Summary
- SoFi Technologies stock has been extremely volatile, bottoming in the $4's, spiking to nearly $8, and now back to the $5 range in just a few weeks.
- You can trade long and short, but on the next selloff in this bear market rally, you can accumulate.
- Expect an H2 2022 ramp in EBITDA.
- Q2 loans are strong despite the rate environment.
- Insiders sell stock for all sorts of reasons, but buy stock for only one, and insiders are buying SOFI.
Matteo Colombo/DigitalVision via Getty Images
It kind of amazes us to see how much of a battleground stock SoFi Technologies, Inc. (NASDAQ:SOFI) has become. On the one side, you have bulls like us that see long-term potential for this disruptorto continue taking market share, reduce costs, and eventually turn a profit. Then, you have bears who consider this simply a "me too" fintech that has no moat and will only continue to see losses.
Right now, the reality of the situation is actually a blend of both the bull and bear cases. The company continues to lose money. However, it is gaining market share, and is reducing costs. In fact, we should see an EBITDA ramp later this year into 2023 as costs are further reduced.
This is a bullish development, though the bears have largely been correct the last few quarters. The stock recently put in a bottom in the $4 range, with a massive spike back toward, $8, but shares have found their way back into the $5 range. The market does not know how to value the name. With no earnings, some may argue that it is worthless. It is true, no-earnings stocks have been decimated. But there are assets here. This is now a bank. It is expanding its offerings.
The student loan moratorium is a headache, but eventually, there will be repayment again, boosting revenues. The stock is very tradeable, both long and short; right now, we think the stock will collapse back, possibly to under $5 on the next market downdraft, in which case, traders should pounce. Investors can accumulate on dips, and play the long-term game. The end goal here is to get to profits. And it is on the path it needs to be on. Let it fall, then get long.
Going back, the Q1 results were strong
While we are finishing up the second quarter, the Q1 results were solid. In the first quarter, revenue growth accelerated. SoFi reported record adjusted net revenue of $322 million. This was a 49% increase year-over-year from the same prior-year period.
Not only was this immense growth, but this revenue increase was far above the high end of management's guidance andit beat consensus estimates.We made a big deal about profit in the opening. On a per share basis, earnings are not there yet, but EBITDA is a critical metric to watch. In fact, adjusted EBITDA of $8.7 million was reported. This was at the high end of expectations, It is also worth noting that this was the seventh consecutive quarter of EBITDA growth. Things are moving in the right direction.
Margins need to get better, but loan growth is a plus
The company is growing loans and revenues despite the continued extension of the student loan repayment moratorium. The company has all but moved passed it. Officially, the moratorium has been extended through August 2022, but SOFI is assuming the moratorium will get extended through the whole year. Inflation is killing budgets, and there are pending elections. But, that said, the student loan issue is out of the equation as far as SoFi is concerned in 2022.
Regardless, SoFi is experiencing accelerated growth in its three reporting segments. Over in lending, net revenue grew 45% year-over-year, to $244 million in Q1. This is better growth than the 30% in Q4 2021. That is strong to see. Higher loan balances and yields led to gains in interest income across both personal and student loans, and record personal loan originations drove growth in noninterest income. Now, where we need improvement is in the margins. The lending business saw $133 million of profit, stemming from a 54% margin, up from 52% margins a year ago. Still, we would like to see margins above 60% here long-term. Even at 54%, things are strong and the dollar volume is up. Winning.
SoFi's tech platform saw revenue of $61 million in the quarter, which was up 32% from last year. Galileo has been growing nicely, taking on 58% year-over-year increases in accounts. Profit was $18.2 million on 30% margins. This is down from a year ago, which had 34% margins. We believe you will see margins bottom out this year and then increase as cost savings and synergies align with the Technisys purchase.
The financial services segment saw $23.5 million in revenue for Q1, up 7% sequentially and up 264% from last year. With big spending on new initiatives to build this segment losses were $49.5 million for the quarter. But the losses should slow. Right now, the spending is elevated largely due to now having the credit card business versus just launching the business in the prior year, and needing to build current expected credit loss reserves.
While revenues are growing, margins should improve soon as the full impact of the bank charter, as well as better rates on new loans, are recognized.
EBITDA ramp up expected
SoFi is still seeing strength margin wise with its loans, though we want to see it do better. Further, lending rates going higher is a big positive at least on earnings per loan. The CFO recently laid out a case for why EBITDA will ramp higher too. Chris Lapointe stated:
"In the back half of the year you’re going to start seeing a much more meaningful impact from the lower cost of capital of using our now high quality deposits that we’ve been able to raise through SoFi bank as well as an extended hold period."
With the bank charter in place, the company is offering a compelling yield on savings accounts, which SoFi then lends from. But the margins and savings per loan is actually much better now because it costs less to fund the loans internally. On top of that, SoFi can now hold loans much longer before it sells the loan to another institution. This is leading to incremental gains on net interest income. On top of this, the CFO also said that the personal loan business "has been doing extremely well in a rising rate environment." This is quite bullish.
One of the big bearish arguments against SoFi, as well as traditional finance, is that the spike in rates is leading to rate shock and slowing down demand right now for new loans. It is great to see evidence to the contrary here in Q2. Of course, there is some truth to the argument, the big spike in rateshas lowereddemand for bank loan originations in the short term as it costs much more to borrow. But after an adjustment period, loan demand will return and in the long-term higher rates will be a benefit for lenders. Combine this with the lower cost of funding and margins will really expand.
Some insider action
There also has been some insider buying ongoing. In the last 6 weeks, there has been massive insider buying, mostly by CEO Anthony Noto. There has been just one recent sale. This was allavailable publicly and summarized below:
Insider transactions SOFI(Guru Focus)
This is pretty impressive. In fact, it always helps to see insider buying. While insiders sell for many reasons, they buy stock for one reason only. Remember that.
Final thoughts
The stock has been volatile. The market has been tough. We got a bit of a bear market rally recently, so let the stock collapse on the next drawdown, which we do see coming again next month. The selloff will happen despite a ramp up in personal loans, major metrics trending higher, strong upside to guidance on both revenue and adjusted EBITDA, as well as the insider buying. Use the weakness to your advantage, once again.
It is our opinion that once again investors are over-discounting the stock when it gets to $5. The company is poised to show a significant ramp in EBITDA in H2 2022, and shares trade slightly over book value. You can trade long and short, but investors are getting the chance to accumulate for the long-term.
Source: Seeking Alpha
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