SoFi Beats Expectations Across the Board
Taking a Look at SoFi Technologies (SOFI) Earnings Report.
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SoFi Technologies Posts Robust Q3 Earnings Amidst Strong Growth
SoFi Technologies (SOFI) recently released its Q3 earnings report, showcasing impressive growth that surpassed analyst expectations on both revenue AND profit. Despite this, the stock tumbled 12.5% in early trading, leaving investors questioning whether it's the right time to buy (as of the publishing of this report, SOFI seems to have partially recovered).
A Closer Look at the Numbers
Analysts had projected SOFI to earn $0.04 per share on revenue of $632.3M. Defying expectations, the company reported a profit of $0.05 per share and revenue of $697.1M. CEO Anthony Noto hailed the period as "the strongest quarter in our history," emphasizing the company's "durable" growth trends.
Membership Growth: The number of SOFI members soared by 35% YoY, reaching 9.4M.
Revenue Increase: Total revenue grew by 30%, fueled by both new and existing customers.
Credit Quality Improvements: Personal loan charge-offs decreased to 3.52% from 3.84% in the previous quarter, while delinquencies fell to 0.57%.
Net Interest Income: There was a 25% rise in net interest income, boosting overall profitability.
Expansion Beyond Consumer Banking
SOFI's financial services and tech platform segment experienced the fastest growth, with sales climbing over 60% YoY. This segment now accounts for nearly half of the company's business. The Galileo technology platform, which SOFI owns, saw a 17% increase in managed accounts, totaling 160 million. Galileo powers financial services for companies like Toast and H&R Block, helping them build and scale their unique products.
Raised Guidance but Stock Declines
Despite the solid report, the stock fell. For the full year, the company raised its revenue guidance by $85M, projecting between $2.535B and $2.55B—a 22% to 23% increase YoY. Earnings per share are now expected to be between $0.11 and $0.12, up from the previous estimate of $0.09 to $0.10.
My guess to the stock decline may be attributed to the shrinking net interest margin, which dropped to 5.57% in the third quarter from 5.99% a year earlier. However, this reduction is due to a strategic shift towards less risky secured loans over unsecured personal loans—a move that could be favorable for risk-averse investors.
Is SoFi Stock Overvalued?
With four consecutive quarters of GAAP profitability, SOFI has accumulated $0.12 per share over the past year. Yet, with the stock trading around $10 per share, this results in a high price-to-earnings (P/E) ratio fluctuating around the low 80s.
Growth Projections: Management anticipates 2024 revenue growth of 22% to 23%, with membership rising by 30%.
Earnings Forecast: Analysts expect profits to more than double to $0.25 per share next year.
Paying a high P/E ratio for a company with the potential to double its earnings might seem reasonable. Bulls have to look at the other side too though, as SOFI’s member base expands, sustaining such rapid growth could become challenging, possibly making it difficult to justify the current valuation. Not being an annoying bear, but its healthy to look at it from this perspective as well.
My Take
I believe SOFI had an excellent quarter, there’s really nothing to complain about unless you want to nitpick. SOFI is a position I hold in my ultra long-term investment bucket, and I'm realistic about the journey ahead—I don't expect everything to be sunshine and rainbows. There will undoubtedly be hiccups along the way, but when viewed through a long-term lens, I anticipate the business performance will trend upward, moving linearly up and to the right.
Business performance is rarely a perfect linear progression. Every success story encounters its share of speed bumps, but what sets successful companies apart is their ability to navigate these challenges. Having Noto at the helm gives me confidence with this, if any obstacles arise like the pessimistic macroeconomic doom and gloom narrative that has been pushed, I think we are in pretty good hands. As long as they continue to execute their strategy effectively, I plan to hold onto my investment in this company.