This online bank wants to build the AWS of fintech.
At one point, $SoFi Technologies Inc.(SOFI)$ was little more than just another run-of-the-millfintech, or digital-only bank similar to privately held Chime or Current. However, SoFi made a big move in 2020 that put it on the path to becoming one of the most dominant fintechs in the world.
Here's the one big reason Sofi should be on your investing radar.
SoFi wants to become the leading financial services cloud
SoFi took a giant step to becoming the Amazon Web Services (AWS) of fintech when it signed an agreement in April 2020 to acquire Galileo, one of the best financial services companies for building payments, checking, savings, credit, debit, and other money transfer functionality.
SoFi bought Galileo for two reasons. First, SoFi can now build new, innovative payment features for its banking platform at a faster pace and lower price than if SoFi were simply a client of an independent Galileo. In contrast, many of SoFi's competitors rely on legacy third-party financial software providers. And finding a third-party supplier that can custom-make leading-edge financial software at a reasonable cost is nearly impossible. For example, many banks have been frustrated with the inability of the biggest legacy third-party financial technology providers to offer competitive new-age payment solutions.
Second, SoFi believed it could fill many fintechs' and banks' crucial need for cutting-edge payment solutions with Galileo's services. And SoFi wound up being correct. Since SoFi bought Galileo, membership grew from 36 million in the second quarter of 2020 to 110 million in the first quarter of 2022.
Galileo currently contributes the lion's share of SoFi Technology's platform-adjusted net revenue, which grew 32% to nearly $61 million in the first quarter. Additionally, the platform increased its contribution profit by 16% year over year to just over $18 million, with a margin of 30%.
SoFi adds another piece to the pie
Then SoFi acquired Technisys, a digital multiproduct core banking platform, in March 2022. There are two significant reasons SoFi boughtthe company.
First, SoFi expects that the combination of Galileo and Technisys will accelerate the combined businesses' three-year compound annual growth rate due to cross-selling between the companies' existing customer bases. As a result, SoFi expects to add between $500 million to $800 million cumulatively through year-end 2025, with high incremental margins.
Second, SoFi expects its core business to gain substantial cost savings. The company anticipates saving around $75 million to $85 million through year-end 2025, and $60 million to $70 million annually after that. The savings should come from moving the SoFi checking and savings and SoFi's credit card businesses off third-party platforms and onto the Technisys platform.
Additionally, the deal looks even better after Technisys recently integrated its platform with Microsoft's Cloud for Financial Services -- an integration in which Technisys gains the ability to scale up operations for even the largest banks, with up to 150 million customers.
SoFi Chief Executive Officer Anthony Noto recently suggested that every multiproduct financial services company will need to move from older technology and to cloud-native technology similar to Technisys's or risk being left behind.
U.S. financial institutions might view SoFi as a threat
Many U.S. financial institutions and neobanks that could use SoFi's technology platform might also view SoFi's banking operations as a significant long-term threat to their business. And those entities might be reluctant to use Galileo and Technisys in the same way that Walmart doesn't want to use AWS from Amazon.
Also, financial institutions have other options for building a modern financial platform. Companies like Marqeta,Adyen, and Stripe are arguably as innovative as the Galileo and Technisys combination. And if too many financial institutions avoid using SoFi's technology, CEO Noto's plans to create the AWS of fintech could derail.
However, Galileo and Technisys have a solid global presence. Since SoFi's U.S. banking operations do not compete with companies outside the U.S. market, Galileo and Technisys should continue to do well in places like Europe and South America, even if U.S.-based companies shun SoFi's technology offerings.
Is SoFi a buy?
SoFi is a rapidly growing fintech selling at a price-to-book ratio of about 1, significantly below 2, the level where many value investors become interested in a company. Moreover, considering SoFi's revenue rose 69% in the first quarter, some investors might regard the stock as significantly undervalued. So if you can see beyond short-term negative market sentiment, it might be a good time to pick up a few shares.
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