$SoFi Technologies Inc.(SOFI)$
Sofi's stock is taking a hit after the company released its quarterly earnings, with shares down around 11% during regular trading hours. Part of this decline could be due to a broader market pullback, especially with younger investors—Memes Gods, Millennials, and possibly Gen Z—who have heavily driven the stock up. While Sofi may look appealing, it's essentially just another financial institution, offering services like JPMorgan or Wells Fargo, yet its valuation has skyrocketed to four times its tangible book value, which is hard to justify.
Earning Overview
There are a few key points to consider when reviewing Sofi's earnings. On paper, the EPS and other metrics seem strong, but once you dig into the numbers, this quarter doesn’t look as great. The company gave disappointing Q1 guidance, especially on the earnings front, with a consensus of 6 cents but actual guidance at just 3 cents. However, revenue came in strong at $734 million, beating expectations, and giving some hope for the future. The company has set a relatively low bar for revenue targets, so they tend to beat those expectations.
Guidance
For Q1, Sofi's revenue guidance falls between $725 million and $745 million, with Wall Street expecting $707 million, which shows strong growth. Looking further into the year, there’s potential for Sofi to hit $750-$800 million by year-end, with a growth rate in the 20%-25% range. But here's the challenge: at its current multiple, this kind of growth may not be enough. Sofi's stock is priced four times its tangible book value, compared to other major banks like JPMorgan (2.7 times), Wells Fargo (1.88 times), and Bank of America (1.74 times). Those banks are also paying dividends and buying back shares, which gives their stockholders more value.
Fundamental Analysis
Sofi, on the other hand, doesn't offer these benefits. Investors hoping for long-term growth have to rely on the stock price appreciating since the company is diluting shareholders as part of executive compensation. That said, Sofi has done a solid job growing savings deposits, leveraging its app and marketing strategies, which have made it a strong player in the space. Still, as the company relies on high-yield savings to attract customers (currently at 4.25%), a lower interest rate environment could compress its margins. The company also has higher-risk loans, like personal loans and student loans, which have been growing quickly, along with home loans, which could benefit from a drop in interest rates and home prices.
In short, while Sofi has impressive growth numbers and is executing well in some areas, its valuation is high for a company that doesn't offer dividends or buybacks, and it's facing challenges if market conditions change. If you're interested in Sofi, you might want to wait for a lower price point.
Risk And Challenges
Sofi's business is heavily dependent on personal loans, student loans, and home loans, but these types of loans come with higher risks. If the economy takes a downturn, the default rates on these loans could rise, especially since they aren't secured by collateral like home loans. While Sofi's loans do have higher interest rates, the company also faces higher capital costs due to the need to offer attractive savings rates to draw in deposits.
Financial Analysis
Now, if we look at the financials, they're solid. Interest income came in at $743 million, with interest expenses at just $273 million, giving the company a $470 million net interest income—this is like a strong gross margin. Non-interest income was $263 million, showing decent growth as well. However, as an investor, you need to consider whether Sofi can sustain this growth, especially since the company may face slower growth in the coming year. For example, their year-over-year net interest income grew from $389 million to $470 million, which is good, but the rate of growth isn’t as impressive as it might seem at first glance.
One thing to note is Sofi's provisions for credit losses, which have stayed steady. This indicates that, based on their current loan mix, the company doesn’t feel the need to set aside more funds for defaults, which is a positive sign. However, what's really inflated their net income this quarter is a one-time income tax benefit of $272 million. Without this tax benefit, their net income would have been much closer to last year’s levels, despite the strong revenue growth. So while they posted impressive earnings, much of that growth was driven by a tax benefit that’s unlikely to repeat soon.
Sofi's future performance is uncertain, especially if interest rates fall and defaults rise. Lower interest rates typically signal a struggling economy, which would make it harder for people to repay their student and personal loans. Sofi might struggle if this happens, given their focus on higher-risk loans. Typically, banks with a more stable, higher-net-worth customer base may weather economic downturns better.
Free Cash Flow
Sofi has struggled with negative free cash flow for most of the past few years, but it's expected to turn positive within the next 12 months. While the company’s growth looks strong, it’s important to note that the trend is starting to show signs of slowing down. Whether or not you factor that into your investment strategy is up to you. Also, Sofi has been diluting shareholders in recent years, which is something to consider. However, if Sofi—or any company—can continue to outperform the S&P, many investors would likely be willing to look past this dilution.
Technical Analysis
From a technical perspective, I view Sofi as a sell for now. While some charts may show a buy signal, I believe the stock is in an uptrend but is likely to face resistance at its current levels. The first support level could be around $14-$15, where the stock has bounced before.
Valuation
As for Sofi’s valuation, based on the discounted cash flow (DCF) model, we estimate its fair value to be around $18. We’ve used a 12% free cash flow growth rate for the year-over-year average. Depending on the discount rate (we’ve tested at 8%, 10%, and 12%), the present value results in an intrinsic value of about $18.40.
A further pullback into the $10-$11 range could present a good buying opportunity for traders, especially considering Sofi’s higher volatility and retail interest.
Conclusion
After reporting disappointing Q1 earnings guidance and seeing a boost from the tax benefit, it’s clear that Sofi will need to find new ways to grow. Without a solid way to boost profitability, the company may start trading like an ordinary bank, with valuations that align more closely with other financial institutions. It’s something to watch, but as of now, The Hard Truth is Sofi’s growth isn’t fully translating into higher profits.
Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.
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