Summary
SoFi Technologies reported record revenues and member growth in Q2, with the potential for GAAP profitability in Q4-23.
Member growth is slowing but still strong, with 584K new additions in Q2.
SoFi Technologies' product growth is driven by its Financial Services segment, reaching a record 9.4 million in Q2.
I going to make a greatest artwork as I can, by my head, my hand and by my mind.
One-stop shop for digital financial services, SoFi Technologies, Inc. $SoFi Technologies Inc.(SOFI)$, reported record revenues and members for the second quarter.
The attainment of GAAP profitability, based on the fintech's guidance, may be achieved in 4Q-23, which triggers a rating change from 'Sell' to 'Hold'. My last coverage on SoFi Technologies was in May, and I concluded that the stock should be avoided amid profitability challenges.
The fintech's member growth is still going strong, and SoFi Technologies is seeing stronger profitability than I expected. Even though GAAP profitability could be a crucial turning point for SoFi Technologies from a financial point of view (the fintech has been historically unprofitable), I still can't get onboard due to SoFi Technologies' high sales multiple.
Member Growth Is Slowing, But Still Going Strong
SoFi Technologies' new member additions totaled 584K in the second quarter, which was a substantial improvement over the 433K added in the previous quarter.
With that being said, on a percentage basis, SoFi Technologies' growth is slowing and 2Q-23 was the eighth consecutive quarter of declining member growth. The absolute number of new member growth in the second quarter was still impressive, however, and it demonstrates that customers do see a lot of value in the fintech's products.
Members (SoFi Technologies)
Member Growth Translates To Product Growth
Whether one likes SoFi Technologies or not, the fintech has been able to open up a lot of new customer accounts and this member growth has translated into the development of new investment and savings products.
Products are the key to SoFi Technologies' sales growth, and they reached a new all-time record of 9.4 million in the second quarter.
Again, even though SoFi Technologies' product growth clocked in at 43% in the second quarter, it was also the eighth quarter of slowing QoQ growth in 2Q-23.
Products By Segment (SoFi Technologies)
SoFi Technologies' product growth hinges on its Financial Services segment which includes SoFi Money, investment alternatives, credit cards, and other products. Money and Investment alternatives are some of the most sought-after products for SoFi Technologies, and the fintech has enjoyed substantial growth in each of those categories in the second quarter on a YoY basis.
Financial Services - Products (SoFi Technologies)
Guidance And Sales Multiple
SoFi Technologies upped its guidance in 2Q-23: The fintech sees $1.974 billion to $2.034 billion in adjusted net revenues for the full year, raising its sales growth rate by 1 percentage point to 28-32% YoY.
The fintech's adjusted EBITDA guidance was also raised to $333 million to 343 million, amid an expected pickup of its student loan business. Student loan payments are scheduled to start again in October 2023.
With approximately $2.0 billion in sales expected for 2023, the present multiple placed on SoFi Technologies is 3.9x. Working with next year's expected sales of $2.53 billion, which implies 25% YoY sales growth, SoFi Technologies' stock has a sales multiple of 3.1x.
PayPal Holdings, Inc. $PayPal(PYPL)$ has a leading sales multiple of 2.0x and Affirm Holdings $Affirm Holdings, Inc.(AFRM)$ of 2.2x.
Revenue Estimate (Yahoo Finance)
Attainment Of GAAP Profitability Could Be A Game Changer
In the past, I have criticized SoFi Technologies primarily because the fintech only achieved adjusted EBITDA profitability, but it looks as if the fintech managed to gather enough momentum to work its way toward GAAP profitability in the near future. This is a development that I clearly underestimated.
SoFi Technologies' adjusted EBITDA in the second quarter was $76.9 million, and I think the high amount of share-based expenses ($75.9 million) can rightfully be criticized. With that said, the fintech's 2Q-23 statement showed $48 million in GAAP net losses, but they declined by about half compared to last year's second quarter.
If SoFi Technologies had reduced its share-based expenses to zero, then SoFi Technologies would have already posted a GAAP net profit in the first half of 2023.
Adjusted EBITDA (SoFi Technologies)
SoFi Technologies sees GAAP profits showing up on its financial statements in 4Q-23, based on guidance. Steering the fintech towards GAAP profits would probably be a catalyst for SoFi Technologies' stock. I underrated the possibility of SoFi Technologies achieving GAAP profitability this quickly, and I am therefore withdrawing my 'Sell' rating.
Stock Risks And Upgrade To Hold
So far, SoFi Technologies is executing better than I anticipated, and the fintech profits primarily from strong member growth. But SoFi Technologies still has a high sales multiple. A key risk moving forward is that SoFi Technologies may not achieve positive GAAP income in 4Q-23, which would likely be a setback for the fintech and impair investor sentiment.
Taking into account that SoFi Technologies is performing better than I expected and that the fintech raised its guidance for 2023, I think that a 'Sell' rating at this point would be hard to defend. Consequently, given the momentum in members and sales, I change my stock rating to 'Hold'.
My Conclusion
SoFi Technologies' second quarter earnings were pretty good, and the fact that the fintech is slowly but steadily moving towards GAAP profitability is the primary consideration why I am changing my stock rating from 'Sell' to 'Hold'.
I still have issues with SoFi Technologies' high valuation multiple which, despite a recent correction, is still higher than the sales multiples of other fintechs.
Clearly, the emergence of GAAP net profits would be a turning point for SoFi Technologies. Given my concerns about the fintech's valuation, however, I am not going to consider SoFi Technologies a buy just yet.
Source: Seeking Alpha
Comments