Summary
SoFi Technologies has executed at a high level since coming to the public market.
The digital bank has seen significant growth, with membership rising from 2.2 million to 5.6 million, and a surge in net interest income, benefiting from the Federal Funds Rate increase.
SoFi's student loan business, hit during the pandemic, is expected to rebound following the Supreme Court's decision to resume student loan payments, offering a potential $200 billion opportunity.
Are you serious?
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Digital banking company SoFi Technologies (NASDAQ:SOFI $SoFi Technologies Inc.(SOFI)$ ) reports earnings in approximately one week, and I suspect it could set off a new wave of positive market sentiment toward the company.
I wrote my original thesis two years ago when SoFi was still pursuing its banking charter. You'll be able to read that note here.
Ironically, SoFi has become a much better business over the past 24 months, despite the stock falling roughly 40%.
I'll walk you through my updated investment thesis below and explain what I'm looking for in the company's upcoming earnings release.
SoFi has blossomed as a bank
A lot has changed in two years. SoFi successfully obtained a bank charter, while users have rapidly flocked to SoFi's super-app approach to digital banking.
Members have grown from 2.2 million in Q1 of 2021 to 5.6 million, more than doubling in just eight quarters.
SoFi Technologies member growth as of Q1 2023.
SoFi Technologies member growth as of Q1 2023. (SoFi Technologies)
As a bank, SoFi has enjoyed a surge in net interest income, the difference between what it receives on loaned funds and what it pays to depositors. The dramatic increase in the Federal Funds Rate has also helped, as banks typically thrive in higher-rate environments.
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Data by YCharts
For those worried about SoFi's depositor base, things look pretty good. The company has a weighted average FICO score of 751 on originations. Additionally, SoFi maintains a strong capital buffer, measured by the CET1 ratio:
SoFi risk- and leverage-based capital ratios and amounts
SoFi risk- and leverage-based capital ratios and amounts. (SoFi Technologies)
The student loan catalyst is coming
SoFi, as it stands today, is a fine digital bank with a rapidly growing member base. However, the company was previously a major player in student loan refinancing, which got virtually snuffed out during the pandemic-driven payment freeze of the past several years.
In 2019, the year before COVID-19, SoFi did approximately $6.7 billion in student loan originations. That fell to just $2.2 billion in 2022. But as many know, the United States Supreme Court struck down President Biden's student loan relief plan, setting the course for payments to resume in September (due in October).
CEO Anthony Noto participated in a fintech conference in June. He discussed the company's belief that there is a $200 billion student loan opportunity for borrowers looking for either lower rates or longer terms to help lower monthly payments. SoFi likely will capture only some of that origination volume, but it signals that pent-up demand could boost its student loan business to new heights.
Two things to look for in Q2 earnings
SoFi initially laid out its full 2023 non-GAAP guidance in Q4 of 2022 and raised it modestly in Q1:
SoFi Technologies 2023 non-GAAP guidance.
SoFi Technologies 2023 non-GAAP guidance. (SoFi Technologies)
First, investors should look for an increase in guidance that potentially surprises some folks. Since the Supreme Court decision, SoFi's management has gotten its first look at the student loan landscape and should start building those expectations into the company's broader outlook.
Second, I'll be looking for continued strong member growth. SoFi's membership growth rate has slowed as the absolute number has increased, but putting up 40% or more growth on 5.6 million members would indicate the company continues to take market share from competitors.
SoFi's operating performance has arguably been very strong given the student loan headwinds it faced, and now could be when the company begins to shine.
Thesis risks
Financial services remain a highly competitive industry. SoFi must continue executing at a high level against deeper-pocketed, larger peers. Additionally, SoFi and all banks face risks from adverse economic conditions.
A recession or banking crisis that harms member confidence in SoFi's stability could trigger a bank run like in Silicon Valley Bank. With that said, these don't seem like looming threats at the moment and are something investors in any bank stock should always keep in mind.
The stock is still priced well for long-term investors
While the share price has soared, doubling since January, the stock is still attractively valued for long-term investors. Its book value multiple is still comparable to big banks. However, the company's rapid member growth should trickle through to stellar financial results if SoFi can continue executing at a high level.
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Data by YCharts
SoFi has proven very volatile since the company went public back in 2021. But SoFi's tremendous fundamental growth and progress over those two years makes it a compelling long-term investment idea with favorable risk-reward upside for patient investors who believe its business model will continue thriving over the coming years.
Source: seeking alpha
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