To The Moon

$SoFi Technologies Inc.(SOFI)$ : Run Forest, Run (But Not Too Far)

Summary

• SoFi popped nearly 20% after earnings.

• The company delivered when it mattered and offered strong guidance.

• However, SOFI stock has run too far.

• This idea was discussed in more depth with members of my private investing community, The Pragmatic Investor. Learn More »

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Thesis Summary

SoFi Technologies (NASDAQ:SOFI) has pleased investors with its Q2 results, and the stock is up 20% on the day.

There's a lot to like when it comes to how profitability and loan originations are increasing, and the company expects this to continue, which was reflected in the guidance.

In my last article, I said SoFi was the bank of the future, and the market is beginning to realize this.

Nonetheless, based on Technical Analysis, we could expect a significant pull-back from these levels. For those itching to get in, you might get a more favourable entry soon.

I'm changing my rating to a HOLD.

Q2 Overview

SoFi has delivered an earnings and revenue beat, sending the stock up 19.9% on the day.

Consolidated Results (Q2 Earnings)

YoY revenue grew by 37%, while losses fell by 50%. Adjusted EBITDA is up 278% YoY, at $76.8 million.

Quarterly Performance (Q2 Earnings)

With that said, it is worth noting that quarterly revenues were up 6.3% sequentially, and adjusted EBITDA increased by only one million.

These metrics are not mind-blowing on a QoQ basis, but the trend is in the right direction, and this can also be seen in the consistent increase in Members and Products:

Members and Products (Q2 Earnings)

SoFi added 600,00 new members, a 10% growth, and products also grew to a similar tune of 11%.

Now, let's break this further and see how SoFi did in each of its three segments:

Segment breakdown (Q2 Earnings)

Starting with the lending segment, we can see that the segment contributed $322 million in revenues.

Lending Results (Q2)

Personal loan originations were a bright spot, growing 51% YoY, while students and home loans have actually decreased from a year ago.

Moving on to Technology, revenues came in at around $67 million, down close to $10 million since the previous quarter:

Galileo Accounts (Q2 Earnings)

If we look at Galileo accounts, these have actually increased since last quarter, but they have pretty much stagnated since the end of last year.

Finally, the Financial Services segment delivered $98 million in revenues., but actually lost the company close to $4 million.

Breaking down deposits in each of these products, we can see where SoFi is making more of an impact.

Financial Services (Q2 Earnings)

SoFi Relay grew the most YoY, over 90%. This is a service that puts all your financial products into one dashboard.

Money which refers to regular deposits, grew 47%. The company offers a very competitive APY, which is attracting depositors.

While this segment is still operating at a loss, this will soon become a net money maker for the company.

Financial services (Q2 Earnings)

Revenues have grown 223% YoY, while directly attributable expenses were up by a tenth of that.

All in all, SoFi delivered above-expected results, reaching nearly $500 million in revenues and a loss per share of -0.06.

This is a company that is still growing reasonably fast, has a big addressable market and is just about to turn GAAP profitable.

While some segments are doing better than others, SoFi is growing and improving in the areas that matter most.

Delivering Where It Matters

SoFi's results lead to a 20% rally in the price, and that's because the company delivered the key metrics that investors were looking for.

On the one hand, customer acquisition costs improved, a metric that I already talked about in my last article:

In the third quarter of 2022, SoFi spent almost $115 million on sales and marketing, which generated 377,000 new memberships. This adds up to a per-customer acquisition cost (CAC) of about $305.

In Q4, SoFi invested around $130 million on sales and marketing and brought in 523,000 new members. The CAC was then $248.

With that said Q1 2023, the company spent $175 million on sales and marketing, adding 433 thousand new members. This means the CAC was actually close to $404.

Source: SoFi: The Bank Of The Future

In Q2, SoFi spent 182.8 million on sales and marketing and gained 584,000 new members. This means that Customer Acquisition costs came down to around $311.

It's great to see a company that can maintain growth in a sustainable way, and that's what we see with SoFi.

The fact that the company can save on customer acquisition is also part of the reason it is achieving higher levels of profitability, which is also a reason investors are happy.

We also generated our fourth consecutive quarter of record adjusted EBITDA of $77 million, representing a 43% incremental adjusted EBITDA margin and a 16% margin overall, as well as a 36% incremental GAAP net income margin...

Source Anthony Noto, CEO of SoFi

The other key reason why SoFi is becoming more profitable is the product mix. Personal loans have increased 38% YoY, and the company can achieve a higher Net Interest margin on these. On the financial services part, we have also seen great strength in many products.

Ultimately, this is all part of the SoFi strategy:

FSPL (Q2 Earnings)

The company's "Financial Service Productivity Loop" allows it to gain more leverage from every customer as they begin to make use of other products.

Lastly, investors were very much pleased with the forward guidance of the stock.

FY2023 Guidance (Q2 Earnings)

For the full 2023 year, the company expects to achieve over $2 billion in revenue, and the EBITDA margin is expected to expand to 17%. This is significantly higher than what the company was expecting at the beginning of the year.

Technical Analysis

Despite what I consider to be a very good long-term outlook for SOFI, the stock has already run a lot since hitting a low in May, and I believe a correction is due.

TA (Author's work)

The way I see it, SOFI is completing a five-wave structure within a large degree wave 3. The target for this is around $12.97-$16.6. These are the 1.618 and 2 ext of wave 1 measured from the bottom of the wave 2.

Once these levels are reached, I'd expect a pull-back in a wave 4, which could take us back towards the $9 area. This is also where there was some established volume support, as shown by the VRVP.

Lastly, it's worth noting that the RSI is showing a divergence while climbing back into overbought territory.

Final Thoughts

All in all, while I really like SoFi for the long term, I would advise potential investors to wait for a pull-back here, or at the very least, a dollar cost average from here. After a +100% rally, there's no rush to get in.

This is just one of many exciting and fairly priced tech stocks you can buy right now!

Source: seekingalpha