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Here's How SoFi Bounced Back With a Great Third Quarter

By Bram Berkowitz – Nov 16, 2021 at 7:57AM

Key Points

  • SoFi's lending division generated more than $210 million of the company's total $272 million of revenue in the quarter.
  • The lending business's contribution profit of $117 million in the quarter was a record.
  • Personal loan originations surged, while student loan refinancing activity is affected by the pandemic.

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The company's strong third quarter was really driven by the performance in the lending division.

After what many investors deemed to be a disappointing second quarter, SoFi Technologies (SOFI 4.03%), a one-stop-shop financial services company for high-income earners, got back on track in the third quarter.

The company last week reported a net loss of $0.05 earnings per share on total revenue that surged to $272 million. Both numbers beat analyst estimates and management raised guidance for the full year, now expecting to generate more than $1 billion of revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) as high as $31 million. The big story in the quarter for me was SoFi's lending division, which generated stellar results as SoFi continues to increase cross-selling volume among its nearly 3 million members.

A loan officer works with a couple in a bank setting on a loan application

Image source: Getty Images.

A great quarter of originations

SoFi's lending division, which originates mortgages, student loans, and personal loans, has always been the biggest piece of revenue for the company. But the segment really shined in Q3, generating more than $210 million of the total $272 million of revenue in the quarter. Revenue from lending grew 26.5% from the sequential quarter and is up a similar amount on a year-over-year basis.

SoFi originated more than $3.4 billion of total loan volume, its largest quarter of originations since the fourth quarter of 2019. Personal loan originations surged to more than $1.6 billion in the quarter, the company's best-ever quarter of originations in that loan category.

The large origination volume comes even as student lending remains hampered as a result of the pandemic. The government has paused student loan payments until 2022. SoFi's CFO Chris Lapointe said on the company's Q3 earnings call that student loan refinancing remained at 50% of what it was prior to Congress passing the CARES act.

SoFi is executing on the cross-sell

SoFi provides a range of financial services in addition to lending, including an online brokerage for investing, credit cards, cash management accounts, and other services like SoFi Lantern, which allows customers to compare different lending products. The fintech's strategy is to be a one-stop shop for its customers, so it can cross-sell multiple financial products. The more products SoFi sells to each individual customer, the more profitable that customer is to the company because it reduces customer acquisition costs.

SoFi brought in 377,000 new customers during the third quarter and is now closing in on 3 million total members. I have been a little worried about SoFi's expenses considering the company is doing all sorts of marketing campaigns, including buying the naming rights to the SoFi Stadium football arena and running campaigns on TikTok. But despite the spend, which management believes is worth it due to the lifetime value of members, the company does appear to be driving some efficiency, as net revenue grew from the sequential quarter, while noninterest expense declined. Looking at the first nine months of 2020 compared to the first nine months of 2021, net revenue growth outpaced noninterest expense growth.

Noto said during the earnings call that the company saw a 65% increase in cross-selling among its SoFi Money cash management customers. Lapointe added that SoFi Money is at the top of the funnel when it comes to cross-selling, meaning cash management customers are the most likely to purchase another SoFi product. SoFi in Q3 grew SoFi Money products by nearly 22% from the sequential quarter and now has more than 1.1 million SoFi Money accounts, which means there should be a lot of new members with high potential for cross-selling. 

SoFi's strategy is starting to pay off

The lending business looks really good after Q3. Origination volume was really good and the lending business' contribution profit of more than $117 million was a record. And what's even better is that it's easy to see the lending division doing a whole lot better. Student lending should pick up in 2022 and if SoFi obtains a bank charter, which many expect it to, that will greatly increase the unit economics of the lending business. The bank charter gives SoFi the ability to hold cheap deposits and lend them out, increasing the margins on loans, as well as saving on loan origination costs. The bank charter may also encourage SoFi to hold some of its loan originations on the balance sheet, which can be very profitable. The performance of the lending division and its future prospects positions the company very well going forward.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends SoFi Technologies, Inc. The Motley Fool has a disclosure policy.

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