SoFi Just Reported Record Earnings... Why is it Crashing?

Ladies and gentlemen, SoFi earnings just came out this week and the stock collapsed on this news at one point falling as low as $1540. But I think that this report is getting a bad rap. Now, I want to show you guys my presentation of this overall earnings and I want to go through showing you guys the good, the mixed, and the bad parts of the report because this wasn't a perfect triple beat. In fact, they came in line on guidance for both EPS and their future guidance as well. So that was a little bit disappointing considering that the other past histories of SoFi's quarters, they've always triple beat. This broke the streak. But as we go along in this presentation, make sure you just keep an eye on the border cuz that'll signify whether or not I believe that this slide is good, mixed, or bad news for SoFi. But let's first look at SoFi's main metrics like members for example where we ended up seeing members grow by an additional almost 1.1 million new members keeping up that 34 plus% growth rate which is extremely hard to do on quarters that have grown in the past at once again 34%. So that growth continues to couple on and they're growing by more and more members each and every quarter is a new record high. Now products same thing. In fact it's even better because we're seeing that acceleration in growth rate now getting up to 39.2%. 2% meaning that there's 22 million products outstanding. A product would be, you know, a SoFi money account, SoFi Invest, maybe a personal loan, a home loan. The more that we have per member, the more that people are sticking around higher lifetime value per customer. And that means that the customer acquisition cost that we'd pay to those customers is more and more beneficial because they have more products, more revenue, etc. And this is what products per member looks like. getting back to that 1.5 times which recently fell off whenever they were starting to introduce some new financial services products where those people were just signing up for maybe one product and that dropped the rate. But now we're getting comfortably back to that 1.5 and hopefully we can start breaking some new records. The current record is 1.52 products per member. Now when we look at revenue broken down per segment, what we can see is that revenue grew by over 40% year-over-year. Another brand new record high for revenue. But it's the segment level that I wanted to talk about where things start to get a little bit mixed. As you can see, this is heavily favored to lending in blue, slightly lower in financial services in orange, and then a drop off in technology services, which is in the purple. Now, on the profitability side, looking at adjusted IBIDA here, we have another record-breaking quarter for them, which is great. However, there was a slight miss on the overall margin, just being lower than last quarter by.1%. It wasn't a record-breaking quarter on the margin, but overall the growth is looking great here. And then on net income, this is where the mixed results start. Although we grew by 100%. This definitely wasn't a bad report, it wasn't what we were expecting at 13 cents. A slight miss from my estimates. And of course, that's going to get sort of a mixed result here. But that rule of 40 though continues to be a super highlight in the quarter. In fact, the third highest that we've ever done for our print at 72 times on a rule of 40. Meaning if you add up their overall adjusted EBIDA growth on top of their revenue growth, that's the total number or the rule of 40, which was an old SAS metric that said if you could hold up a 20% margin with 20% growth, you're a phenomenal company. SoFi, 72%. This is something that we've never seen before for a lot of fintech and overall growth stories. The real challenge is going to be for next quarter cuz you're going to have to put up extremely high growth on a quarter that is lapping a 73 rule of 40. So, it's going to be hard putting up that growth on top of a quarter that in the past grew at 44%. But now, let's get a little bit more granular into the segment level financials and take a look first at lending, which skyrocketed in overall growth here. We passed the 500 million mark, jumped from $490 million in revenue to $640 quarter over quarter, bringing that year-over-year growth rate to 55.4% on lending. It was a dominant quarter for lending. Financial services, on the other hand, showed its first ever quarter-over-quarter decline in financial services revenue growth and bringing down that year-over-year growth rate to 41% which is very different than the usual doubling or high 70 percentages that we've seen in the past. And then for the technology platform, this was a bad part of the report. Technology platform lost Chime and although they got 13 new deals, only one of those new deals actually had an install base. And so the other 12 were extremely small customers, meaning it didn't really make a financial impact. And Chime dropping off the platform really, really hurt the business. This is the lowest amount of revenue that the technology platform has seen all the way back since March of 2022, essentially erasing 4 years worth of growth. So whenever we look at these three quarters, what we end up seeing is that the diversification is going away. Well, past quarters, a big highlight to SoFi's story was the fact that we were gaining in financial services, gaining in the tech platform, and lending was shrinking a little bit. Not that it was shrinking, it was still growing, it just wasn't growing as fast. And so, we were looking to get to a place where we'd be 33% technology platform, 33% financial services, and 33% lending. But whenever we take a look at this quarter, look at the dominant share in lending, a decrease in financial services, a big decrease in technology platform, and then on contribution profit, it gets even worse. There's only a sliver for the technology platform. And this company is heavily reliant on lending at now 64% nearly 65% of overall contribution profit. And that's not including the loan platform business. Another bad metric was feebased revenue. This has completely dried up going from year-over-year growth to only 23% versus the 60 or 75% that we were seeing in the years prior. That feebased revenue mix is also declining from 43% down to 36% which is what should get SoFi that tech-like multiple. If most of the revenue that comes into SoFi is riskbased revenue, that's not good because defaults could rise and that could end up hurting the business. If you're collecting cash in terms of feebased revenue, it doesn't matter what happens. that money is yours. You either find that through the loan platform business, people using their credit or debit cards, or investing like brokerage income. That type of revenue is perfect because we've already collected it and it doesn't matter. And hopefully we can grow on that. But riskbased revenue is just obviously a little bit more risky. I just wanted to show off another way to visualize this contribution profit. If you just see how much this has shrunk to be almost exclusively lending dominant inclusive in this purple line is also loan platform business which probably makes up for about 50 $60 million. So this is heavily lending right now but hopefully we can get that revenue mix back on track. I should add however whenever we are talking about lending this was a very significant lending quarter and it was great in terms of the diversification within that sector. So, whenever we talk about SoFi, a lot of people think about the personal loans. If you think back in the past, you'd think it was a student loan lender, but now we ended up breaking a new record on home loans, a new record on student loans, and a new record on personal loans. It was a crush across the board and it wasn't dominant towards only one line item. So, the fact that we're doing good across all segments is actually a form of diversification and that's healthier for the business. And in terms of credit performance on their loans, because personal loans is the biggest one. This is the one that they're showing off. And it is slightly growing, which could be concerning, but it's actually not. I mean, this is still very, very healthy. But I just wanted to keep in mind, this is something to watch out for. But right now, it remains very good. And student loans are also coming down, which is another great sign. Capital ratios even after all of this loan growth remains extremely healthy. 21.3% ratios is like more than double what the requirement was for total riskbased capital requirements. It's an extremely good sign as well. And then Chris La Point on the lending segment also said the most mind-blowing thing here as well. I would note that we had significant demand for the loan platform business partners over and above what we decided to fulfill this quarter, but we did fulfill all demand from our contractual commitments and more. He went on to say, "In addition to our loan sales, we executed a $919 million securization of loan originations on behalf of our partners through the loan platform business. The transaction priced at an industry-leading cost of funds level with a weighted average spread of 86 basis points. Our best execution of any securization deal to date." So, listen to this. The loan platform business is them selling loans with other people's money. They're just doing the underwriting and getting paid a huge fee for doing so and collect no losses on this. It's 100% cashbased. And then on top of that, those people say, "Hey, we actually want to do what you're doing. We want to go and sell these loans to the market and then come back to you and write some new loans." So if I says, "Okay, perfect. We'll help you deal with that transaction as well." And so they get paid again by selling the loans that they wrote for another institution. It's the most brilliant business model ever. And they're doing it at industry-leading cost of fund levels with weighted average spreads of 86 basis points. Our best execution of any securization deal to date. That's unbelievable. But let's continue on with products here where SoFi Money ended up breaking a new all-time high. 528,000 new accounts, 7.3 million total accounts. That's going to end up bringing up that overall amount of deposits growing 47.8% year-over-year. looking very very good. This is both good for lending and good for feebased revenue. SoFi Invest skyrocketed. I don't know what happened here. They more than doubled their highest ever amount of total SoFi Invest accounts quarter over quarter. 428,000 new accounts. Incredible. That's not inclusive of crypto. Crypto is a separate line item. This was unbelievable. And then on credit cards, this was not good. I'm not really sure what happened. Whenever you actually go through the quality of their credit cards, it looked really good. Defaults are falling. It's a very healthy business, but they only added 460 new credit cards. They essentially just cancelled this product. The existing members are perfectly getting everything that they want out of this product, but new members not able to get a card. Definitely giving me mixed feelings about the product. But let's continue. Valuation. Overall, this company is looking to be at a 36 times PE ratio. Before this quarter, we were roughly at somewhere around 45 times. So, we've cut down on that valuation because the stock fell and because we ended up making a lot more money year-over-year. We replaced a 6-cent EPS quarter with a 12cent EPS quarter. That's very good for price to earning. But then the forward PE is now sitting at 23 times. 23 PE ratio for a company that's expecting to grow EPS like next year at like 54% 60 cents of EPS overall growth rate of 30% on revenue. That's just way way too cheap. We're cheaper than the S&P 500 but growing way faster than many of the companies that are in the index. Yet, I put this as a mixed result because they didn't raise guidance, but guidance was still very strong. These are extremely strong numbers, especially whenever you look at the fact that midterm guidance did not change. So, we're expecting 30% compounded annual growth rates for the next 3 years while putting up 40% compounded annual growth rates on earnings per share. There's no other bank, financial institution, honestly, many tech companies cannot do this. Yet, we're putting a 23 times forward PE on SoFi and now under one times PEG ratio for going out to 2028. This is way, way too cheap. And in fact, it's not me just saying this. Even analysts are saying this. Andrew Jeffrey, who does not actually do price targets, but did say that he could see this stock at $40 a share whenever we did a podcast together, put an outperformance rating and said, "We are buying this dip. Do not sleep on SoFi. Very, very happy five-star analyst." Devin Ryan, one of the highest rated analysts that cover SoFi, continued to put a market outperform with a price target of $30 and said, "This company is intact. Nothing went wrong." And said that the sell-off is overdone. He has an average return of 30% and gets it right 67% of the time. Five-star analyst, one of the highest analyst ratings of all of Wall Street. He's putting a $30 price target. So, overall, I'm bullish on this quarter and so is the high ranking Wall Street analysts. Only the one-star people that ended up thinking that this quarter was bad. But let's listen to what not thinks about the quarter. The markets do not like uncertainty. We're not raising our guidance for the full year. People think there's some degree of uncertainty. While the outlook for the market is different today than what it was when we gave guidance three uh months ago, um if the interest rates do actually come down, we'll see a big pick up in our business that would cause us to be more bullish than we already are. It's not it's not like we're um um growing a very slow rate even on our current guidance. Our current guidance calls for 30% plus revenue growth and 30% margins. um there just aren't a lot of companies with a billion dollars of quarterly revenue growing 30% with 30 uh% margins. So we're focused on two things, driving durable growth through product innovation and brand building and then delivering great returns and that's what we continue to do. Um and so I understand why people are concerned about the outlook because we didn't raise guidance but um the world is changing every day around us. We're executing incredibly well. Our goal is to generate escape velocity so that we're the winner that takes most in in the industry. As you mentioned, we're an everything digital financial services app. That's in place. The brand building in place. The execution's in place. We just have to keep delivering. Everything else will take care of itself. >> I mean, classic noto, right? Focus on the actual performance of the business. Focus on member satisfaction, getting more products, delivering the best product, high margin business, and everything else will settle itself. I know it can be a little bit frustrating when the stock is down, but SoFi continues to perform. But if you like this sort of content, make sure you subscribe.