pessimistic just because SOFI's valuation seems stretched. The company's ability to consistently drive upward earnings revisions is a testament to its management prowess. Given the recent breakout momentum, it should also deter bearish investors from aggressively loading up short-selling positions.Notwithstanding my caution, I'm leaning increasingly bullish on SoFi Technologies, Inc.'s thesis, as the stock is expected to return to an uptrend bias following the recent breakout. However, its price action seems stretched and overbought, suggesting a pullback shouldn't be ruled out. Hence, investors awaiting an opportunity to add exposure should consider buying more aggressively at its next retracement. Therefore, I urge investors to remain patient, as we allow the recent FOMO surge to consolidate, as we reassess a potential buying opportunity.Rating: Maintain Hold (under review).","kind":"highlight","is_publish_news":true,"is_publish_highlight":true,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":2,"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":"4.29.3","shortVersion":"4.29.3","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/2484114045"}