Fintech has become such a big deal that it doesn't even look like a trend anymore; it's just the new way to do finance. Every bank and financial services company has gone digital, and you can do all of your financial management in a single app through virtually every bank.
So what makes one company stand out? SoFi Technologies (SOFI -2.75%) was one of the original all-digital banks, and it's been a popular stock to follow since it went public. Let's see whether or not it offers anything unique for users, and any benefits for investors.
SoFi stands out
The age of true fintech disruption has passed, but there are notable differences between the start-ups and the establishment. Some of these are general differences between young and old companies.
SoFi was created as an all-digital bank -- it has no physical branches. That means all of its investments go into the development of a top digital experience. It also targets young professionals and students, a continuation of its mission as a student loan cooperative. It was built with the younger consumer in mind, and it tailors the experience to reach a tech-savvy generation.
The concept is catching on. SoFi adds hundreds of thousands of customers quarterly, and these are high-quality add-ons with strong credit scores.
Image source: SoFi.
90% of SoFi Money account deposits come from direct deposit, indicating a strong and increasing revenue stream coming from working members.
It operates a winning model
Management calls its model the financial service productivity loop. What that means is that it attracts customers to a financial service, perhaps a high-rate savings account or loan that looks less intimidating than one from the big banks, and when customers like the service, they begin to adopt more services and engage at a higher rate with SoFi's platform. Products reached nearly 12,000 in the first quarter, a 38% increase over last year.
This strategy accomplishes several things for SoFi. For one, it increases overall revenue. Next, it creates an expanded business with several growth drivers, some of which can pick up the slack if one area isn't performing.
In the first quarter, non-lending segments gained more traction, and they were important levers in SoFi's overall growth. Loans were SoFi's first business, but in the first quarter, technology platform and financial services rose to 42% of total revenue, increasing 54% together and driving a 26% year-over-year increase in adjusted net revenue.
Lending segment adjusted revenue was flat in the first quarter, although generally accepted accounting principles (GAAP) revenue decreased 2% from last year. Lending products increased 20% year over year.
Finally, getting more out of current customers leads to higher revenue without significant customer acquisition costs and creates profitability. SoFi reported its first GAAP profit as a public company in the 2023 fourth quarter. It followed that up with another one in the first quarter with $0.02 in earnings per share (EPS). Management is guiding for continued positive net income in the second quarter and for the full year.
Why is the market cautious?
SoFi stock more than doubled last year, but it's down 30% year to date. There are several reasons the market has turned against it right now.
Mostly, investors have been cautious about SoFi's lending business. Lending is still its core business, but it's been losing momentum. Revenue growth from this segment was decelerating and is guided to slightly decline in 2024 versus last year. Although management is making a push for investors to understand that SoFi's non-lending businesses are gaining momentum and will take the place of lending revenue, which so far appears to be the case, a decline in a company's main business is a red flag. Even more distressing for investors is management's guidance for lending revenue to be 92% to 95% of 2023 levels.
Some investors didn't like a financial move management made, which was converting some debt into stock. CEO Anthony Noto said this had a "minimal impact" on EPS dilution, but investors don't like seeing EPS dilution.
So even though SoFi had a fabulous quarter and gave an optimistic outlook, there are elements to be wary of.
Focus on the long term
SoFi is adding members at a high rate and getting them to adopt more products on its platform. It's engaging its customers, launching well-liked products, and demonstrating profitability at scale.
The reasons why SoFi stock might be on the decline year to date should be taken into consideration when evaluating the stock, but to me at least, SoFi's model, execution, and opportunities look much more compelling. The way management scaled up the lending business in adverse macro-economic conditions, i.e., in an environment of higher interest rates, convinces me that it can pull off this "transition" by scaling up the more stable non-lending business via its technology platform whose potential growth rates are quite high -- something the market is not currently factoring in. That could mean some near-term pressure, but the long-term outlook looks very strong, and I would take a position in SoFi Technologies stock now.
