SoFi in Three Words: One-Stop Fintech

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Background

As the world shifts toward digital banking solutions, the largest legacy banks have a key disadvantage over newer market entrants; rather than building their businesses from the ground up with digital foundations and technological innovation in mind, many are attempting to defend their turf by essentially stacking digital platforms on top of their substantial legacy infrastructures.

By contrast, SoFi Technologies — short for “Social Finance” — is a mobile-first personal finance company with a comprehensive suite of financial products built on a digital substrate. SoFi was founded in 2011 as the first company to refinance federal and private student loans. But today, it has effectively diversified into a one-stop finance shop while fulfilling its mission “to help people reach financial independence and realize their ambitions.”

SoFi now offers everything from checking to savings accounts (via SoFi “Money”), home loans, personal loans, school loan origination and refinancing, auto loan refinancing, travel, credit cards, and the ability to invest in stocks, cryptocurrencies, and even participate in new IPOs through its SoFi Invest platform. Each product serves to further improve the app’s network effects and cross-selling capabilities, creating what SoFi calls its financial services productivity loop (FSPL) with some of the industry’s highest lifetime value (LTV) and lowest customer acquisition costs (CAC),

Zooming out a bit, we can see that SoFi splits its results into three reportable segments:

• Lending Products, where it makes money through a combination of interest paid on held loans and (to a greater extent) securitization of loans as well as whole loan sales.
• The Technology Platform segment, which comprises sales from banking infrastructure technology platform Galileo, which SoFi acquired for $1.2 billion in early 2020, as well as cloud-native banking platform leader Technisys, which SoFi acquired for $1.1 billion in March 2022. Galileo for its part, can be described as SoFi’s “in” for the business-to-business (B2B) side of the financial services market. SoFi was already using Galileo’s API (application programming interface) software solutions for payments processing for SoFi Money prior to the acquisition. But Galileo’s remaining client base reads like a who’s-who of the fintech world: Robinhood, Chime, Monzo, Revelut, Varo, and Wise (to name a few) all utilize its capabilities for account setup, funding, ACH transfer, bill pay, and dozens of other consumer-facing and B2B financial services. To maintain its neutral status as a service provider to these other partners — several of which are notable competitors to SoFi — Galileo continues to operate independently from SoFi’s core B2C (business-to-consumer) offerings.
• Its Financial Services segment primarily includes SoFi’s cash management (checking/savings) and investment brokerage services. SoFi earns revenue here through a combination of interest on cash held, debit/credit card interest and swipe fees, securities lending, payment for order flow, fees on crypto purchases, and ETF management fees. The financial services segment is similar in its revenue-generating capability as the Technology Platform segment – but it’s also growing much more quickly at this stage; last quarter Financial Services revenue more than tripled (up 244% YoY) to $81.1 million. Financial Services remains a loss leader in these early stages, generating a contribution loss of $24.2 million last quarter, but should enjoy significant operating leverage in the coming quarters as SoFi marches toward sustained profitability.

Conviction Rating Changes:

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SoFi Technologies was downgraded from Strong Buy to Buy on November 12, 2024.

I’m far more bullish on the company than many others, and am actually eager to see its upcoming growth in both assets and in new loans now that lending is picking back up again.

Recent Company Updates:

January 27, 2025:

SOFI just reported its 4Q results and the financials looked really good.

• Member count grew 34%
• New originations hit an all-time high of $7.1 billion
• The tech platform' churned a $32 million contribution profit
• Total assets expanded to $31.6 billion
• Net interest margin expanded to 5.91%
• 90-day delinquency rates declined to 0.55%

They pretty much checked every box you could ask them to check, and yet the selloff seems tied to "underwhelming forward guidance."

SOFI's fiscal 2025 guidance is calling for...

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Deep Dive Presentation:

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