SoFi Stock’s Pullback Post-Q4 Earnings Is Justified (NASDAQ:SOFI)

We previously covered SoFi Technologies (NASDAQ:SOFI) in November 2023, discussing the impressive results across all of its segments, further aided by the returning student loan refinancing as the US federal student loan repayment restarted from October 2023.

Combined with the growing bank deposits, the contribution to its lower cost funding, and the promising reversal in its GAAP profitability, we had maintained our Buy rating then.

In this article, we shall discuss why we are maintaining our Buy rating, with the SOFI bank likely to continue generating excellent results as the management kickstarts the growth trend for the lending/ tech segments.

Readers may want to take advantage of the recent pullback for what we see as a potential doubling in its stock prices over the next few years, as long as the company delivers on its ambitious FY2024 growth targets.

The SOFI Investment Thesis Remains Robust – Albeit Somewhat Expensive

For now, SOFI has reported a top-line beat in its FQ4’23 earnings call, with adj net revenues of $594.24M (+10.6% QoQ/ +34% YoY) and adj EBITDA of $181.20M (+84.8% QoQ/ +158.6% YoY).

Most importantly, the fintech has delivered on its promise to generate positive GAAP profitability by FQ4’23, with net incomes of $47.91M (+117.9% QoQ/ +219.7% YoY) and EPS of $0.02 (+106.8% QoQ/ +144% YoY).

Most of SOFI’s bottom-line tailwinds are attributed to the growing net interest incomes of $389.64M (+12.9% QoQ/ +86.8% YoY) in FQ4’23 and strategic timing in goodwill impairment of $247.17M timed in FQ3’23.

The growing net interest income is unsurprising, since the online bank reported expanding bank deposits of $18.56B (+18.9% QoQ/ +155.6% YoY), thanks to its higher 4.60% Annual Percentage Yield (APY) on savings balances.

This is compared to the US big banks such as JPM at 0.01% and BAC at 0.01%, with SOFI’s APY also being higher than the national average savings account interest rates of 0.47% as of January 16, 2024.

SOFI’s Financial Performance

However, while these are all good and great, it is also apparent that SOFI increasingly relies on the elevated interest rates to generate its topline growth.

This is observed with the net interest income (spread between the borrowing and lending interest rates) comprising a larger part of its top-line at 63.3% by the latest quarter (-0.9 points QoQ/ +17.7 YoY).

We believe that there may be more headwinds as well, with the Fed likely to pivot by H1’24 as the inflation cools to 3.1% by January 2024 (-0.3 points MoM/ -3.3 YoY).

Perhaps this is why the market is already pricing in a near-term uncertainty, since we may see the online bank’s growth decelerate as the fintech segment is still underperforming thus far.

For context, despite the growing members and supposed increased cross selling/ products sold in the Lending and Financial Services segment, the fintech only reported non-interest income of $225.76M (+17.4% QoQ/ -9% YoY) in FQ4’23 and $861.04M in FY2023 (-12.9% YoY).

SOFI’s Growing Delinquency

Despite the tailwinds from the student loan refinancing and home loans in H2’23, it is apparent that SOFI needs to focus on the tech segment as its top/ bottom line driver.

This is especially since its loan delinquency is also rising, triggering the growing “cumulative fair value adjustments” of 4.3% (+1.2 points QoQ/ +1.9 YoY) at $961.64M in FQ4’23 (+48.9% QoQ/ +194.8% YoY).

This is based on “markdowns on loans beginning when they are 10 days or more delinquent, with additional markdowns at 30, 60 and 90 days past due,” despite the supposedly higher overall weighted average origination FICO of 750 over the past nine months.

It is apparent that SOFI may face more headwinds with the consumer loan repayments, with this thesis playing out as outlined in our previous June 2023 article here, especially since its delinquency rate is higher than JPM’s at 1.05% (+0.37 points YoY) and BAC’s at 1.85% (+0.26 points YoY) as of the latest quarter.

Perhaps this is why the SOFI management has aimed to achieve an impressive +50% YoY growth in the Tech Platform and Financial Services segment in FY2024.

This may be a necessary monetization pivot to achieve the aggressive adj EBITDA target of $585M (+35.5% YoY) and GAAP net income target of $100M (+133.2% YoY) at the midpoint.

SOFI Valuations

Assuming that the SOFI management is able to achieve these lofty goals, we may see the stock eventually grow into its premium FWD Price/ Sales valuation of 3.42x and P/E valuations of 59.81x.

This is compared to the sector median of 2.49x/ 10.54x and its fintech peers, such as Block (SQ) at 1.85x/ 34.12x, Upstart (UPST) at 3.87x/ NA, and LendingClub (LC) at 1.33x/ 39.45x, respectively.

The Consensus Forward Estimates

For now, it is apparent that SOFI’s high growth trend has been awarded by the market, especially given the recent upgrade in the consensus forward estimates with a top/ bottom line CAGR of +18.3%/ +42.9% through FY2026.

This is compared to the previous estimates of +19.6%/ +29.6% and its historical growth at +50.6%/ +71.3% between FY2020 and FY2023, respectively.

Assuming that SOFI is able to sustain its premium forward P/E valuations of 59.71x moving forward, we may see the stock nearly double to our price target of $14.30 over the next two years, based on the consensus FY2025 adj EPS of $0.24.

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

SOFI 2Y Stock Price

As the result of the near-term headwinds discussed above, we are unsurprised by the pullback after the FQ4’23 earnings call, with SOFI quickly returning to its previous trading range of between the $7s and $8s.

With the overreliance on the online bank to generate growth as opposed to the fintech segment, we believe that the recent correction is warranted in the short-term, allowing the stock to slowly grow into its premium valuations as the macroeconomy normalizes in the long term.

Even so, we maintain our conviction that SOFI’s strategic well-diversified approach across banking, personal/mortgage/student/auto loans, investments, insurance, and even credit cards remains highly successful.

This is especially since its marketing approach has worked extremely well in attracting and retaining younger audiences as an alternative to the US big/ conventional banks. This is on top of the cloud-native strategies, which may trigger improved cost efficiencies once the fintech achieves additional economies of scale.

As a result of the attractive long-term risk/ reward ratio, we maintain our Buy rating for the SOFI stock here.