We came across a bullish thesis on SoFi Technologies, Inc. (SOFI) on Capitalist Letters’ Substack by Oguz Erkan. In this article, we will summarize the bulls’ thesis on SOFI. SoFi Technologies, Inc. (SOFI)’s share was trading at $11.81 as of Nov 6th. SOFI’s trailing and forward P/E were 98.42 and 56.18 respectively according to Yahoo Finance.
A businessperson checking their laptop, highlighting the company’s integration of technology across its banking and financial services.
SoFi has once again delivered a standout quarterly performance, reporting EPS of $0.05, surpassing the estimate of $0.04, and revenue of $689 million, roughly 10% higher than the consensus forecast of $633 million. Despite these results, the stock has seen a nearly 8% drop following the announcement, a reaction not uncommon for SoFi, which has often experienced price pullbacks after significant gains. This recent decline follows a 30% stock rally in the month prior to earnings, indicating a pattern of heightened market expectations and subsequent correction.
In the months leading up to this quarter, SoFi has shown steady improvement in both revenue and profitability. Since CEO Anthony Noto took the helm, the company has undergone a strategic evolution from a private lender into a full-scale fintech platform, now functioning as a vertically integrated financial services provider with a bank charter. In Q1 2023, SoFi’s balance sheet held approximately $15 billion in unsecured personal loans, which had fueled investor apprehension, particularly as the Federal Reserve’s rate hikes intensified. Many investors feared SoFi might face elevated default risks similar to those seen during the 2008 financial crisis. However, SoFi’s portfolio has proven resilient, with borrowers averaging annual incomes above $150,000 and FICO scores over 740, metrics that have helped alleviate concerns over credit quality. Additionally, SoFi adheres to strict lending standards, not extending credit to individuals with FICO scores below 680. As of Q1 2023, SoFi’s annualized charge-off rate was just 2.7%, showcasing strong loan performance relative to market fears.
Throughout 2023, Noto has publicly underscored his disappointment with SoFi’s stock performance, given the company’s strong operational metrics. In response to investor concerns regarding its loan portfolio, SoFi shared data during its Q2 2024 earnings report showing that the Q4 2022 loan vintage was performing about 20% better than the 2017 vintage, which had come closest to experiencing higher loan losses. Since then, SoFi’s later vintages have continued to perform well, strengthening confidence in the business. This quarter, SoFi saw a marked rebound, as the market began to recognize the business’s underlying strength, particularly as interest rate cuts appeared on the horizon.
This quarter’s results confirmed SoFi’s strategic shift from lending toward a diversified fintech model. For the third consecutive quarter, SoFi has demonstrated its progress in revenue mix, with financial services and tech platform revenue comprising 49% of total revenue in Q3 2024, up from 39% a year ago. SoFi’s continued growth in non-lending revenue streams highlights its resilience in an unpredictable economic environment and shows its commitment to scaling a robust, diversified financial services business.
The quarter brought impressive member growth as well, with SoFi adding 750,000 new members, representing a 35% increase year-over-year and reaching nearly 9.4 million members. In addition, the company added 1.1 million new products this quarter, pushing its total product count to nearly 13.7 million, up 31% year-over-year. SoFi’s tech platform revenue, a critical part of its transformation, grew 14% year-over-year and generated $30 million in operating income. SoFi’s financial services business has also been integral in building operational leverage. The segment’s revenue doubled from $118 million to $238 million year-over-year, with non-interest income making up more than 35% of total financial services revenue, up from 26% a year ago. Despite doubling revenue, expenses for this segment only rose by 20%, reflecting significant operating leverage and SoFi’s strategy to transition to fee-based revenue, which further strengthens the business’s profitability.
Another area of exceptional growth has been SoFi’s capital-light lending platform, which grew fivefold this quarter. In Q3, SoFi originated $1 billion in loans on behalf of third parties, generating $61.1 million in revenue through loan generation fees and servicing cash flow. This approach highlights SoFi’s ongoing effort to pivot away from legacy lending by emphasizing capital-light revenue channels. However, with rates expected to stabilize, SoFi remains well-positioned to increase lending activity strategically, balancing risk and profitability.
CEO Anthony Noto’s strategy of underpromising and overdelivering has solidified SoFi’s position as a leader in fintech innovation. SoFi’s revenue mix has shifted dramatically in recent quarters, signaling its transformation into a technology-driven financial platform. Today, SoFi stands at the cusp of becoming a “pure-play” fintech company, with financial services and tech platform revenue nearing a majority of its total revenue.
SoFi’s strong Q3 results and effective business evolution underscore its position as a high-growth fintech with a well-diversified revenue base and capable management. The company’s momentum points to significant growth potential, with room for the market to increasingly value its resilient business model and diverse revenue streams. Despite impressive recent performance, SoFi remains attractively priced. Revenue guidance for 2024 stands at $2.5 billion, with an EBITDA target of $645 million, supported by 30% year-over-year growth. Assuming conservative growth rates of 15% in revenue and 25% in EBITDA, SoFi’s 2029 revenue could reach $5.3 billion, with EBITDA at $2 billion, valuing the company at just 2x 2029 sales and 5x EBITDA. Notably, management is forecasting 26% revenue growth next year and aims for $0.5 EPS by 2026, equating to only 20x 2026 earnings. This favorable valuation, even after recent gains, highlights an appealing investment opportunity.
SoFi Technologies, Inc. (SOFI) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 29 hedge fund portfolios held SOFI at the end of the second quarter which was 31 in the previous quarter. While we acknowledge the risk and potential of SOFI as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SOFI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.