To The Moon

Summary

• Thanks to the elevated interest rate environment, SOFI has generated another quarter of robust net interest income and net interest margin, temporarily negating the growing delinquencies.

• The SoFi Bank has largely contributed to its profitability flywheel as well since the growing deposits allowed 50% of its loans to be funded internally by FQ2'23.

• Due to the student loan refinancing tailwinds, the management has raised its FY2023 guidance, demonstrating its high growth cadence.

• SOFI still has a massive runway for growth, due to its well-diversified fintech offerings and highly sticky deposit/ member base, with an improved upside after the correction.

• Investors may continue adding the SOFI stock, depending on their dollar cost averages and risk tolerance.

RomoloTavani

The SOFI Investment Thesis Has Proven To Be Robust Here

We previously covered SoFi Technologies $SoFi Technologies Inc.(SOFI)$ in June 2023, discussing its bright prospects surrounding student loan repayments.

Then again, while the stock had been rated as a buy at that time, we had also warned investors that the elevated interest rate environment posed short-term headwinds to its delinquency rates, which had been expanding drastically on a QoQ and YoY basis in FQ1'23.

SOFI Delinquency Rates In FQ2'23

Seeking Alpha

For now, it appears that our suspicion has materialized, with SOFI recording expanding loans that are 90 days or more delinquent at $9.89M in FQ2'23 (+19.8% QoQ/ +407.1% YoY).

This is on top of the increase in its annualized net charge-off across its loan portfolio to $103.36M (+20.7% QoQ/ +458.4% YoY), with a ratio of 2.33% (+0.05 QoQ/ +1.38 YoY).

These numbers are alarming indeed, compared to the big US banks in the recent quarter, with JPMorgan Chase $JPMorgan Chase(JPM)$ reporting a ratio of 0.47%, Bank of America $Bank of America(BAC)$ at 0.64%, and Wells Fargo $Wells Fargo(WFC)$ at 0.32%.

SOFI's provision for credit losses have also naturally increased to $12.61M (+50.1% QoQ/ +24.8% YoY), partly contributing to its expanding net losses of -$47.54M (+34.5% QoQ/ -49% YoY) in FQ2'23.

Then again, the elevated interest rate environment remained a net positive on its performance, attributed to the growing net interest income of $291.12M (+23.3% QoQ/ +137.2% YoY) and net interest margin of 5.74% (+0.26 points QoQ/ +0.51 YoY) in the latest quarter.

Much of this success may be attributed to the SOFI Bank's high return offerings, with an APY of up to 4.5% and an added bonus of 0.25% in personal loan discount rate for its premium members. This is compared to JPM's APY of 0.01%, BAC's 0.04%, and WFC's 0.15%.

This also explains the bank's impressive growth in deposit base to $12.74B (+26.3% QoQ/ +73.5% YoY), members to 6.24M (+10.4% QoQ/ +44.7% YoY), and products to 9.4M (+9.9% QoQ/ +42.8% YoY) in the latest quarter.

Therefore, due to the promising development thus far, it is unsurprising that SOFI has reported another excellent FQ2'23 performance, with revenues of $488.82M (+6.2% QoQ/ +37.2% YoY) and GAAP EPS of -$0.06 (inline QoQ/ +50% YoY).

Most importantly, the SOFI Bank has largely contributed to its profitability flywheel, since the growing deposits have allowed 50% of its loans to be funded internally by FQ2'23, reducing its dependency on expensive credit facilities.

Combined with its highly sticky offerings across bank, personal/mortgage/student/auto loans, investments, insurance, travel, and even credit cards, it is unsurprising that the fintech has reported higher average account balances and spending volume across its full suite of financial products, naturally improving its monetization cadence:

More than 50% of newly funded SoFi Money accounts are setting up direct deposit by day 30. And this has had a significant impact on spending. Q2 annualized spend was over 2.7 times full-year 2022 spend. And Q2 spend per average funded account was up 13% quarter-over quarter. (Seeking Alpha - FQ2'23 earnings call)

As a result, we believe that SOFI has an immense runway for growth, especially since market analysts have priced in the Fed pivot by 2024, potentially lifting the uncertain macroeconomic outlook while boosting its intermediate-term prospects.

So, Is SOFI Stock A Buy, Sell, or Hold?

SOFI 1Y Price/Sales Valuations

S&P Capital IQ

For now, SOFI still trades at a NTM Price/ Sales valuation of 3.37x, elevated compared to its 1Y mean of 2.97x. The same premium is also observed compared to its fintech peer - Block $Block(SQ)$ at 1.50x, online bank peer - Ally Financial $Ally(ALLY)$ at 0.96x, and the consumer finance sector mean of 2.42x.

SOFI 1Y Stock Price

Trading View

On top of this premium, SOFI appears to have met immense resistance at the $10s, with the stock also losing much of its recent gains despite the excellent FQ2'23 results and raised FY2023 guidance.

Combined with the elevated short interest of 14.19% at the time of writing and the stock's current retest at the Q3'23 levels of $8s, there may be more volatility in the near term.

Then again, we are maintaining our Buy rating for SOFI, attributed to the tailwinds from student loan refinancing.

For example, SOFI has raised its FY2023 guidance, with revenues of $2.004B (+27.3% YoY) and adj EBITDA of $338M (+135.8% YoY) at the midpoint, compared to the previous guidance of $1.9875B (+26.3% YoY) and $278M at the midpoint (+93.9% YoY).

With most of its H2'23 numbers to be heavily weighted to FQ4'23, it is apparent that the management is expecting a higher contribution from the student loan refinancing, with things likely picking up from 2024 as well.

Google Search Trend

Google Search

This is unsurprising, given that the payments will restart from October 2023 onwards, with the Google Search Trend also recording increased interest surrounding "Student Loan Refinance" and "SOFI Student Loan" from April 2023 onwards.

SOFI's Projected Top & Bottom Line Through FY2026

Tikr Terminal

Most importantly, we may see SOFI generate FY2023 adj EBITDA per share of $0.36 (+140% YoY), based on its raised adj EBITDA guidance of $338M at the midpoint and its current share outstanding of 936.57M in FQ2'23.

In addition, the consensus expect the adj EBITDA per share to grow to $1.00 by FY2026, expanding at a tremendous CAGR of +40.57%. This suggests a long-term stock price target of $12.20, based on the sector's EV/ EBITDA valuation of 12.2x.

As a result of the attractive risk reward ratio, investors may continue adding the SOFI stock, depending on their dollar cost averages and risk tolerance.

Source: Seeking Alpha