Following a brutal year for most unprofitable yet theoretically promising stocks, it has never been more critical for businesses to show a clear path to profitability for investors. With stock-based compensation (SBC) and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) figures running amok, income based on generally accepted accounting principles (GAAP) has come back into vogue.
SoFi Technologies (SOFI 1.46%), which offers diversified digital finance products, is hoping to highlight its impending GAAP profitability. While optimism around SoFi's stock is nothing new, GAAP profits would be a boon for the young upstart.
NASDAQ: SOFI
Key Data Points
Already delivering the goods in terms of high revenue growth, let's see why the company's improving net income margin could send its share price skyward.
Profitability incoming
While most stocks trading with a negative 9% net income margin won't garner much attention from investors, SoFi is the rare case that deserves a much deeper look. For example, consider the fintech company's rapidly improving net income margin over the last four quarters.
Data by YCharts.
Riding the combined tailwinds of maturing business lines, gradually declining SBC (relative to revenue), and a new bank charter designation, SoFi's operations have streamlined over the last year. In its oldest segment (lending), the company continued to wait out macroeconomic issues facing its home and student loan lines but saw its personal loan originations rise by 81% from 2021 to 2022.
Meanwhile, its SBC as a percentage of revenue declined to 16% in the fourth quarter of 2022, compared to 27.5% in the same period the prior year. Even better, management expects this figure to dip into the single digits over the long run.
Finally, SoFi's bank charter designation allowed it to launch full-speed ahead into its financial services ambitions. This development enabled the company's members to open checking, savings, investment, and credit card accounts at SoFi, providing the company with precious deposits and financial data on its customers. Since the start of 2022 alone, SoFi grew its total deposits from just under $1 billion to $7.3 billion as of Q4, arming the company with new capital to continue funding its lending operations.
The cherry on top of it all?
Founder and CEO Anthony Noto announced that the company should see GAAP profits by the fourth quarter of 2023.
As exciting as this progress is on the bottom line, let's not forget that SoFi grew net revenue by 60% from fiscal 2021 to fiscal 2022 -- and it may just be getting started.
SoFi's balanced attack on growth
Adding 480,000 new members in the fourth quarter, SoFi grew its total base by 51% to over 5.2 million members. Across these millions of customers, 7.9 million lending and financial services products were utilized, which rose 53% year over year in Q4.
While SoFi's lending unit accounts for 72% of net revenue, its technology platform and financial services segments offer outsize growth potential, increasing by 62% and 189% in 2022, respectively.
Intent to turn its technology platform into the "AWS of fintech," SoFi's payment processing platform, Galileo, and its cloud-based banking platform, Technisys, bring an end-to-end financial tech solution to its arsenal. Highlighting the opportunity ahead for this segment, Galileo announced 11 new clients in Q4 -- nine of which had existing customer bases. This demonstrates that despite SoFi being perceived as a partner to younger "neobanks" (think fintechs with apps or digital finance technology), it continues to make inroads with more established banking partners.
Finally, the financial services segment, powered by SoFi's technology platform and adjacent to its lending unit continues to widen the company's unique financial ecosystem. Alongside the benefit of bringing in deposits, this nascent segment also offers immense cross-selling potential with the lending unit, creating a tidy network effect between the two. Not only did the financial services segment grow its products utilized by 60% in Q4, but its annualized revenue per product rose to $40, compared to $21 at the end of 2021.
With SoFi trading at a price-to-sales ratio of 4.1, its outlook for profitability in 2023 and three-pronged growth attack make it a reasonably priced buy for enterprising investors. Guiding for 25% to 30% sales growth in 2023, despite the brutal student and mortgage loan conditions, look for SoFi to thrive over the long haul -- especially if the macroeconomic scene ever allows it to fire on all cylinders.
