SoFi Q4: First Of Many Profitable Quarters?

Introduction

SoFi Technologies, Inc. (NASDAQ:SOFI) is a formidable player in the dynamic financial sector, marking its latest quarterly earnings with significant strides toward traditional banking services. This strategic shift propels SoFi into capturing vast market opportunities, evidenced by a remarkable surge in deposits and net interest income.

With the stock price witnessing a notable leap following the Q4 2023 earnings report, SoFi sets a precedent for profitability, underlining its operational efficiency and diverse financial offerings. We first rated the company as a buy and outlined our thesis in this article.

The market quickly threw the stock below $8 after it surged to almost $9.50 on the day of their Q4 2023 earnings release. This was not necessarily because the market threw SoFi’s earnings out the window.

A flurry of robust economic data and Jerome Powell revealing an interest rate cut in March was unlikely made the bond yields shoot up, and equities took a hit. Nevertheless, SoFi Technologies emerges as a compelling choice for future investment, especially after its landmark achievement of a profitable quarter and its projected continued profitability for FY 2024. Such milestones make SOFI an excellent addition to your long-term investment portfolio.

An Impressive Finish To 2023

In the fourth quarter of 2023, SoFi Technologies showcased a stellar financial performance, with GAAP net revenue hitting $615 million, a 35% leap from the previous year. This growth wasn’t just a flash in the pan; the annual net revenue surged by the same percentage to an impressive $2.1 billion.

The adjusted EBITDA for the quarter stood at a record $181 million, marking a 159% increase year-over-year and demonstrating SoFi’s exceptional operational efficiency and burgeoning profitability.

Their profitability showcased an impressive rise as well. The fourth quarter saw a record $181 million in adjusted EBITDA, a staggering 159% increase compared to the previous year. For the full year, adjusted EBITDA increased to $431.7 million, up 201% year-over-year, underscoring SoFi’s operational efficiency and profitability.

SoFi’s journey towards profitability is evident by its GAAP net income, which stood at $48 million in the fourth quarter, with an EPS of $0.02. This marks a significant turnaround for the company, showcasing its ability to reach profitability even in an economic environment with high-interest rates that can stunt many growth stocks.

In addition, its journey towards profitability is also mirrored in its expanding customer base and product offerings. In the last quarter, SoFi welcomed nearly 585,000 new members, pushing its total membership over the 7.5 million mark-a 44% increase from the previous year. Alongside that, nearly 695,000 new products were added, expanding the total to over 11.1 million-a testament to SoFi’s ability to innovate and cater to the diverse needs of its growing member base.

Gazing ahead to Q1 2024, SoFi beams with optimism, forecasting its adjusted net revenue to swing between $550M and $560M and its adjusted EBITDA to land somewhere between $110 million and $120 million. This anticipation mirrors SoFi’s steadfast belief in its growth path and pledges to deliver unparalleled value through its diverse financial offerings.

The impressive stride SoFi made in 2023, coupled with its hopeful stance for 2024, showcases the fruition and adaptability of its strategies in the ever-evolving realm of financial services. The leaps in revenue, profitability, and customer engagement magnify not only SoFi’s escalating market footprint but also its capability to fulfill the varied financial aspirations of its expanding member circle.

The standout performance of 2023 owes much to the remarkable surge in net interest income and deposits, a deliberate shift towards traditional banking avenues, and the broadening of its financial services sphere. The net interest income ballooned by 87% from the previous year, spurred by heightened loan balances and the net interest margin stretching to an unprecedented 6.02%, reflecting SoFi’s knack for leveraging the strong demand for its lending products. Deposits, too, saw a hefty upswing, climbing $2.9B to $18.6B, a testament to enduring customer faith and financial solidity.

SoFi has sharply focused its strategic vision on expanding into traditional banking services, a move underscored by significant increases in deposits and net interest income. This foray into broader financial services has been vital, with a notable 40% of its adjusted net revenue now stemming from areas outside of lending, such as its Technology Platform and Financial Services segments. This diversification strategy has strengthened SoFi’s position as a comprehensive provider of digital financial services, broadening its revenue base.

Looking at SoFi’s loan data over the last two years tells a success story. The value of personal, student, and home loans has been rising, showing SoFi’s knack for drawing in a wide range of customers and meeting their various loan needs. This approach not only proves SoFi’s deep understanding of the market and its dedication to custom-fit financial services but also shields it from market ups and downs. By offering a mix of top-notch, low-risk products, SoFi strengthens its position and appeal to both lenders and investors, climbing higher in the market.

SoFi’s operations are growing fast, showing it can quickly adapt and expand. This growth isn’t just in one place; SoFi is reaching new people and places, proving its marketing and tech are top-notch. SoFi keeps growing its reach and success by making borrowing easy and seamless with its platform.

From a revenue standpoint, the escalating fair value of SoFi’s loan portfolio is particularly promising. As the portfolio grows, so does the potential for interest income-the lifeblood of any lending institution. If SoFi maintains prudent interest margins and keeps defaults in check, this growth in loan fair value should translate into tangible financial gains.

The growth in SoFi’s loan portfolio is a clear sign of its increasing clout in the financial world. This expansion is a testament to SoFi’s ability to not only draw in and keep a diverse customer base but also to innovate and adapt its loan offerings to meet the ever-changing needs of consumers. The trends and numbers suggest that SoFi’s growth is strategic and thoughtful, establishing a solid foundation aimed at ensuring long-term profitability and stability in the financial sector.

Profitability Has Been in The Cards for Years

If you look at the evolution in many of SoFi’s financial measurements, you will see that they have been on a trajectory to profitability for some time now. We are not just talking about their impressive revenue growth but rather the betterment of many of their margins.

The financial trajectory of SoFi, as indicated by the net income margin and EPS growth, reflects a steady march toward profitability. Starting from 2019, SoFi faced significant challenges, as evidenced by a substantial net loss margin of -54.15%. However, the subsequent years exhibit a notable trend of improvement. By 2020, the net loss margin decreased to -39.62%, suggesting initial strides in either revenue growth or cost management.

Despite a temporary regression in 2021, with net loss margins widening again to -49.14% – potentially due to increased investment in research and development – the company resumed its positive trajectory in 2022.

A marked improvement to a net loss margin of -20.36% and further to -14.55% in 2023 underscores SoFi’s consistent efforts in refining its business model and cost structure.

Meanwhile, despite remaining negative from 2020 through 2023, EPS growth reveals a slowing in the rate of decline by 2023 -11.61%, compared to the steeper drops in the preceding years. This deceleration in EPS contraction aligns with the reducing net loss margins, painting a picture of a company that mitigates its losses and lays the groundwork for future profitability and shareholder value creation.

Furthermore, from 2020 onwards, the company has reported positive retained earnings, beginning at 20.75%. This figure indicates that SoFi was able to retain a portion of its net income, which is a healthy sign of growing financial stability. The slight dip to 14.06% in 2021 may reflect the company’s decision to reinvest in its operations or cope with market challenges. A significant increase to 31.51% in 2022 suggests strong profitability, although the dip to 14.58% in 2023 could be due to increased dividends or further reinvestments.

The ‘Cash > Debt’ metric provides insights into the company’s liquidity and its ability to cover short-term obligations. It shows how much more cash SoFi has on hand than its short-term debt (in millions). SoFi has taken a substantial leap from 2019 to 2023, now sitting with almost $2.700M more cash than their current debt, which is excellent for a company still growing quickly, such as SoFi.

Comparative Performance Analysis

The financial sector is highly competitive, but despite that, SoFi stands out for its strong growth potential compared to peers like ALLY, CACC, OMF, and JPMorgan Chase. Despite mixed current financial indicators, especially their P/E ratio, SoFi is seen as aggressively aiming for growth, though this ambition impacts its present profits.

SoFi’s Price-to-earnings (P/E) ratios stand out, with a Non-GAAP ratio of 80.40 and a GAAP forward-looking ratio of 117.89 for the upcoming fiscal year. These high numbers indicate strong investor confidence in SoFi’s future earnings. Yet, this optimism might hint at overvaluation, as market expectations could surpass reality. In contrast, JPMorgan Chase presents more conservative P/E ratios, suggesting a market belief in its steady financial performance, drawing a clear distinction between the two companies’ market perceptions.

That said, it is not unusual for companies in their growth stage to trade at high P/E ratios. Therefore, while it is essential to keep this in mind, it is also likely that the P/E ratio will fall significantly as SoFi hopefully posts better earnings in the future.

When it comes to growth, SoFi’s narrative takes a compelling turn. The company’s forward revenue growth is an impressive 22.37%, dwarfing JPM’s respectable but less striking 8.07%. Furthermore, SoFi’s three-year and five-year CAGRs are remarkable at 54.06% and 50.32%, respectively. These figures not only eclipse those of JPM but also suggest a robust expansion trajectory that could, in time, translate into substantial market share gains.

However, SoFi’s profitability metrics reflect the cost of such aggressive expansion. A net income margin of -14.54% and a return on equity of -5.43% signal that SoFi is yet to translate its growth into net profitability-a stark contrast to JPM’s strong profitability indicators, such as a net income margin of 33.94% and a return on equity of 15.98%. SoFi’s modest return on assets at 0.52%, although positive, pales compared to JPM’s 1.86%, further emphasizing the current efficiency gap between the two.

While SoFi demonstrates extraordinary growth potential, it operates at a deficit, preceding current profitability for future expansion. This strategy sharply contrasts with the other more established entities like JPM, which showcase a balanced blend of growth and profitability. Investors may find SoFi’s aggressive growth strategy appealing. Still, it comes with the caveat of current financial underperformance-a gamble that some may be willing to wager on for long-term gains.

Risks and Challenges

As we have seen, SoFi Technologies excels in the fast-paced finance industry, having successfully grown their business from 2021 to 2023. The core of the company’s revenue comes from net interest income, which is sensitive to interest rate changes. Such fluctuations have a direct impact on SoFi’s bottom line. As interest rates swing, borrowing costs can climb, leading to diminished loan demand and tighter margins for SoFi’s lending operations.

We have talked about where we believe the interest rate is headed here and here, and once interest rates begin to come down in 2024 (this is at least the overall belief at the time of writing), SoFi may see loan demand increase.

Furthermore, SoFi has previously highlighted the issue of credit loss provisions in its earnings discussions and reports. These provisions are critical financial buffers set aside to absorb potential loan losses. The economic well-being of SoFi’s clientele, alongside their loan repayment capacity, is paramount. Adverse economic shifts may lead to an increased need for credit loss provisions, adversely affecting SoFi’s profit margins. The threat of a recession is still alive, and a mild to severe recession can have vast implications for SOFI’s target of reaching a profitable year in 2024.

Conclusion

Reflecting on SoFi’s journey through 2023, the company celebrated its first-ever profitable quarter and solidified its stance as a holistic digital financial services provider. The year was marked by strategic diversification, significant customer base expansion, and a robust net interest income and deposits increase. Looking ahead, SoFi’s optimistic forecasts for 2024 underscore its commitment to growth and value delivery. Amidst the financial sector’s challenges, SoFi’s adaptability and strategic foresight have positioned it for continued success and growth.

SoFi is currently expecting a GAAP EPS of $0.07-$0.08 in 2024, which is enormous for the company as it establishes itself as a profitable entity.

We believe if the company continues to execute and reach its targets it could become a multi-bagger stock for investors, especially with the stock price hovering around $8. As such, we currently rate SoFi Technologies as a strong buy.