Breaking Down SOFI's Q1 2024 Results

Breaking Down SOFI’s Q1 2024 Results

7investing advisor Anirban Mahanti shares his thoughts about SOFI's first quarter 2024 earnings results. He also argues the company should be valued less like a FinTech and more like a bank.

May 1, 2024

Note: This SOFI earnings commentary was originally posted to our 7investing Community Forum, where investors discuss stocks directly with our lead advisors. Sub-headings have been added to make it more article-friendly.

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I recently took a look at SoFi’s (Nasdaq: SOFI) Q1 2024 earnings report. Here are a few of my thoughts about their results.

Adjusted EBITDA is an Imperfect Metric

First, a high-level point.

Management keep talking about adjusted EBITDA, which I think is a fine metric for an asset-light fintech. But I don’t think that works for a neo bank like SoFi.

I think the crux of the matter is this. SoFi takes deposits (which are a liability from a bank’s perspective) and uses those to drive loans (which are an asset from the bank’s perspective). Deposits are good for lending as it drives down the cost of lending versus something like warehouse loans.

Now, for the bank to keep growing they need to deliver earnings. Retained earnings are added to the capital base. The capital base is important because how much lending can be done is a function of the capital base. This is known as the regulatory capital ratio.

Why is all this mumbo jumbo important? Well, if the core business is slowing down, it impacts earnings growth, which slows down capital base growth, and thus impacts lending.

SoFi does have a fair bit of slack here though as their regulatory capital ratio is around 17% (and the minimum required is 10.5%). SoFi is being conservative because of the macro, so it does have slack to pick the pace up.

However, there’s also the question of how its loans are travelling.

In recent vintages they are seeing “a more rapid factoring down of loan principal” because of increasing prepayment rates and a demand for shorter loan terms. This is resulting in higher loan losses upfront. General trend is for higher losses early on and lower losses later, but they expect life of loan losses to be in the 7% to 8% range.

Given how SoFi has limited track record for lending, it is perhaps hard for the market to just believe what management is saying about their lending standards.

But then there are things like selling off $62.5 million of “late-stage delinquent personal loans” in Q1 2024. These things make investors nervous.

Why? Had they held on to these, they would have increased the loan loss rates on the books. Management argues they could generate positive “value” by selling them now versus letting these loans actually go bad on the books and then sell them off.

Then add to the mix the following “negative” news.

Q4 2023 adjusted revenue was $594 million. Q1 2024 landed below Q4 2023 at $581 million. Q2 2024 guidance calls for $560 million at the mid-point, so it is another QoQ decline. So we are looking at back to back sequential revenue declines.

I think that too is causing nervousness.

So What’s the Takeaway?

I think there are nuances here … quite a few.

But the high-level view is SoFi is a neo bank and I think we ought to value it like a modern-day, perhaps fast-growing bank.

Ultimately, the game here is to secure deposits, use cheaper deposit funding to fuel lending and drive uptake of financial services.

For the flywheel to spin, they need to be prudent in their lending decisions and generate earnings. Retained earnings grow the company’s capital base, which then allows them to do more lending while being under the required capital ratios.

That means we should be using more bank-like metrics to value the stock and not EBITDA which works well for asset light fintech.

Tangible book value was $4.1 billion. TBV per share is $3.92. Price/Tangible Book Value is 1.8x, which one could argue is somewhat undervalued.

What multiple would one assign to a fast growing neo bank with high NIMs but not so much of a diversified (lending) portfolio? Maybe at the high-end something like 2.5x TBV … which would mean a high end value of around $10 per share.

If SoFi keeps executing, TBV will keep growing and our fair value target will keep moving alongside it.

So, that’s the high-level takeaway for me.

By The Numbers

In terms of numbers/metrics …

Tech platform revenue was $94 million, up 21% YoY
Financial services revenue was $151 million, up 86% YoY.
Lending revenue was $325 million, flat YoY.
Adjusted EBITDA was $144 million for a 25% margin.
In Q1 2024, financial services and tech platform accounted for 42% of total revenue. They aim to finish with a 50-50 split between lending and non-lending by Q4 2024.
Member growth was strong at 44% YoY to 8.1 million.
Galileo account grew 20% YoY to 151 million.
Deposits grew by $3 billion in the quarter to nearly $22 billion; higher deposits lowers reliance on warehouse funding for loans.
Net interest margin (NIM) was 5.91% reflecting improved funding structure.
Deposits are now fueling loans versus earlier reliance on external funding sources (e.g., warehouse loans).

With respect to guidance here’s what they are saying:

The lending business will be down in 2024, with expectations to be at 92% to 95% of 2023 revenue.
SoFi is taking a conservative approach to loan originations because of concerns around rate uncertainty and macroeconomic climate. The financial services and tech platform segments are expected to be up 50% year-over-year.
From a revenue distribution point of view, it’s important to note that the company generated 64% of the consolidated revenue from lending in 2023. Therefore, a drop in lending has an outsized impact on the overall revenue line.
They expects adjusted net revenue of $2.39 billion to $2.43 billion and adjusted EBITDA of $590 million to $600 million for 2024.
So revenue growth is 16% at the mid-point and EBITDA margin is expected to be 25%.

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