SoFi Technologies (NASDAQ:SOFI) delivered an impressive Q3 2022, resulting in an earnings beat and guidance raise, which correlated to SOFI’s stock appreciating by over 15%. The short sellers are fleeing as SOFI delivers, and this quarter should put an end to lingering bearish sentiment or bears trying to build a narrative regarding SOFI’s business. On February 28th, 2022, short interest was at a high as $1.36 billion worth of shares were sold short. This has decreased to $465 million as of October 15th, 2022. The facts are that SOFI has had every curveball thrown at them, and the Administration has moved the goalpost time and time again regarding the student loan moratorium, yet SOFI has continued to build out its other businesses and generate record revenue and Adjusted EBITDA in the face of adversity. What could be the largest sign of adoption for SOFI that continues to be overlooked is that the traditional banks such as JPMorgan Chase (JPM) and Bank of America (BAC) continue to see deposits leave their ecosystems as SOFI has recognized a large influx, proving that cloud-based banks are penetrating their stranglehold on customer relationships. SOFI is only getting stronger, and when its main source of revenue was taken away, SOFI outmaneuvered the obstacles and built a financial institution that drove growth across its membership, product base, revenue, and EBITDA. The proof is in the numbers, and short sellers should be concerned because the numbers that SOFI delivered in Q3 is probably just the beginning.
SOFI is proving that cloud-based banking solutions are gaining momentum and taking deposits away from traditional banks
I looked through the balance sheets for JPM, BAC, Wells Fargo (WFC), Citigroup (C), and UBS Group AG (UBS) to determine if SOFI is gaining ground on the traditional banks, or if the banking industry as a whole is experiencing a surge in deposits. I looked at the numbers throughout 2023, consisting of the total deposits at the close of Q1, Q2, and Q3. The balance sheets indicate without a shadow of a doubt that traditional banks see their total deposits decline while SOFI’s total deposits are increasing.
Throughout 2022, the major banks, consisting of JPM, BAC, WFC, C, and UBS, have all seen QoQ deposit decline, except Q1 for C. JPM finished Q1 2022 with $2.56 trillion in deposits, and this declined by -3.5% in Q2, then by another -2.55% in Q3. Overall, JPM’s deposits have declined from $2.56 trillion to $2.41 trillion over the past 6 months as $152.59 billion (-5.96%) has disappeared from its balance sheet from total deposits. The overall story of declining deposits over the past 2 quarters is a reoccurring theme among the majors. BAC has seen $134.32 billion (-6.48%) evaporate from its total deposits, while WFC lost $84.33 billion (-5.69%), C’s total deposits declined by -$10.74 billion (-0.82%), and UBS had the steepest decline as -8.45% (-$45.8 billion) left its deposits.
SOFI, on the other hand, is a different story. The night of 1/18/22 will be a night that Anthony Noto never forgets as he received confirmation that SOFI received approvals from the Office of the Comptroller of the Currency (OCC) and the Federal Reserve to become a bank holding company and acquire Golden Pacific Bankcorp. SOFI was an official bank for a portion of Q1, and after the banking product was launched, SOFI ended Q1 2022 with $1.16 billion in deposits. Q2 2022 was the first full quarter that SOFI was an officially licensed bank, and its deposits grew 134.65% ($1.56 billion) QoQ, while the majors started seeing QoQ declines in deposits. Throughout Q3, JPM, BAC, WFC, C, and USB all witnessed their total deposits decline QoQ, while SOFI’s additional deposits grew by $2.32 billion from $2.71 billion in Q2 to $5.03 billion in Q3, representing an 85.51% QoQ increase.
Over the past 6 months, SOFI has increased its total deposits by $3.88 billion or 335.30% while, the majors are seeing mid to high single-digit percentage base declines. I want to be clear on something, SOFI’s deposit growth is not declining. The bears may try to distort the numbers and say that growth is slowing to create a new narrative for the bear case. It’s very easy to have explosive percentage base growth during inception as your starting from the ground floor. Just because SOFI had 134.65% deposit growth QoQ from Q1 to Q2 and 85.51% from Q2 to Q3 doesn’t mean growth is slowing. Deposit growth is increasing as it’s more important to look at the actual dollar amount. In Q2, the $1.56 billion of deposit growth represented 134.65% QoQ growth, but in Q3, SOFI’s deposits grew by 85.51% on a percentage basis. On a dollar basis, SOFI’s deposits grew by $2.32 billion in Q3, which was $762.93 million or 49.02% larger than in Q2.
There were countless aspects of the Q3 earnings report to like, but SOFI’s deposit growth compared to the majors is one of the most important factors, in my opinion, and that’s why I started here. Obtaining the banking charter positions SOFI to reduce its cost of capital, increase the holding period of loans, and drive growth through its lending programs. Previously SOFI didn’t have the ability to fund its borrower loans through its customer deposits resulting in them paying a higher cost on the capital utilized in loans. Funding loans through deposits are more stable than warehouse lines of credit and securitization funding which can be difficult to obtain in periods of economic uncertainty and is reliant on market participation. Having a stable source of funding will allow SOFI to hold loans for a longer period. We’re seeing SOFI’s dependence on warehouse lines decrease and drive incremental EBITDA. SOFI’s bank charter couldn’t have come at a better time as we are now living through a rising rate environment. If SOFI didn’t receive the banking charter, its margins would have been significantly impacted throughout 2022. SOFI’s balance sheet tells us that total deposits are growing, which should lead to increased net interest margins and net interest income generated over time as SOFI has more lending capacity from its deposits. Decreasing the dependence on warehouse lines and lending from deposits should afford SOFI the flexibility to become more aggressive and lower borrower lending rates to drive faster loan growth and innovate a lending-as-a-service platform it can cross-sell to Galileo clients. This is critical as SOFI isn’t a one-trick pony but rather a one-stop shop that’s building an ecosystem where cross-selling can occur holistically through a 360-degree model.
SOFI delivers another earnings beat and guidance raise, despite student loans operating at half mass.
SOFI delivered a top-line revenue beat as they generated $424 million in Q3, which was a 55.9% YoY increase and $32.2 million more than the consensus estimates. SOFI’s Q3 GAAP EPS came in at -$0.09, which was $0.01 better than the consensus estimates. Market dynamics have changed, and valuations based on a P/S ratio have dramatically contracted compared to 2021. Mr. Market wants profitability, and companies running in the red have seen their stocks drastically decline in 2022. There are different measures of profitability, including EPS, net income, FCF, EBITDA, and Adjusted EBITDA. While EPS losses are shrinking, I am quite confident there will be future articles citing profitability issues to support a bear thesis.
Mr. Noto has been clear on his position regarding profitability and why SOFI holds itself accountable to the metric of EBITDA from a profitability standpoint. Jonah Lupton hosted an interview with SOFI’s CEO, Anthony Noto (can be viewed here), and Mr. Noto stated, “I have always been a believer that EBITDA is a better longer-term measure of economic cash flow because there is a lot of non-cash charges below EBITDA.” Adjusted EBITDA is the financial metric that indicates earnings before interest, taxes, depreciation, and amortizations. Adjusted EBITDA removes non-recurring, irregular, and one-time items that could distort EBITDA. He explained that financial service companies utilize their cash to fund loans, so they feel EBITDA minus CapEx is a better measurement of cash flow because that drives increasing book value.
I am looking at SOFI’s progress based on its revenue and Adjusted EBITDA growth, as EPS and net income will follow the Adjusted EBITDA trend. SOFI just delivered $419 million in net revenue, and $44 million in Adjusted EBITDA in Q3. QoQ, SOFI’s net revenue increased by $63 million or 17.70%, while YoY, its net revenue increased by $142 million or 51.26%. Q3 marked the largest QoQ net revenue increase by dollar amount over the past year, and I believe SOFI could continue this trend into the future.
Adjusted EBITDA is where the focus should be. SOFI delivered $44 million of Adjusted EBITDA, which is the equivalent of the Adjusted EBITDA SOFI generated over the TTM at the end of Q2. Mr. Noto and Mr. LaPointe had discussed on numerous occasions that the bank charter would significantly increase the amount of Adjusted EBITDA SOFI generated, and it is paying off in spades. Looking at the quarterly numbers, Adjusted EBITDA grew by 120% QoQ as there was an increase of $24 million in Adjusted EBITDA. In Q2, SOFI had an Adjusted EBITDA margin of 5.62%, which increased to 10.5% in Q3. On the Q3 earnings call, Mr. Lapointe responded to one of the questions and reiterated from previous earnings calls and conferences that SOFI is acquiring members at a rate that supports its longer-term EBITDA margin target of 30%. On a TTM basis, SOFI has generated $78 million of Adjusted EBITDA from $1.38 billion in revenue, which is a 5.66% Adjusted EBITDA margin. SOFI is projected to generate $1.52 billion in net revenue and $115 million in Adjusted EBITDA on the lower end of its range which is an 8% Adjusted EBITDA margin for 2022. Hypothetically, if SOFI was able to achieve its 30% margin goal in 2024 and generated $2.7 billion of net revenue, it would generate $810 million of Adjusted EBITDA.
Mr. Noto and Lapointe haven’t digressed and are sticking to a 70-30 methodology to drive revenue and Adjusted EBITDA. SOFI will reinvest 70% of incremental revenue in the business and drop 30% of incremental revenue to the bottom line. The long-term goal is to achieve and exceed a 30% Adjusted EBITDA margin. A critical aspect that may have gone overlooked is that Mr. Noto said that the growth SOFI has experienced in 2022 is something they want to compound for decades and have it consistent over time. This goes back to what I said about percentage growth and dollar growth regarding deposits. It’s not realistic to believe a triple-digit growth rate on a percentage basis is achievable over a decade or longer, but the growth in dollars QoQ and YoY very well could be realistic. SOFI is doing an incredible job increasing awareness, growing its member base, and driving revenue and Adjusted EBITDA from its suite of financial solutions. When I look at the numbers, I am looking at where this could go by 2030 and beyond, not 2024, and that’s why I am extremely bullish on SOFI.
SOFI has navigated an unpredictable environment quite well as the goalpost tied to the student loan moratorium continued to move. On 4/6, SOFI provided an update to its 2022 guidance as President Biden extended the federal student loan payment moratorium from May 1, 2022, until August 31, 2022. SOFI’s management team updated 2022 guidance, assuming that the student loan moratorium will not end during the course of 2022. SOFI updated Revenue and Adjusted EBITDA guidance for full-year 2022 of $1.47 billion and $100 million, a reduction from previous guidance of $1.57 billion and $180 million. In the Q1 2022 earnings presentation, SOFI delivered its first beat and raise of 2022. SOFI raised guidance to $1.505 – $1.51 billion (49-50% YoY) and $100-$105 million of Adjusted EBITDA with a 6-7% margin. In the Q2 presentation, SOFI provided its second consecutive guidance raise for 2022 after the initial reduction as they guided for $1.508 – $1.513 billion of revenue and $104 – $109 million of Adjusted EBITDA. SOFI just delivered its 3rd consecutive guidance raise to $1.517 – $1.522 billion of revenue and $115-$120 million of Adjusted EBITDA.
SOFI is delivering in the face of adversity, and I believe this should be positively reflected in its share price. Prior to the Biden Administration extending the Student Loan Moratorium, SOFI projected that their revenue would come in at $1.57 billion and they would deliver $180 million of Adjusted EBITDA. SOFI’s 2022 guidance declined to $1.47 billion in revenue and $100 million in Adjusted EBITDA, and we have received 3 consecutive guidance increases bringing the top range to $1.522 billion in revenue and $120 million of Adjusted EBITDA. This is occurring without the moratorium ending in 2022. This is a testament to SOFI’s internal operating ability and external value delivered to its members. If the moratorium ends in January of 2023, we could see a large YoY guidance increase for 2023, compared to where the 2022 numbers finish.
Tearing through SOFI’s Q3 results and discussing the total originations from SOFI’s lending segments
SOFI’s business is fueled by its members, and while businesses thrive on the revenue and earnings generated, these numbers can’t be produced without customer activity. The relevancy of SOFI’s platform and its product offerings is directly reflected in its member growth. If SOFI had a sub-par platform, its member adoption rate wouldn’t grow QoQ. SOFI’s members continue to grow, and is a direct correlation to its deposit, revenue, and Adjusted EBITDA growth. In Q3, SOFI added 424,000 members, bringing its membership additions to 1.8 million over the TTM. This represents a 61.46% YoY increase from the 2.94 million members they had at the end of Q3 2021. Last year we witnessed a huge Q4 spike which many believe was a direct result of SOFI’s brand awareness being front and center during the NFL season. In Q4 2021, SOFI added 523,000 members. Over the previous 4 quarters, SOFI has added an average of 451,250 members quarterly, and if this number is hit again, SOFI could end 2022 with a milestone achievement of exceeding 5 million members and coming in around 5.19 million members for the year.
SOFI continues to build its ecosystem with its membership in mind. They continue to deliver products that their members want and need and provide solutions that are readily available. SOFI added 635,000 new products to their suite, increasing the total number of financial service products to 7.2 million, which is a 69% YoY increase. There are 1.28 lending products and 5.92 million financial service products available to SOFI members. This is a critical aspect of SOFI’s plan because they want to generate as much cross-selling as possible. SOFI wants members to stay within its financial service productivity loop and utilize SOFI’s products across all of their financial needs from saving and investing to taking out a personal loan or a mortgage. With over 7.19 million products, SOFI has built an inclusive ecosystem where solutions for any financial need is at the member’s fingertips.
There are a lot of aspects for investors to focus on, and I probably won’t cover everything in this article, but the loan originations in the segment financial slide are one of the area’s I focus on. I created a line graph below from Q1 2020 – Q3 2022 showing the student loan, personal loan, and home loan originations quarter by quarter. Loans are arguably the most important aspect, as they are a bank’s lifeblood. Banks make money by taking in funds from depositors and other sources and then lending money out to customers. The bank spread is the difference between what the interest a bank must pay to obtain the funds and the rate the bank charges on the loan. SOFI’s bank charter allowed them to lower their cost of capital as they are able to lend directly from the deposits on their balance sheet rather than borrowing the capital from other financial institutions.
In 2020, SOFI generated $9.69 billion of total originations. The trajectory for total originations fell off a cliff as the pandemic occurred and the moratorium on student loans was placed into effect. In Q2 2020, student loan originations declined by 63.05% from $2.13 billion to $788.69 million QoQ. Over the past 10 quarters, since Q2 2020, student loan organizations exceeded $1 billion only 3 times, and pre-pandemic SOFI was doing over $2 billion quarterly. In 2021, SOFI generated a 30.59% increase YoY in loan generations, and in 2022, SOFI added an additional 8.8% to total loan originations. Q3 2022 marks the 2nd consecutive quarter where personal loan originations exceeded the level of student loan originations from Q1 2020.
While the pandemic caused SOFI to pivot and adapt to change, SOFI succeeded in growing its lending business despite its largest segment operating at less than 50% capacity. I am excited for 2023 and 2024 as the blue line (student loan originations) in the graph below should create a tighter spread to the orange line representing personal loans. One the moratorium is over, SOFI could see billions of new originations hit the books on a quarterly basis. Eventually, when the Fed pivots, which may not be for a while, and mortgage rates start to decline, there is a chance that SOFI will see growth across all 3 segments in lockstep.
What I am looking forward to in 2023 and 2024
The things I am most looking forward to in 2023 and 2024 for SOFI are the student loan moratorium ending, Galileo going after a $200 trillion opportunity in B2B payments, and the AWS of Fintech coming to life.
There is a misconception around the Biden Administrations Student Loan Debt Plan and while some student loans are projected to be paid back, it’s not a doomsday scenario for SOFI. President Biden released an outline of The Biden Administrations Student Loan Forgiveness Plan on 8/24. Here are the broad strokes of the plan:
- The freeze on federal student loan payments has been extended for the final time and will end on 12/31/22
- U.S. Department of Education will provide up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the Department of Education
- U.S. Department of Education will provide up to $10,000 in debt cancellation to non-Pell Grant recipients.
- $10,000 in debt cancellation to non-Pell Grant recipients.
- The Biden-Harris Administration is proposing a rule to create a new income-driven repayment plan that will substantially reduce future monthly payments for lower- and middle-income borrowers.
- Require borrowers to pay no more than 5% of their discretionary income monthly on undergraduate loans. This is down from the 10% available under the most recent income-driven repayment plan.
There is currently $1.6 trillion of federal student loan debt, and there are reports surfacing, such as the one from CBNC, that President Bidens Student Loan Forgiveness plan could amount to $329.1 billion. If this number is accurate, there would still be $1.27 trillion in federal student loans, which need to be repaid.
The previous amount of an average student loan was $70,000, and if $10,000 is forgiven, then there will still be $60,000 left to be repaid. With a moratorium in place, individuals with federal student debt are not required to make repayments, but once this is lifted, the floodgate will open. This will cause a surge of individuals to look at their current interest rate and compare it to refinancing options from companies such as SOFI. Once this occurs, I expect that SOFI’s student loan originations will spike and drive increased revenue and Adjusted EBITDA.
There is a massive opportunity in Galileo, and while I have seen comments that SOFI overpaid for this company, I have a feeling that narrative will drastically change in the future. Through Galileo’s API’s its clients can create a custom, multi-product solution that includes card issuing, payments, checking, savings, deposits, digital banking, lending, and future financial products. By owning Galileo, SOFI owns the entire backend regarding their processing and payments, and it allows them to innovate at their speed rather than depending on a 3rd party where it’s product roadmap may not coincide with SOFI’s needs.
Galileo just became Visa (V) Ready Certified as an issuer processor for its PCaaSA (Payment Cards as a Service API) technology used for card issuing. This allows Galileo to accelerate its partnerships throughout the evolving payment landscape. In Q3 Galileo reached 124 million accounts and provides backend services to many large organizations, including Shell, and Chime.
There is a $200 Trillion opportunity in the business-to-business (B2B) payment sector, Galileo estimates that 50% of B2B payments still occur from writing paper checks. Trillions of dollars move in and out of businesses each year, and to think that roughly 50% aren’t optimized for a digital world is quite perplexing. Galileo has created a cost-effective way to incorporate digital payments, accounts payable, and accounts receivable solutions into any business model through their API-based technologies. The Visa Ready Certified credential that Galileo just obtained should provide a boost to Galileo account growth as they become a more prominent solution for companies digitizing their financial platforms. Today, Galileo is generating revenue from 124 million accounts, and over the next decade, they have the ability to scale and take a sizable amount of the B2B business that is still utilizing antiquated business practices.
I have written about the SOFI building the AWS of Fintech before, and I may be more excited about this than anything else on SOFI’s roadmap. The combination of SOFI’s bank charter, Galileo, and Technisys puts SOFI in a position to offer a full product suite for financial businesses to build out a robust product stack utilizing every component of SOFI’s as a service platform. There are internal performance synergies while generating incremental cost reductions by building a full product stack on a single core internally, while externally, this product offers monetization opportunities as SOFI can power the backend of any neobank and become a bank sponsor for them. SOFI is still in its infancy, and there is a long runway for future growth. The bank charter is a proven game changer, and the efficiencies from Technisys haven’t been realized yet. Transitioning SOFI’s checking, savings, and credit card to Technisys technology stack will create $75 – $85 million in cumulative cost savings from 2023 to 2025. From 2025 forward, SOFI will benefit from roughly $60 – $70 million of cost savings on an annual basis.
Galileo was acquired so SOFI could replicate the end-to-end integration they created in lending with their checking and savings business. The Cyberbank platform from Technisys is cloud-native and supports the integration of third-party technologies via the Technisys marketplace. Acquiring Technisys allows Galileo and Technisys to create synergies throughout their infrastructures and build cloud-native architecture on a single core that supports multiple financial products and innovate at a moment’s notice. SOFI owns the entire backend, from the cyberbank architecture to the payment processing, and has the bank charter to create a one-of-a-kind trifecta. There isn’t another company with this level of capability.
Starting next year, SOFI will recognize a reduction in cost-related expenses through vertically integrating on a single core and building all its products through a single-core multi-tenant foundation. The reduction in SOFI’s costs will help them reach GAAP profitability quicker and drive additional EBITDA to the bottom line. Building its own cloud solution is a defensive play, allowing SOFI to control the destiny of its product mix, and an offensive play by having a full end-to-end cloud Banking as a Service (BaaS) that will be unmatched by anything on the market. There isn’t another company that I have found that owns all the pieces that SOFI owns in addition to having a national bank charter. Mr. Noto has referenced the AWS of Fintech many times, and it is my understanding that he will follow the AWS model and not only improve SOFI’s product and functionality but monetize the full stack by powering the backend of other digital and possibly traditional banks.
SOFI continues to increase brand awareness, drive member growth, and improve its fundamentals. SOFI’s members have spoken, not with words, but through the adoption of SOFI’s services. The bottom line is that SOFI is growing its deposits while traditional banks are on the decline, as SOFI is building the financial solution of tomorrow, not yesterday. I am not looking at what SOFI’s share price will be next week, next month, or next year, I am looking at where it will be in 2030. I can’t time the markets, and I will just continue to buy shares of SOFI when opportunities present themselves, as I believe SOFI will become a top financial institution in America. There are many catalysts on the horizon, including the student loan moratorium ending, new products, and features such as implementing options and monetizing the AWS of Fintech. Short sellers are starting to lose interest, and the bear thesis is imploding. Management is doing an excellent job, and I believe we’re in the early innings. SOFI is on the verge of closing out 2022 with over 5 million members, and regardless of what the share price does in the short term, I believe SOFI will create large amounts of capital appreciation down the road.