Digital finance company SoFi Technologies (SOFI +1.86%) dropped more than 10% the day after releasing its earnings for the second quarter of 2021. The company disappointed investors with a large miss on earnings per share from analysts' estimates, and management failed to raise its full-year guidance. But looking closer, there are three major positives to take from this quarter that should have investors eyeing up the stock on this dip.
1. SoFi's user base is rapidly growing
SoFi started as a student loan lending business but has evolved into a finance "super-app" under current CEO Anthony Noto. Users of SoFi's app can manage and transfer cash, invest, trade crypto, obtain a credit card, and take out a variety of loans. Its vision is to bring all of a consumer's personal finance needs under one roof.
SoFi's user base must grow to make this business model profitable, and in 2021 Q2, user counts grew 113% year over year to 2.6 million. This is the eighth consecutive quarter in which membership growth has accelerated, a sign that the app resonates with consumers.
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With more members on SoFi's platform, the odds improve that customers will begin to use other products throughout the app. For example, a user may join SoFi to refinance a student loan, but then decide to open up a cash or investment account to buy stocks once onboard. This results in SoFi being able to lower its cost to acquire customers, making the business ultimately more profitable.
The strong user growth was mirrored by strong product growth across SoFi; total products grew 123% year over year to 3.7 million. Financial services products, which would be anything used on SoFi's app outside of loans, grew 243%, which accounted for the majority of SoFi's overall product growth, demonstrating successful "cross-selling," where members begin using multiple products on the app.
2. Nonrecurring costs hide improving financials
One of the major eyesores on the earnings headline was that SoFi reported a loss of $0.48 per share, a massive $0.42 miss from what analysts expected. On the surface, this would suggest that SoFi is consistently losing a ton of money.
But not so fast. If we look at the financial statements from the quarter, a handful of large no-recurring expenses caused SoFi's losses. These include a fair value adjustment to the company's warrant liabilities and increased stock-based compensation; both are noncash items and are normal after a company goes public.
In other words, these costs won't repeat. After making adjustments, SoFi generated positive EBITDA (earnings before interest, taxes, depreciation, and amortization expenses) for the quarter of $11.2 million compared to ($23.7 million) in 2020, and is SoFi's fourth consecutive quarter showing a profit using adjusted EBITDA. This signals that the core business is profitable. SoFi's profitability could continue to increase as revenues continue to grow over the years to come.
3. Student loan headwinds are temporary
Investors were concerned that management failed to raise guidance for the full year, and Noto declared that the reason for this was the ongoing federal policy on student loans. The government has frozen most student loans from generating interest or being paid on as part of pandemic relief.
This policy has been in effect since last year, and in 2021 Q2, student loans were SoFi's weakest segment, with originations growing just 11% year over year.Noto estimated that SoFi would lose $40 million on lost student loan refinancing over the last six months of 2021, which is why the company didn't raise guidance.
This seems to be a short-term setback, as the federal student loan freeze is completely out of SoFi's control and doesn't reflect anything to do with the actual workings of SoFi's business. Sometimes short-term hiccups can create great buying opportunities.
Is SoFi a buy?
Does that mean SoFi is a buy? The company is trading at a market cap of $12 billion, and based on its full-year guidance of $980 million, trades at a price-to-sales ratio of 12. This seems like a reasonable valuation considering the massive addressable personal finance market and the company's strong membership growth.
Investors shouldn't be focusing on short-term hurdles like one-time expenses or the student loan freeze; they should be looking at signs that SoFi is successfully executing its plan to grow into a much larger and stronger business over the long term. Based on the company's Q2 earnings, SoFi is doing just that.
