Before SoFi Technologies (SOFI -1.25%) reported its third-quarter earnings, few investors wanted to invest in this unloved financial company amid a terrible economic environment. However, the company's recently reported earnings changed some investors' minds.
Here are two reasons some investors are now interested in SoFi Technologies and one reason why you still want to be cautious.
1. Reason to buy: SoFi begins benefiting from banking charter
Once SoFi received regulatory approval to become a bank-holding company earlier in 2022, it benefited in three ways:
First, it gained the ability to use its bank deposits to fund loans, a lower-cost funding source. As a result of the lower costs, it can now produce an increased net-interest margin or increased profitability per loan -- a huge benefit in a rising interest rate environment.
Second, the company uses a gain-on-sale model for its lending whereby it originates loans and sells them either as whole loans or through securitization. However, since it is now operating a bank, SoFi has more leeway to hold these loans on its balance sheet for longer periods, earning more interest.
Lastly, it can invest any increased gains from the loan business into boosting the annual percentage yield in its checking or savings accounts, thus attracting even more depositors and higher average account balances.
2. Reason to buy: Strong fundamentals
SoFi operates under three segments: Lending, Technology Platform, and Financial Services. All performed relatively well in this terrible economy.
The Financial Services segment grew net revenue 288% over the previous year's comparable quarter to $49 million.
Lending products, its largest revenue segment, grew adjusted net revenue by 38% over the previous year's comparable quarter to $297 million.
The Technology Platform segment might have the best long-term potential. In Q3 2022, SoFi grew its Technology segment by 69% over the previous year's quarter to reach $84.8 million in revenue. This platform serves the banking-as-a-service (BaaS) market, selling digital banking services to other fintechs and banks. If the company's goal of becoming the "[Amazon Web Services] AWS of fintech" plays out favorably, this segment could become SoFi's largest business when all is said and done.
Good performance in all three segments resulted in SoFi beating analyst revenue and earnings expectations, its second straight quarter of exceeding estimates on the top and bottom lines. In addition, it raised its full-year guidance for the third time this year -- a sign this fintech bank is a different beast from struggling financial companies like Upstart (UPST 3.39%), Robinhood (NASDAQ: HOOD), and Lemonade (LMND 0.46%).
Unlike many fintechs that concentrate on only one financial service, SoFi differentiates itself by being a one-stop shop for all financial services on one digital platform.
The attractiveness of the one-stop-shop business model for investors is the ability to cross-sell customers. And SoFi is aggressively building and selling new products. In Q3, SoFi added 635,00 new products for a total of 7.2 million products -- an impressive 69% over the previous year's quarter.
Cross-selling, or merchandising a different product to an existing customer, is a tactic that increases a customer's lifetime value (LTV) and decreases customer-acquisition costs (CAC). SoFi investors are counting on today's aggressive investment in new products to pay off long term in increased LTV and lower CAC driving eventual profitability.
Lastly, a PwC survey shows that a large and growing customer base is interested in internet banking. This growing interest and increased comfort with internet bank adoption drive massive membership growth. SoFi now has 4.7 million members -- up 424,000 members or 61% from a year earlier, driving its third quarter 56% year-over-year revenue growth.
One reason to be cautious
In late August, President Biden introduced his student loan forgiveness plan that would have ended the student loan moratorium on Dec. 31, 2022, with payments restarting in January 2023. Investors hoped that students having certainty about the need to repay student debt would bring a fresh wave of student refinancings that would benefit SoFi by the late fourth quarter of 2022.
However, on Nov. 10, 2022, a federal judge in Texas blocked the student loan forgiveness program. This move was followed by a ruling by the Eighth Circuit Court of Appeals, which also blocked the plan. This led to investor uncertainty about what Biden would do next, though on Nov. 22 he extended the freeze on federal student loan payments. As a result of the uncertainty, students might be holding off on refinancing student loans, which could mean lower student loan originations for SoFi.
The problem is that the company's full-year forecast assumes a late Q4 2022 surge in student loan originations. As a result, SoFi could underperform its full-year guidance if that surge fails to show.
While this company has a bright future, only risk-tolerant investors cognizant of the near-term risks should entertain investing in the company.