SoFi Technologies Does Not Have Any Competitive Advantage

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SoFi Technologies Does Not Have Any Competitive Advantage

seekingalpha2022-04-29

Justin Sullivan/Getty Images News SoFi Technologies (NASDAQ:SOFI) has good growth prospects over the next few years, but its business model is not unique in its industry and I doubt it will become a ...

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ET77
·2022-05-05
Not a long term hold unless the financials change
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MoneyFace168
·2022-04-30
For mid to long term investment rather then speculation.
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UncleRango
·2022-04-30
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Company Overview SoFi's roots go back to 2011 when Social Finance, Inc was founded, offering student loan refinancing. Over the years, it enlarged its product offering including mortgages and personal loans. SoFi went public through a SPAC merger in 2021 and changed its name to SoFi Technologies in May 2021. It currently has a market capitalization of about $5.8 billion. SoFi's business is the offering of financial products and services through a digital application, using data to offer a better customer experience and adapt its offerings to the customer's needs. Its strategy is to have vertically-integrated technology platforms supporting its operations, to offer a better service to its members and differentiate itself from competitors. SoFi's business is segmented into three operating units, namely Lending, Technology Platform and Financial Services. Lending is related to student loans, home and personal loans, while the Technology Platform consists of Galileo, which it acquired in 2020. Galileo is a provider of technology platform services for financial and non-financial institutions. The Financial Services segment includes cash management and investment services. In the last year, some 75% of its revenues were generated from the Lending segment, 20% from the Technology Platform and only 5% of Financial Services. Regarding its growth history, SoFi has a solid track record, particularly over the past couple of years, in which the number of its members (customers) has increased significantly. It reached more than 3.4 million at the end of 2021, as seen in the next graph, showing that the company's strategy of evolving from a student loan refinancing company to become a one-stop-shop for financial services is bearing fruit. Customers (SoFi) Business Model & Competition SoFi is a digital personal finance company conducting its business through digital channels. More recently, the company completed the acquisition of Golden Pacific Bancorp and now has a banking license, and therefore can be considered a neobank or online bank. Contrary to traditional banks, which usually have a significant physical presence through bank branches, SoFi does not have a significant retail network and is focused on delivering its products and services through its digital platform. Neobanks, sometimes also referred as 'challenger banks', are part of the fintech segment, offering apps, software and other technologies in the financial industry. By being more streamlined and not owning the traditional retail network, which is usually expensive due to real estate and staff costs, neobanks can offer, theoretically, a better service and charge lower fees than traditional banks. This is especially attractive to younger generations that prefer to use digital channels to interact with their bank, a trend that was boosted by the pandemic with even more people using digital channels for their financial needs. According to Statista, there were about 20 million neobank accounts in the U.S. at the end of last year, a number that is expected to grow to 39 million by 2025, being a strong tailwind for SoFi's growth over the next few years. Accounts (Statista) Usually, these fintechs specialize in specific fields or financial products, like checks, savings accounts, or stock brokerage, but SoFi's approach has been to be a one-stop-shop for its customers, offering a vast array of financial products including loans, savings, investments, and insurance, beyond others. This business model puts SoFi in direct competition with other neobanks, such as Chime, but also to traditional banks like JPMorgan (JPM). According to SoFi, its business is built around its members' needs operating as a member-oriented one-stop-shop for financial services, being this the main competitive differentiator to other financial services providers. For instance, its customer service is available 24x7, a key differentiator compared to the traditional financial service availability based on 9-5 Monday through Friday. This means that SoFi's strategy is to build a strong and lasting customer relationship, and with time offering a higher number of products to its customers. This enables it to increase the value and revenue generated from each customer without the cost of acquisition of an additional customer, improving its economies of scale and business profitability. This is reflected in what the company calls the 'financial services productivity loop', in which SoFi considers to be at the beginning of realizing its benefits as it still is adding new products and services, being the recent addition of a banking license an important milestone to offer a full stack of financial services to its members. Business Model (SoFi) Beyond the 'banking' business, SoFi is also investing in the development of a technology platform for itself and other financial institutions, first through its acquisition of Galileo in 2020 and more recently with the acquisition of Technisys for $1.1 billion, which is expected to close in the coming months. The development of in-house technological capabilities is part of SoFi's vertical integration strategy, being potentially a key differentiator to other financial institutions that traditionally rely on several IT providers for back-to-front office applications. SoFi's goal is to create a better technological infrastructure that is able to integrate different products in one single platform, instead of, for example, having a system for credit cards and another completely different for investing products. This traditional architecture means that financial institutions can use dozens of different software to run their business, which are difficult to integrate and add complexity when managing a customer's total relationship with the financial institution. Technisys Cyberbank platform is a multi-product platform based on the cloud, which is already used by many banks, neobanks, fintechs and other financial institutions. By combining Cyberbank with Galileo, SoFi's goal is to have a digital banking platform that can be used by itself and its customers, in what SoFi calls the 'AWS of Fintech'. I think this business line has good growth prospects as traditional banks need to invest in digitalization and may not have the resources, or will, to develop in-house capabilities, but I doubt SoFi will be the major provider of banking platforms for the financial industry worldwide as the company is trying to sell to investors. Barriers to entry in this industry are quite low and large banks and technology companies are also investing considerably in digital banking solutions, thus competition is strong and especially large banks aren't likely to rely on a single provider for their banking infrastructure. Therefore, SoFi can be interesting for smaller and regional banks that need to update their systems for the digital banking era, but most likely SoFi will struggle beyond that to gain large customers like JPMorgan or Citigroup (C). Financial Overview Regarding its financial performance, SoFi is a recent company and therefore is still in an early-growth phase and has naturally reported losses throughout recent years. In 2021, its net loss was close to $490 million, more than double compared to 2020. Its adjusted revenue was slightly above $1 billion, more than double from 2019, showing that SoFi's top-line is growing quite rapidly. From an operating perspective, SoFi also reported losses in the past year (including stock-based compensation) and this is not expected to reverse anytime soon, considering that SoFi's guidance for 2022 is to generate some $1.57 billion in revenues, but EBITDA should be negative by around $160 million. At this stage, this is not particularly an issue but, in my opinion, one of SoFi's main challenges is to continue to grow its business, but at the same time reach a level of scale that will enable it to achieve breakeven. Even though its top-line is increasing as the total number of customers increases and the company sells more products to its customer base, SoFi also continues to invest in sales, marketing and technology over the next few years, thus operating expenses are also expected to increase markedly in the coming years. Additionally, as the company recently acquired a bank charter, it now has to comply with additional regulations and requirements, which will certainly lead to higher expenses in the near future. This means that it's quite difficult to currently forecast if SoFi will rapidly improve its profitability or continue to report losses over the medium to long term. In the short term, the extension of student loan moratorium is negative for SoFi's revenues and the recent acquisition of Technisys may increase costs, while on the other hand, the acquisition of a bank charter will help to obtain cheaper funding and improve its net interest margin. According to analysts' estimates, SoFi will continue to report losses this year (net income of -$380 million), but this is expected to improve gradually in the next few years and achieve a small profit by 2025 on revenue of about $3.7 billion. This shows that despite SoFi's strong growth prospects, expenses will certainly also increase at a very high rate as SoFi needs to invest both in technology and business growth. Regarding its valuation, I see SoFi nowadays more as a financial institution rather than a technology company given that most of its revenues and operating profits come from its lending segment. In the future, this is likely to change as SoFi's technology platform business grows and its revenue profile gears more towards fees from providing IT services, making it more comparable to tech companies. Nevertheless, currently, as SoFi does not have profits and its business is more geared to the banking business, I see the price-to-book value as the best metric to value it. Like most high-growth stocks, SoFi has de-rated considerably from its highs reached last November, when it was trading at about 4.5x book value, to its current valuation of only 1.2x book value. Valuation (Bloomberg) As the company is not profitable and is not expected to be in the next three years, investors should keep in mind that SoFi's valuation is highly speculative and therefore a valuation close to book value seems fair. This means that after being down by some 75% from its all-time highs reached back in November, SoFi may now be approaching its bottom. Conclusion SoFi has good growth prospects both in its banking and technology businesses, but I don't see anything really unique in its offering that can be considered a competitive advantage in the financial services industry. Barrier to entry and product differentiation is low in the industry and SoFi knows that, trying to differentiate itself from a better customer service than competitors. This may lead to long-term relationships with its members but doesn't seem to be enough to make it a leading company in the industry over the long term. Therefore, I think that investors should see SoFi as an interesting growth play in the fintech industry, but management comments of becoming the 'AWS of Fintech' or a major financial institution in the U.S. seem to be more wishful thinking than reasonable business goals.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":9068044936,"gmtCreate":1651707563456,"gmtModify":1676534951987,"author":{"id":"3565944798085236","authorId":"3565944798085236","name":"ET77","avatar":"https://static.tigerbbs.com/2c73ac2c436c2e43d9b78a2c52d24cb7","vip":1,"hat":"https://static.tigerbbs.com/0a8758340a08196056f8bc1e54805193","crmLevel":8,"crmLevelSwitch":0,"idStr":"3565944798085236","authorIdStr":"3565944798085236"},"htmlText":"Not a long term hold unless the financials change&nbsp;","listText":"Not a long term hold unless the financials change&nbsp;","text":"Not a long term hold unless the financials change","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9068044936","repostId":2231429020,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9069854830,"gmtCreate":1651277908619,"gmtModify":1676534881721,"author":{"id":"4099482900818530","authorId":"4099482900818530","name":"MoneyFace168","avatar":"https://static.tigerbbs.com/7bdd85e800730854af8b21f55ba73619","vip":1,"hat":"https://static.tigerbbs.com/b073a07f77dbe6b3bec6b12311fde6bd","crmLevel":5,"crmLevelSwitch":0,"idStr":"4099482900818530","authorIdStr":"4099482900818530"},"htmlText":"For mid to long term investment rather then speculation.","listText":"For mid to long term investment rather then speculation.","text":"For mid to long term investment rather then speculation.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9069854830","repostId":2231429020,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9069859689,"gmtCreate":1651277449395,"gmtModify":1676534881568,"author":{"id":"4094279521119940","authorId":"4094279521119940","name":"UncleRango","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"4094279521119940","authorIdStr":"4094279521119940"},"htmlText":"K","listText":"K","text":"K","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9069859689","repostId":2231429020,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"hasMoreComments":true,"newsSizeData":{"likeSize":8,"commentSize":3,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}