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Is SoFi Primed for Earnings Acceleration?

With its bank charter in place and broad-based strength across its segments, the up-and-coming fintech is about to reach an inflection point for earnings growth.

May 25, 2022

SoFi Technologies (NASDAQ: SOFI) is enjoying stellar growth and recently guided for a massive impending acceleration in earnings starting the second half of 2022 — but you certainly wouldn’t know it by the up-and-coming financial technology (fintech) company’s languishing share price.

Down nearly 70% from its 52-week high as of this writing, SoFi stock has struggled through a combination of a broader pullback in growth stocks, pressure on the fintech space in particular, and concerns over impact of the ongoing student loan moratorium on its student loan refinance business. If SoFi’s recent full-year 2022 earnings guidance is any indication, however, the underlying strength of its other businesses will soon become clear — particularly as SoFi enjoys the fruits of its recently approved national banking charter and ramping bank operations.

A strong start to 2022

Before we get to that guidance, let’s tackle the headline numbers from SoFi’s first-quarter 2022 report released last week.

Adjusted net revenue climbed 49% year over year to $321.7 million, while its net loss narrowed to $110.4 million, or $0.14 per share, from $1.61 per share in the same year-ago period. Both figures compared favorably to Wall Street’s expectations for a loss of $0.15 per share on revenue of only $286 million.

SoFi also recorded its seventh straight quarter of positive adjusted EBTIDA, with the metric more than doubling year over year to $9 million. The company added 408,000 new members during the quarter, leaving its total members up 70% year over year to just under 3.9 million.

Digging deeper within SoFi’s core lending segment, adjusted net revenue climbed 45% year over year to $244.4 million, as roughly $2 billion in personal loan originations (up 151% year over year) helped more than offset roughly flat student loan volume (of $984 million) amid the student loan moratorium. SoFi noted the student loan business remains below 50% of pre-COVID levels.

In the smaller financial services segment — including SoFi Checking and Savings, Invest, Credit Cards, and others — revenue soared 264% year over year to $23.5 million.

On the technology segment side — primarily including results from banking services platform Galileo and a small contribution from the recently acquired cloud-banking platform Technisys — revenue increased 32% year over year, helped by a 58% increase in total enabled client accounts to 110 million.

SoFi’s profits are about to soar

With these kinds of stellar results, why then is SoFi stock still struggling to gain ground? There are two reasons I can see — and in my opinion, neither truly justifies the beating SoFi stock has taken in recent months.

First, it’s clear that the ongoing student loan moratorium prevents bullish investors from sincerely saying that SoFi is firing on all cylinders. Here again, however, this is a headwind that won’t last forever given SoFi’s continuing diversification into other products. It’s absolutely incredible the company has been able to drive the growth that it has despite its previously largest segment operating at below 50% of pre-COVID levels.

Second, SoFi’s guidance remains heavily skewed toward the back half of 2022. To be sure, SoFi’s second-quarter 2022 outlook called for adjusted net revenue to increased 39% to 43% year over year, or to a range of $330 million to $340 million — slightly below the $343.7 million Wall Street was modeling. At the same time, SoFi raised its full-year outlook for both adjusted net revenue (ranging from $1.505 billion to $1.510 billion, up 49% to 50% year over year and from previous guidance of $1.470 billion) and adjusted EBITDA (of $100 million to $105 million, more than tripling from just $30 million in 2021 and from guidance for $100 million previously) — both ranges well above analysts’ consensus estimates.

It seems SoFi has finally reached an inflection point in its earnings growth as the business continues to scale. That earnings acceleration should only become more evident in the back half of 2022 and into 2023.

To be fair, SoFi has long told investors that this would be the case as soon as it began ramping business under SoFi Bank — the charter for which was only approved a few months ago and is now serving to significantly reduce SoFi’s cost of capital.

Recall the slide below, for example, which SoFi provided to investors prior to going public via SPAC almost a year ago:

SoFi illustrative impact of bank charter approval
Source: SoFi Investor Presentation

We’re slightly behind that schedule, of course, as receiving the national bank charter and beginning to ramp operations under SoFi Bank took several months longer than expected. But the general trajectory of adjusted EBITDA growth should still remain roughly intact in the coming years, assuming (as the footnote describes) the company expands its loan hold period to six months rather than three and achieves “moderate growth” in its baseline lending originations.

Sure enough, during this quarter’s earnings conference call with analysts, CEO Anthony Noto elaborated:

We’ve just started moving towards holding loans six months on average versus three, which allows us to collect more net interest income. This also creates a more rational pricing environment for our paper as we leverage our ability to hold loans for longer, should pricing not be acceptable. And we can now introduce new loan types and pricing models that improve our competitive positioning.

Noto added that SoFi Checking and Savings (which offer 1.25% APY with direct deposit) accounts have already raised around $1.5 billion in deposits, with the total growing by $100 million per week. Coupled with catalysts for continued rapid growth elsewhere in financial services (SoFi Invest says it recently added margin investing and will soon follow with after-hours trading and options, for instance), as well as a wild card with the potential end to the student loan moratorium in 2023, and SoFi is feeling more like a coiled spring waiting to pop with each passing day.

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