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We have discussed SoFi (NASDAQ:SOFI) stock a number of times, and have traded it both long and short. It has been a tough stock to be bullish on. We have been bullish since the charter application was approved by the Office of the Comptroller of Currency and the Federal Reserve. The stock has nosedived with the overall market, but also with fintech which has been decimated. With the stock falling, the valuation has improved with this massive retracement. The action in the share price has been absolutely horrific. More and more you will see complaints like “I hate this stock” in reference to SoFi. As the sentiment gets more bearish, we like to buy.
Discussion
For years this company has been used as an alternative to banking. They offer products that a bank offers, without being an actual bank until very recently. We felt getting the charter was absolutely key. Not having it made costs to lend be much higher than banks. It increased costs for the company in terms of how much it had to pay to acquire funding. SoFi now has its charter, on top of being a fintech. The charter means the company is going to pay far less to lend to customers. This combines with the already very low cost to acquire customers. Overall, the immense bearishness makes no sense in regards to operational growth. Valuation wise, it is expensive even after the retracement, but not prohibitively so. SoFi has a very low cost of customer acquisition with low-value financial products and high-value loans on the same app. Lending is SoFi’s biggest source of revenue and profits and with the charter, we are talking about a possible $1 billion in profit margins in the next few years being recognized. We love it because it builds on the existing strength of the company.
Strong revenue and EBITDA growth
In the most recent quarter, top line growth accelerated and the company saw record adjusted net revenue of $280 million, up 54% year-over-year from the same prior-year period. This was also and at the high end of management’s guidance of $272 million to $282 million and it beat consensus estimates slightly. Adjusted EBITDA of $5 million was also at the high end of expectations, it really stood out as a big strength. Keep in mind that for all of 2021 SOFI put in just over $1 billion of adjusted net revenue, up 63% year-over-year, while adjusted EBITDA was $30 million in profits for the year, way up from the losses of $45 million in 2020. Winning.
Loan growth but mixed margin outcomes
This comes despite the continued extension of the student loan repayment moratorium. Please keep in mind that it may get extended again in an effort to provide relief from high food and gas prices. That remains to be seen but is a short-term risk that keeps on weighing revenue down. The good news is that once again growth accelerated across all 3 reporting segments. In lending, Q4 adjusted net revenue grew 30% year-over-year to $208 million versus 21% in Q3 of 2021. The personal loans business which grew 168% or $1 billion year-over-year to $1.6 billion in originations for the quarter driven by home improvement demand and refinancing activities. Despite the moratorium, the student loans business enjoyed just over a 50% year-over-year growth to $1.5 billion, driven also by refinancing before moratorium expiration.
Margins were a touch mixed in lending. The lending business saw $105 million of profit stemming from a 51% margin, down from 53% margins a year ago. Some of this was from less lending demand, but overall dollar volume was still up 23%. For the full year, lending adjusted net revenue grew 42% to $764 million and the segment delivered $400 million in profit at a 52% margin.
This is outstanding growth no matter how you look at it. The growth cannot be denied. The bears will focus on the lack of profit but that is in part why we are so bullish about the banking charter as a game-changer.
Tech platform growth driven by Galileo
Let us not forget the strength of SoFi’s tech platform where revenue of $53 million in the quarter was up 42% from last year. Galileo has been growing nicely, taking on 67% year-over-year increases in accounts. There are now about 100 million. Thanks to heavy investment in building out the platform, profit dipped however. That has the bears clawing. Profit was $20 million on 38% margins. While this is down from a year ago it was a step up from Q3 2021. In all of 2021 SoFi grew revenue 102% in the tech platform segment to $195 million, with 33% overall margins. Nice growth indeed. The growth will continue and the company plans to save money through its recently closed deal for Technisys.
Financial services losing money
Finally the financial services segment registered $22 million in revenue for Q4, up 74% sequentially and up 450% from last year. Growth is being seen heavily in the SoFi Invest product as well as SoFi Money. We expect ongoing growth here with the recent roll out of fee free cryptocurrency on automatic investments. This will allow customers to get no fee purchases of crypto on direct deposits. This may draw in a lot of customers, and could allow cross selling of other products. Of course this segment is ramping up and spending to grow. As such losses were $35 million for the quarter and $135 million for the year.
SoFi’s balance sheet
This company has a sizable $9.2 billion balance sheet. The company has enjoyed significant expansion here in recent years as a result of big loan origination growth. The company ended its Q4 with $1.6 billion drawn on its credit facility. It still has nearly $5.5 billion in liquidity available on its facilities. By not borrowing to heavily the cost of funds has been well managed. The company has raised an additional several billion in capital. With the new charter in place, the ability to lower cost of funds has improved. Book value is $4.7 billion now, and the company stock now trades at well less than 2X book. This is significantly cheaper than the stock has traded at before. Book value expansion is also welcomed.
Looking ahead
The bank charter is huge. The company is still transitioning operations to have loan originations occur from the bank, but this is expected to be done by Q2. It is expected the moratorium on student loan repayment will end in May 2022, but it could get extended again, keep that in mind. Without the loan repayments SoFi misses out on $30 million to $35 million of revenue.
As we forecast Q1, we are looking for $281-$284 million of revenues. In the conference call we learned that management expects “$280 million to $285 million of adjusted net revenue, up 30% to 32% year-over-year and $0 million to $5 million of adjusted EBITDA”. For the full year 2022 our team is looking for SoFi to register revenue growth of 53% to 60% year-over-year. While the timing of rate hikes will impact this, we also expect adjusted EBITDA of $175-$190 million. There are several recent developments that factor into our full year guidance. If SoFi Bank manages to contribute to Q1 more heavily, we think the Q1 numbers will be exceeded. But the bank needs to be the one originating loans in order to see the big benefits of the charter. That will take a few more months to ramp up.
As for the stock, the action has been horrific. As an investor you have to love the top line growth strength. The expansion to new markets and business lines is impressive. EBITDA is improving. Ultimately, we want to see the company ramp toward really being earnings positive. We expect that may come in 2023, more sustainably. With the huge selloff in the stock for a myriad of reasons, we think you take the contrarian view and start to buy when everyone is this negative.
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