Although SoFi Technologies Inc. (SOFI, Financial) is not impervious to the challenges affecting the wider economy and some of its business segments are facing difficulties, the company has demonstrated its capacity to surpass expectations and maintain stability, as demonstrated by its solid execution amid macro headwinds.
However, it is unlikely we will see a change in sentiment. The sudden collapse of SVB Financial Group's (SIVB, Financial) Silicon Valley Bank has triggered a swift response from regulatory authorities.
The bank, which had a significant presence as a lender to technology companies, suffered a major setback when a wave of customers withdrew their deposits earlier this month. The fallout from the bank's failure has prompted regulators to take action to contain the impact.
Concerns have been raised over the potential knock-on effects on the wider financial system, particularly on other banks with significant exposure to the technology sector. Investors are closely monitoring the situation, and many are questioning whether this could be the start of a larger banking crisis.
Separately, President Biden's student loan moratorium extension has impacted SoFi's student loan refinancing progress, while the continuous interest rate hikes by the Federal Reserve have led to higher mortgage rates.
Since SoFi has no control over any of these circumstances, it is unfair the market is penalizing the successful growth stock.
I believe the company's fundamentals will continue to improve as it progresses toward profitability. As we will discuss, SoFi is building a world-class portfolio that will do well regardless of the student loan business. That makes it a very appealing option at present multiples.
The moratorium on student loan payments
SoFi, short for Social Finance, was established in the summer of 2011 by four Stanford Graduate School of Business students: Mike Cagney, Dan Macklin, James Finnigan and Ian Brady. The founders' objective was to offer more cost-effective alternatives for individuals taking on debt to finance their education.
After debuting, SoFi developed a prosperous business in student debt refinancing. The company successfully appealed to new members with incomes exceeding $170,000, offering assistance to professionals such as doctors, lawyers, MBAs and software engineers seeking to refinance their student loans.
As time progressed, the company expanded its range of financial products to complement its student debt refinancing service. Nonetheless, the federal student-debt refinancing business remains the company's most significant offering.
When the federal moratorium on student loan repayments was implemented in March 2020, investors hesitated to invest in SoFi's federal loan refinancing business. The company reported that the moratorium significantly impacted its federal loan refinancing business. As a result, the company estimates it has suffered a loss of $300 million to $400 million in total revenue.
The Biden administration's plan to forgive student debt loans of up to $20,000 per borrower, subject to specific income criteria, was recently the subject of oral arguments in the Supreme Court regarding its legality.
The Supreme Court's preliminary remarks indicate doubts about President Biden's power to forgive $400 billion worth of student debt without Congress' approval. Randomly waiving a significant sum of debt is not within the executive branch's authority.
Nevertheless, SoFi is primarily interested in resolving the student debt moratorium problem rather than the Supreme Court's potential dismissal of the forgiveness plan. This lawsuit and the moratorium on student debt repayment have postponed the opportunity for high-income clients of the fintech company to refinance their student loans with SoFi.
SoFi collaborates with borrowers ineligible for the loan forgiveness plan because of their high earnings. However, the legal dispute has resulted in a prolongation of the moratorium. The company desires the lawsuit to conclude whether or not the Supreme Court blocks the plan, and its banking affiliate has filed a lawsuit against the Biden administration to eliminate the student loan payment moratorium, particularly for those not even covered by the cancellation initiative.
Meanwhile, SoFi looks ready and able to tackle all challenges.
On Jan. 30, the fintech provided strong guidance for 2023 that included critical macro assumptions, including interest rates, the economy and credit.
Assuming a considerable recession with a significant increase in unemployment this year, the growth projections have been made. The fintech has possibly anticipated the worst-case scenario without considering any favorable outcomes resulting from the Supreme Court's decision on the Biden administration's loan forgiveness plan or the resumption of loan payments.
Therefore, the fintech's growth projections for the upcoming year may be conservative and do not consider any potential positive developments arising from the Supreme Court's decision or the government's policies to support the economy.
More than a one-trick pony
SoFi offers a comprehensive range of financial products and services, including banking, loans, investments, insurance and credit cards. This suite of services has resulted in significant synergies and increased cross-engagement among its customers.
By leveraging cloud-native strategies, SoFi can expand its services with minimal physical infrastructure, making it an attractive option for geographic expansions in markets like Latin America, where fintech startups have been booming since the Covid-19 pandemic.
The cross-selling strategy, which involves marketing additional products to existing customers, effectively boosts a customer's lifetime value and minimizes customer-acquisition costs. SoFi investors were banking on the current substantial investment in novel products to yield long-term gains in the form of heightened LTV and decreased CAC, ultimately leading to profitability.
Having built up its capabilities over the last several years, SoFi is now reaping the rewards of this strategy.
Despite the increase in interest rates and President Biden extending the student loan moratorium, SoFi delivered strong results in the fourth quarter of 2022, beating expectations on both the top and bottom lines, narrowing GAAP net losses and recording a year-over-year expansion in adjusted Ebitda. Personal loan originations significantly aided these results, experiencing impressive 50% year-over-year growth, totaling $2.5 billion.
Nevertheless, the standout performer was SoFi Bank, which exhibited an exceptional performance with total deposits amounting to $7.3 billion by the fourth quarter. The bank experienced a substantial growth of over 46% quarter over quarter and an approximately 630% increase from the first-quarter levels.
Remarkably, 88% of the bank's deposits were from members who increased their average spending by 25% quarter over quarter and an impressive 240% year over year, indicating the appeal and retention of its financial product offerings.
Speaking of which, during the quarter, SoFi incorporated more than 695,000 new products, resulting in a total of almost 7.9 million products by the end of the period, reflecting a 53% increase from the previous year.
The impressive performance of SoFi Bank could potentially expedite the company's attainment of GAAP net income profitability. Management noted this could happen as early as the fourth quarter of 2023.
Moreover, using its integrated financial platform, SoFi optimized costs through a cloud-native strategy. This strategy reduced its on-premise footprint, which began in the first quarter of 2023. Consequently, any restructuring costs that may arise are not a major concern since they are related to the company's improved efficiency in the future.
Vote of confidence
SoFi's recent growth and strategic moves suggest the company is undervalued. The fact that CEO Anthony Noto has personally invested $5 million in the stock strongly indicates his confidence in the company's potential.
Despite the positive news, SoFi's shares trade at a relatively low price-sales ratio of 3.19, suggesting the market undervalues its growth prospects and potential future earnings.
One possible reason for the undervaluation is that SoFi is still a relatively new company, so investors may be hesitant to evaluate its potential fully. Additionally, the company has faced some regulatory hurdles, which may have caused some investors to remain cautious.
Takeaway
In conclusion, despite recent declines in its stock price, SoFi appears to be a solid investment opportunity. The recent pullback in the stock is likely due to irrational fears related to bank contagion concerns rather than any fundamental issues with the company itself.
Investors should focus on the likely positive outcomes from the upcoming Supreme Court ruling on student debt, which could be a major catalyst for SoFi's growth in the coming years. Additionally, the company's expanding product offerings, strong leadership team and recent insider investments by its CEO all point to a promising future.
In light of these factors, investors willing to look beyond the short-term market fluctuations and focus on the long-term potential of SoFi may find the stock to be an attractive opportunity at its current price.
