The banking landscape is ruled by the likes of Citigroup, Bank of America, Wells Fargo, JPMorgan Chase, and others. Smaller players like SoFi (SOFI 1.97%) have made their mark against the big guys by identifying fragmentation and inefficiencies in the personal banking industry. Many of the services offered by legacy incumbents are archaic in nature and do not resonate with the rising popularity of mobile-first services.
SoFi's latest acquisition signals the company is doubling down on tech-enabled services that cater to this new class of customers. It also offers some clues on how it plans to become the one-stop shop for consumer-oriented personal finance.
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Encouraging underlying trends
SoFi originally began as a lending business, and the majority of its revenue still derives from loan obligations. However, management has made a conscious effort to diversify its revenue streams and branch out beyond loans over the last few years.
Roughly two years ago, SoFi acquired banking-as-a-service company Galileo. This was a savvy move by SoFi management as Galileo's tech-heavy platform paved the way for SoFi to broaden its digital offerings. At the heart of the deal, SoFi is combining Galileo's APIs (application programming interfaces) with its own mobile-first platform, making it appealing to both Galileo's commercial clients and SoFi's consumer base.
SoFi's management has compared its combination with Galileo as analogous to Amazon and its cloud computing service Amazon Web Services (AWS). One side of the business presents a growing consumer business, while the other side facilitates these consumers with robust technology infrastructure.
The company's full-year 2021 financials illustrate that the company's thesis is beginning to take shape. For the year ended Dec. 31, 2021, SoFi reported that it had reached 100 million Galileo accounts, up 67% from 2020 totals.
And investors can see the direct impact of the increase in Galileo members on the income statement. In 2021, SoFi generated $194.9 million in revenue from its technology segment, an increase of 102% compared to 2020. By comparison, the company's flagship lending business generated $763.8 million in revenue, up 59%. Even though the lending segment is almost four times larger than the technology business, SoFi is adding new Galileo members at a staggering rate, helping shift the revenue mix.
Given the robust growth it is generating from its technology business, it should be no surprise that SoFi recently announced another billion-dollar acquisition.
Another aggressive acquisition
In February, SoFi announced it was acquiring Technisys SA for roughly $1.1 billion in an all-stock deal. Technisys adds a unique layer to SoFi's already impressive technology stack because the combination of its platform and Galileo's will be able to support a variety of products such as checking and savings accounts, deposits, lending, and credit cards, all made available through API optionality.
Management expects the acquisition to serve as a catalyst to SoFi's top-line growth. According to the company's press release, management estimates incremental revenue from the acquisition to be approximately $500 million to $800 million annually through year-end 2025.
Although mergers and acquisitions (M&A) can present operational challenges, SoFi has already laid out its roadmap to achieve seamless integration. The company explained that as it migrates away from its current multiple third-party cores and onto the Technisys core it now owns, SoFi should be able to offer its members greater personalization.
In a press release following the acquisition, management stated, "the vertical integration with Galileo will create approximately $75 to $85 million in cumulative cost savings from 2023 to 2025 and approximately $60 to $70 million annually thereafter."
Investors should feel encouraged by this acquisition. Not only does SoFi expect even more revenue growth from the technology side of its business, but the company also expects to generate even further margin expansion, given the overlapping infrastructure and synergy opportunities with Galileo.
Keep an eye on valuation
SoFi's market capitalization is roughly $7 billion. Although there is a lot to be excited about from this deal, investors should keep the acquisition price in mind. The $1.1 billion cost represents roughly 15% of SoFi's current market cap. Furthermore, since the company is financing the entire deal in stock, shareholders will see their stock diluted.
SoFi presents a unique opportunity to invest in an industry ripe for innovation and disruption. Yet, as the stock hovers near 52-week lows -- despite growing its revenue at an impressive rate across its different verticals -- it remains unprofitable. And since the full potential of the payoffs from Galileo and Technisys is likely years away, some investors may be looking for safer, more stable investment opportunities. It may be most prudent for investors to assess further earnings, the progression of the Technisys integration, and the company's path to profitability before initiating a position.
