SoFi Technologies (SOFI 0.26%) reported third-quarter earnings on Nov. 1 with revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $424 million and $44.3 million, respectively -- ahead of the analysts' consensus estimates. The company added 424,000 new members and 635,000 new products in the third quarter, bringing the total to 4.7 million members and 7.2 million products.
These numbers are impressive, especially when the entire fintech sector is grappling with recessionary and inflationary pressures. SoFi is also witnessing a lack of demand for student loan refinancing due to the ongoing moratorium on student loan payments and low demand for home loans.
Yet the company seems to have managed to beat all odds and has also guided for strong fourth-quarter results. Is SoFi worth owning now? Let's find out.
SoFi's improving revenue mix
In the third quarter, SoFi recorded loan originations of $3.5 billion, up 2% year over year. While student loan and home loan originations dropped by more than 50% year over year, personal loan originations rose 71% year over year to $2.8 billion.
Although it was mainly a student loan player in pre-pandemic times, SoFi has been increasingly focusing on higher-margin personal loans in the past few quarters. This has played a crucial role in improving the overall yield of SoFi's loan portfolio. SoFi has also managed to attract high-income personal borrowers with a weighted average income of $160,000 and a weighted average FICO score of 746, thereby dramatically reducing the risk of defaults or delinquency in loan repayment. The company also plans to pass the impact of rising interest rates to customers through its personal loan products.
Reducing the cost of capital
SoFi's national bank charter is playing a crucial role in controlling its cost of capital in the current inflationary environment. The fintech ended the third quarter with $5 billion worth of direct deposits, up 86% on a sequential basis. The rapid growth in the deposit base is especially impressive considering that U.S. banks have reported declining deposits in the same time frame. By using these deposits to fund loans instead of other funding sources, SoFi managed to report savings of 125 basis points in the third quarter. This has enabled the company to earn more profit per loan, even in the current high-interest environment
A promising B2B business opportunity
Besides consumer payments, SoFi focuses on the burgeoning $200 trillion opportunity in the digital B2B payments space. The acquisition of payment software company Galileo in 2020 and banking software maker Technisys in 2022 has helped position SoFi as a major third-party infrastructure technology provider for institutional clients.
A closer look at SoFi's valuation
SoFi's revenue and earnings are expected to rise 35.6% and 75.9%, respectively, next year -- although the company is expected to produce positive earnings per share by fiscal 2024.
The company is trading at 3.2 times forward sales. That's higher than its fintech peers such as Upstart Holdings and LendingClub, which trade for 1.8 and 0.9 times forward sales, respectively, but SoFi deserves the premium valuation owing to its solid future growth expectations and robust business model.
Is SoFi stock a buy?
SoFi's stock is down over 66% this year. Besides macroeconomic pressures, investors remain concerned about the company paying a lot in stock-based compensation (SBC). While SBC (paying employees with the company's equity) helps align their interests with those of the company, it also results in equity dilution for shareholders. In the first nine months of 2022, SoFi has paid $235 million as SBC, up nearly 45% year over year.
But on the bright side, management has raised fiscal 2022 guidance three times in a row. This highlights SoFi's high confidence in its business model as well as execution capabilities.
The expiration of the moratorium on $1.7 trillion in student debt will boost demand for loan refinancing after January 2023, even after considering President Joe Biden's student loan forgiveness plan of up to $10,000 per borrower (the average student loan per borrower is $28,950).
Investors may experience some stock price volatility for SoFi in the short run, especially as the Federal Reserve has hiked interest rates for the sixth time in 2022. However, considering the company's long-term prospects, I believe retail investors should consider buying at least a small position in this fintech stock.
