Why SoFi Technologies (SOFI) is a Hidden Gem Despite Recent Stock Slump

Despite a notable 35.5% year-to-date (YTD) decline in SoFi’s stock and continued weak performance following the Q1 FY2024 earnings report, my bullish stance remains firm. I believe the stock decline was primarily due to short-term guidance falling below analyst expectations, not fundamental issues within the company. In this article, I will delve into the reasons behind my optimism, provide a detailed analysis of SoFi’s performance across its segments, and explain why I urge my readers to ignore the market’s pessimism and buy SoFi for the long term.

Recent Stock Performance and Market Sentiment

SoFi’s stock has faced a significant 35.5% YTD drop, exacerbated by the Q1 FY2024 earnings report and weak Q2 guidance. The stock experienced a 6.6% drop following the Q2 guidance, which fell short of analyst expectations despite a robust Q1 earnings beat of almost 196%. Consolidated sales grew by 26% year-over-year (YoY), exceeding consensus by 3.8%. However, mid-range guidance of $560 million for Q2 FY2024 revenue (versus consensus of $590.2 million) and adjusted EBITDA of $120 million (versus consensus of $135.9 million) led to negative sentiment and several earnings revisions. In my opinion, this decline is due to changes in short-term expectations rather than any fundamental problems within the company.

Segment Performance Analysis

Lending Segment

SoFi’s Lending segment had a challenging Q1 2024 with a slight 2% YoY decline in GAAP net revenue to $330.5 million. This decline marked the first QoQ and YoY revenue drop in recent memory, likely contributing to growing negativity towards SoFi, especially since this segment accounts for nearly 57% of the company’s total consolidated revenue. Despite the revenue decline, loan volume grew significantly, reaching $4.37 billion (+22% YoY), driven by an 11% increase in personal loans to $3.28 billion, a 43% increase in student loans to $751.7 million, and a notable 274% increase in home loans to $336.1 million. However, the profit contribution fell by 1% to $207.7 million due to cautious lending strategies amid economic uncertainty.

Technology Platform Segment

The Technology Platform segment performed exceptionally well, with net sales increasing by 21% YoY to $94.4 million, bolstered by strong customer acquisition and successful business in Latin America. The contribution margin more than doubled, increasing by 107% to $30.7 million, resulting in a robust margin of about 33%. SoFi’s number of enabled client accounts in this segment grew by 20% YoY to 151 million, showcasing the company’s ability to leverage its technological capabilities and expand its market presence.

Financial Services Segment

The Financial Services segment was the standout performer in Q1 2024, with net revenue increasing to a record $150.6 million (+86% YoY). This growth was driven by a significant increase in interchange income and net interest income. The segment generated a profit of $37.2 million, a remarkable turnaround from the loss of $24.2 million in the same period last year. Key products such as SoFi Money, SoFi Relay, and SoFi Invest recorded significant growth. The increase in debit transaction volumes and higher deposit growth solidified the segment’s important role in SoFi’s diversified revenue streams.

Management Strategy and Future Outlook

Conservative Lending Approach

The difficulties in the Lending segment during Q1 were primarily due to management’s conservative approach rather than inherent problems. In the face of rising credit costs and interest rate uncertainty, SoFi has opted for a cautious strategy, resulting in flat origination volume compared to the previous quarter and around $1.9 billion in loan sales. In a recent conversation with Mizuho’s Dan Dolev, CFO Chris Lapointe clarified the company’s near-term growth strategies. SoFi plans to strengthen its home loan business, particularly following the acquisition of Wyndham Capital to enhance back-end capabilities. Significant growth is expected in this area despite the current interest rate environment. There’s also potential for growth in student loans, especially in student loan refinancing post-elections and as interest rates fall. Growth in personal loans is being managed conservatively, but given the high credit quality of borrowers, there’s still considerable scope for expansion.

High-Quality Loan Portfolio

SoFi’s loan book is composed of high-yield, short-term loans given to borrowers with excellent credit scores (above 740) and high incomes (average salary over $160,000). This contrasts sharply with the lower-yielding, long-duration mortgage-backed securities (MBS) and commercial real estate (CRE) loans held by many other institutions. Potential investors should focus on SoFi’s long-term strategy rather than short-term performance. The company is deliberately taking a conservative approach to developing its core segment while actively investing in and expanding the other two segments, which are showing solid growth.

FY2024 Expectations

Looking at the end of 2024, SoFi is raising its expectations. The company projects fiscal 2024 adjusted net revenue of $2.41 billion (versus consensus of $2.38 billion) and adjusted EBITDA of $595 million, approximately 1.6% above consensus at the time of publication. Additionally, tangible book value (TBV) is expected to soar, with a total capital ratio exceeding 16%:

“Management now expects growth in tangible book value of approximately $800 million to $1 billion for the year versus previous guidance of $300 to $500 million, given the benefits of the recent convertible debt exchange along with the effects of new convertible issuance. We now expect to end the year with a total capital ratio of over 16%, due to those transactions versus our previous guidance of 14%. We continue to expect to add at least 2.3 million new members in 2024, which represents 30% growth.”

Valuation and Growth Potential

EPS Growth and P/E Multiple

I suggest focusing on EPS and the implied price-to-earnings (P/E) ratio as the primary valuation metrics for SoFi. If management’s approach to business growth continues to yield EPS expansion, the current consensus forecasts may be accurate. According to consensus estimates, SoFi is expected to achieve an EPS of $0.83 for FY2028. Assuming SoFi can trade at a P/E multiple of 20x by the end of 2028, the stock could reach $16.6 in five years, resulting in a potential compound annual growth rate (CAGR) of around 21%. This optimistic outlook is supported by Morningstar’s fair value model, which estimates SoFi’s fair value at $13 per share, significantly above the current stock price.

Peer Comparison

Comparing SoFi to its peers in the fintech industry, it appears to be the fastest-growing company in the sample based on consensus estimates. Moreover, its implied P/E multiple for FY2028 does not indicate overvaluation compared to industry averages. This further supports the potential for SoFi’s stock price to appreciate significantly over the next five years.

Risks and Concerns

Economic Downturn

In a severe economic downturn, SoFi could face significant risks, including the reversal of $607 million in mark-to-market gains and accelerated credit losses, leading to a sharp decline in its stock price. Although SoFi has high FICO scores and a strong Common Equity Tier 1 (CET1) ratio of 17%, these buffers may not be sufficient. Adjusted for accounting treatments and expected credit losses, the CET1 ratio could fall to around 9%, which may be too low given SoFi’s focus on unsecured retail loans. This could result in market or regulatory action, highlighting the importance of being aware of this risk when investing in SoFi stock.

Slowing Growth

There is also a risk that SoFi’s growth may slow faster than consensus estimates suggest, which would disrupt my calculations of the stock’s growth potential. Investors should closely monitor SoFi’s performance and be prepared for potential adjustments in growth projections.

Institutional Selling

It is concerning that some large institutional investors, such as the Qatar Investment Authority, are reducing their stakes in SoFi. This could indicate underlying issues that retail investors are not aware of. Investors should stay informed about such developments and consider the potential implications for SoFi’s stock.

Conclusion

Despite a notable 35.5% YTD drop in SoFi’s stock and continued weak performance following the Q1 FY2024 earnings report, my “Buy” rating remains unchanged. The stock decline was primarily due to short-term guidance falling below analyst expectations, not fundamental issues within the company. SoFi’s Lending segment faced slight revenue declines due to conservative strategies, but loan volumes grew significantly. The Technology Platform and Financial Services segments performed exceptionally well, demonstrating robust growth and profitability. Based on my calculations, SoFi’s projected 5-year EPS growth after 2028 exceeds 12.7%, and it should trade at around 20x P/E by FY2028, resulting in a potential CAGR of around 21% in SoFi’s stock price growth over the next five years. For all these reasons and despite the existing risks, I urge my readers to ignore the market’s pessimism and buy SoFi for the long term.