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Here's Why This Fintech Could Be a Bargain After Earnings

By Matt Frankel – Aug 31, 2021 at 6:22AM

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This company reported some impressive results, but the stock dropped anyway.

Fintech disruptor SoFi (SOFI -1.36%) recently reported its first quarterly results since completing its merger through a special-purpose acquisition company, and most of the numbers look extremely impressive. However, the stock is significantly down since the report and is about 50% off its all-time highs. In this Fool Live video clip, recorded on Aug. 19, Fool.com contributor Matt Frankel, CFP, discusses why he's a big believer in this innovative financial company. 

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Matt Frankel: First, we'll start with the bad before we get into what's on your screen right now. We'll start with the bad news. SoFi, the stock, sold off. If you're a shareholder of SoFi, you already know that the stock is down about 20% since earnings in the past weeks. The battery reaction was due to a couple of factors. First, it posted a much wider loss than analysts had been expecting. No one expected SoFi to be profitable, but a loss of $0.48 per share on a roughly $15 stock is pretty big loss -- $0.48-per-share loss versus a $0.06 loss per share that was expected.

A lot of investors had expected SoFi to raise its guidance for the year based on all these positive numbers that I'm about to talk about. They just maintain their guidance. I mean, a negative catalyst is the extension of the student loan pause. That's just not really helping their business at all. They cited that as the reason they kept their guidance flat, even though there are private lender, it had some trickle-down effects. That's why the shares sold off. But if you are a long-term investor and can ride out the ups and downs, here's a few reasons why you might want to pay attention.

Number one, what you are looking at is member growth. These are how many people are registered and active in the SoFi ecosystem. Whether they are a borrower, whether they have a cash management account, whether they have a brokerage account, SoFi has 2.56 million members. If you look at the blue number on the bottom of this screen, that's the most important, the year-over-year growth. That's up 113% year over year, and the net growth rate has accelerated for eight quarters in a row. That's pretty impressive. A lot of companies posted accelerating growth in the early days of the pandemic. For example, a lot of tech disruptors we saw accelerate early throughout 2020. But this growth just continues to accelerate, and one of the big reasons is that SoFi keeps rolling on more and more products and getting more and more people into its ecosystem in one way or another. For example, a customer might start off as a brokerage customer and realize that SoFi is a great personal lender. Or someone who already borrows from SoFi might open a SoFi money account, which is a checking account replacement. This is the total number of products that SoFi members use, which is up even higher.

Remember that members increased 113% year over year. The amount of products that their members use increased 123% year over year. Just doing the quick math, about 3.7 million products divided by 2.56 million members, shows that the average member is using about 1.5 products, so one or two products per member. A lot of room to expand in cross-sell products to existing members is the key takeaways. You could see this number accelerate in the quarters to come.

There's two kinds of products that SoFi offers. You can generally break them into two categories; lending products and financial-services products. SoFi started out as a private student loan company, essentially. They have expanded it to personal lending. They offer mortgages on their website. This is now the main driver of their growth right now. They are a well-established lender. If I had to call one part of their business mature, it will probably be this one. Not surprising that this growth rate has decelerated if you look at the blue on the bottom of the screen. People really didn't need private student loans in the past year or so. A lot of people pumped the brakes on their education during the COVID pandemic. Didn't really want to pay for virtual school. Didn't need extra money to pay for housing and stuff that they were learning virtually. A lot of stimulus has decreased the need for personal loans in a lot of cases.

Lending growth is not really the exciting part. But if you look at this chart, financial-services products, things like their money account, their brokerage account, their credit card product now. This is some incredible growth. Look at those numbers on the bottom: 243% year-over-year growth in the number of financial services products their members used. This looks like a parabolic growth chart, like, just exponentially growing and should continue to do so. Remember, 2.56 million members. If you look at that number, that's pretty close to 2.7 million financial-services products. Roughly one per member in terms of financial services products, so a lot of cross-selling potential. I'll get to the products SoFi offers in just a second. But really quick on just the numbers. I'll translate into revenue.

Revenue grew slower than the membership base, which I think could've been a concern for investors and may have been a contributor to the decline in the share price. Revenues are up 74% year over year. Remember, membership grew 113%, so some of their newer members might not be converting into revenue as much as people wanted to see. On an adjusted basis, SoFi returned an adjusted EBITDA profit. Compared to last year during the middle of the pandemic when SoFi posted a loss. Pretty impressive, not a profitable company on traditional metrics yet, but definitely getting there. I mentioned cross-selling potential is really the thing to watch going forward. Remember, the average SoFi customer uses just over one financial-services product.

Look on the right side of your screen there to the financial-services products they offer. SoFi Invest is a brokerage platform, which is essentially a Robinhood (HOOD -2.21%) competitor that, in my opinion, does it even better. They offer cryptocurrencies, they offer IPO access to all investors, things like that Robinhood are doing. But they offer things like educational services, prioritize long-term investing, really try to make people better investors, not just traders. Essentially, a better version of Robinhood, my opinion. SoFi Money is SoFi's bank alternative. SoFi recently acquired a bank that has a banking charter so it could build out that significantly in the quarters ahead. They have their own credit card product. A bunch of other financial service offerings there.

Last thing I wanted to mention is the Galileo Technology Platform. That was an acquisition last April. They acquired the Galileo Technology Platform, which is essentially a payments platform that enables other companies to offer banking products to their customers. They have 79 million active accounts using that platform. Not through SoFi, not SoFi customers. SoFi uses this. They essentially let other companies use their infrastructure to offer financial-service products to their customers. Big part of the business just going to keep growing. That is up 119% year over year in terms of members. They acquired this last April. It's, in my opinion, going to improve to be a great pandemic era steal. They paid $1.2 billion for this platform, here, mentioned 79 million active accounts and more than doubling year-over-year. That is SoFi's quarter in a nutshell.

Matthew Frankel, CFP owns shares of SoFi Technologies, Inc. The Motley Fool owns shares of and recommends SoFi Technologies, Inc. The Motley Fool has a disclosure policy.

Stocks Mentioned

SoFi Technologies Stock Quote
SoFi Technologies
SOFI
$4.34 (-1.36%) $0.06
Robinhood Markets Stock Quote
Robinhood Markets
HOOD
$9.31 (-2.21%) $0.21

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