Digital bank and one-stop-shop financial services company SoFi Technologies (SOFI -0.13%) recently delivered a good beat on earnings for the fourth quarter. Even better, SoFi provided guidance for 2023 that was well above Wall Street's expectations, particularly for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
But there was another number in SoFi's Q4 report that was even more impressive. It was for a metric that will also be more important to watch as things shake out this year.
Focus on the financial services division
SoFi has three main divisions. There's the lending division, which houses almost all of its lending products, including student, personal, and home loans. Its technology division is composed of the operations it gained via its acquisitions of Technisys and Galileo. And then there is its financial services division, which includes products such as its online investment brokerage and checking and savings accounts.
Lending is regularly SoFi's most profitable division, while its financial services segment is regularly its biggest money loser. But investors need to understand that the financial services division also serves as a customer-acquisition vehicle -- it's really how SoFi brings members into its ecosystem. New customers tend to start their relationships with the company by opening investment or savings accounts. Then later, SoFi can try to cross-sell lending products to them.
Image source: SoFi Technologies.
In the fourth quarter, SoFi's financial services division generated about a $43.5 million contribution loss. While that's still a big loss, it was the smallest contribution loss the financial services division has booked in about a year, and there are a few reasons why I thought it was the most impressive number in SoFi's report.
For one, management said the company invested $13 million in the division in the fourth quarter to continue to attract deposits, which it can use to fund loans. SoFi also added 480,000 new members, making Q4 one of its best quarters for member growth ever. Management also said that annualized revenue per product practically doubled year over year to about $40.
Management also expects the financial services division to be "contribution profit positive" in 2023. Hitting that goal would show that the unit has achieved enough scale to attract new members and deposits without having to excessively spend.
Impressive, but still a long way to go
While I did think that the smaller loss from the financial services division was flat out the most impressive figure in SoFi's Q4 results, given its member and deposit growth, the company still has a long way to go to achieve profitability in the division.
SoFi is also claiming that the company can achieve profitability by the end of 2023, which would imply some pretty strong results in the back half of the year to compensate for a bit of a slowdown in the first half. I still find SoFi stock to be expensive right now. It's trading at about 26 times expected adjusted 2023 EBITDA, based on the top end of its guidance range.
But I did see good progress in financial services and think the market will be watching it closely in 2023. Ultimately, SoFi will need to keep making progress in financial services in order to reach companywide profitability.
