The one-stop-shop financial services company and digital bank SoFi Technologies (SOFI -4.14%) delivered first-quarter earnings results on May 1 that beat analyst estimates. Management also raised the company's full-year guidance.
But that didn't stop the stock from trading 12% lower by the time the market closed that day. Ultimately, while the numbers looked good, the market was disappointed anyway. Here are three reasons why.
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1. SoFi's balance sheet optics don't look great
SoFi's largest division that generates the most revenue for the company is its lending business, which originates mortgages, student loans, and personal loans. Due to the student loan moratorium, which depressed student lending, and the high interest rate environment, which depressed mortgage activity, SoFi leaned heavily into personal loans and now regularly originates more than $3 billion per quarter. Personal loans on the company's balance sheet now exceed $9.5 billion.
SoFi designates the loans as held for sale, meaning it intends to sell them before they mature. The bank typically keeps the loans on its balance sheet for several months to collect recurring interest income payments for a time and then sells the loans to investors in the secondary market. This allows SoFi to not have to take any meaningful provision for credit losses, which would drag down earnings. However, the difficult macro environment categorized by high funding costs and the potential for a recession dried up investor interest in personal loans.
This drove up fear that SoFi may have trouble offloading these loans, especially if the Fed keeps rates higher for longer or if the economy tips into a more severe recession. In this scenario, SoFi might be on the hook for loan losses in the portfolio or have to sell the loans at a loss.
SoFi didn't do any personal loan sales to whole loan borrowers in Q1, which could be due to a lack of demand or bad gain-on-sale margins. However, the company did execute a $440 million asset-backed securitization. If the Fed pauses its interest rate hikes soon, this may nudge investors back into the market. But until the company starts to offload some of these loans, I think the stock may continue to see pressure.
2. SoFi raised guidance, but not enough to impress
SoFi did manage to raise its guidance for the full year, but it was nothing to get too excited about. The company now expects adjusted revenue of $2.02 billion this year and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $288 million at the top end of management's range. The prior guidance called for $2 billion of revenue and $280 million adjusted EBITDA at the top end.
Investors were likely hoping for more, although the company is still expecting to hit GAAP (generally accepted accounting principles) profitability by the fourth quarter of this year. I'm much more interested in this number, if the company can hit it, and then where it can go from there.
3. Galileo accounts fell
Galileo offers back-end payments infrastructure technology that enables companies to provide digital banking and card-issuing capabilities. For the first time ever, Galileo accounts fell -- from 131 million to 126 million in the first quarter.
SoFi's CEO Anthony Noto attributed the trend to the decision to stop going after small accounts and focus on larger, more durable clients that require longer sales cycles but will have a more material financial benefit once signed on.
Galileo is part of SoFi's tech segment, which may be driving SoFi's more expensive valuation. So weakness in the business also may be contributing to the less-than-enthusiastic reaction to SoFi's beat-and-raise quarter.
