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SoFi: Q3’23 Earnings

SoFi Technologies Delivers A Triple Beat And Is Upgraded By Morgan Stanley After Q3’23

Q3’23 Overview

  • Morgan Stanley upgrades SoFi Technologies from underweight to equalweight after impressive Q3 earnings and raised guidance.
  • SoFi’s deposits continue to grow at a staggering pace, outperforming other banks in the industry.
  • SoFi’s ability to sell loans from its balance sheet and its strong growth in lending segments prove bear cases wrong.

Following another impressive quarter, significant changes are occurring on Wall Street as Morgan Stanley (MS) upgraded SoFi Technologies (NASDAQ: SOFI) shares from underweight to equalweight. SOFI continued its strong performance by delivering another triple beat, surpassing consensus estimates for non-GAAP EPS by $0.06, with a loss of only -$0.03, and achieving $537.2 million in revenue, exceeding the consensus estimate by $21.64 million. Additionally, they raised their 2023 guidance for the second time. It is my belief that Q3 2023 will be remembered as a pivotal quarter for SOFI as they achieved record-breaking numbers across various metrics in their pursuit of becoming a household name and one of the top-10 financial institutions in the United States.

This quarter marked a significant milestone as it was the first since Q3 2021 where originations in their student, personal, and home lending segments grew sequentially, with each segment generating a contribution profit. Notably, SOFI also announced a strategic agreement to place a $375 million personal loan securitization with BlackRock (BLK), enhancing their diversity of capital sources.

SOFI’s exceptional growth trajectory, coupled with the anticipation of GAAP profitability in Q4, suggests the possibility of further upgrades and potential for SOFI to return to double-digit valuations in 2023, with the potential to revisit their all-time highs in 2024.

SOFI Stadium has been a major success, and SOFI announced a multi-year partnership with TMRW Sports to develop a tech-forward golf league led by two of golf’s biggest stars, Tiger Woods and Rory McIlroy.

SOFI is rapidly gaining recognition as it expands its product offerings and forms strategic partnerships. During Q3, SOFI experienced a significant increase in its member base, adding a record-breaking 717,000 new members on a quarter-over-quarter basis, bringing the total membership to just under 7 million by the end of Q3. Notably, this marked the second consecutive quarter of quarter-over-quarter growth in terms of member count, and the year-over-year growth rate also saw an increase on a percentage basis. SOFI is undeniably in a strong position, with exceptional growth evident across all aspects of its operations.

In the United States, the banking landscape is indeed quite competitive, with numerous options ranging from community banks to large financial institutions.

The remarkable growth in SOFI’s deposits, as evidenced by their Q3 report, underlines the company’s appeal and value to consumers. They reported a substantial increase in quarterly deposits, amounting to $2.93 billion. Notably, when compared to many of the other banks you’ve been tracking, including regional banks, community banks, large money center banks, and other FinTech firms, SOFI’s growth in deposits stands out. Their quarter-over-quarter deposit growth of 23.01% is a significant achievement, especially when many others have experienced declining deposits. This data further emphasizes the positive reception and value that SOFI is providing to its members in a highly competitive financial landscape.

SOFI may still be in its early stages, but its growing relevance is becoming increasingly evident. While their deposit total of $15.67 billion might not appear significant when compared to banks with over $100 billion in deposits on their balance sheets, it’s essential to recognize the consistent influx of capital into SOFI accounts each quarter.

The key strength lies in the fact that over 90% of SOFI’s consumer deposits come from customers who use direct deposit, and an impressive 98% of these deposits are insured. This combination creates a “sticky” environment where an ever-increasing percentage of new members choose SOFI as their primary banking institution. As the member base continues to expand, it’s quite reasonable to expect that SOFI’s balance sheet will keep growing quarter-over-quarter. This trend suggests that SOFI’s strategy is effectively building a loyal and expanding customer base, which can have a significant impact on the company’s future growth and success.

SOFI’s continuous achievements have positioned the company for sustained growth. The latest quarter marked a new record, with accelerated growth on a quarter-over-quarter (QoQ) basis. SOFI achieved $531 million in revenue in Q3, representing a significant 27% year-over-year (YoY) increase, and $98 million in Adjusted EBITDA, indicating an impressive 121.29% increase.

Comparing this to the preceding quarter, where SOFI’s revenue increased by 6.23% QoQ and Adjusted EBITDA increased by 1.49% QoQ, the growth rates witnessed in Q3 are even more remarkable. With a QoQ revenue growth of 8.57% and Adjusted EBITDA growth of 27.61%, it’s evident that the momentum of growth is robust and far from over. This strong performance suggests that SOFI has a promising path ahead, with the potential for sustained growth in both revenue and Adjusted EBITDA.

I have been bullish on SOFI and I do believe that it has the potential to deliver the most Alpha in my portfolio over the next several years. SOFI is seeing an acceleration in growth within its technology platform and the pipeline was described as the most robust and viable that Anthony Noto has seen on the earnings call.

There is a specific quote that is relevant to the tech platform in which Mr. Noto said:

the growth prospects that we’re expecting there really started to come through in a much bigger way as many institutions are under pressure to upgrade their technology and to go after new growth opportunities.

The acceleration of growth within SOFI’s technology platform, along with a strong and diverse pipeline, is a promising sign. The company’s involvement with large financial institutions and a regional bank deal demonstrates its potential to play a significant role in the industry’s technology landscape. The ability to control the entire backend of digital banking, from processing to the cyberbank platform, positions SOFI uniquely as a technology-driven financial institution. The monetization potential through offering banking-as-a-service further sets them apart from traditional banks.

SOFI’s journey to profitability is also a pivotal development. Achieving profitability not only indicates a sustainable path to success but also opens doors to potential inclusion in prominent indexes like the S&P 500. This could significantly impact the company’s visibility and value in the market.

My expectations for SOFI in the coming quarters and years are certainly optimistic/bullish. I am anticipating profitability in Q4, a strong finish for 2023 in double-digit growth, and promising guidance for 2024 reflects your confidence in the company’s performance and leadership.

SOFI has undoubtedly faced its share of challenges, but it’s clear that the management team has steered the company effectively through unprecedented times. The growing numbers in deposits, members, revenue, and Adjusted EBITDA are strong indicators of the value that SOFI is providing to its customers and the company’s growth potential.

As more institutions recognize SOFI’s potential, we may indeed see further upgrades and increased interest from analysts and investors. It will be interesting to see how SOFI’s growth trajectory unfolds in the coming weeks and beyond, and your insights offer a positive outlook for the company’s future.

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