The last couple of months have been turbulent for banks. Traditional brick-and-mortar financial institutions like Silicon Valley Bank and First Republic, along with investment bank Credit Suisse, all collapsed within a few weeks of one another. While this made for dramatic headlines about a potential banking contagion, some other developments in the banking industry may be more interesting.
SoFi Technologies (SOFI -0.28%) is a rising star on the banking landscape. The company's chief executive officer, Anthony Noto, has repeatedly told investors that his vision is to turn SoFi into the Amazon Web Services (AWS) of banking. But what does that mean?
Let's break down Noto's vision, what he has done, and why it's so important.
What is SoFi building?
Unlike traditional banks such as Wells Fargo or Bank of America, SoFi's roots lie in a digital-first approach. In SoFi's ads, the company urges you (the viewer) to download its app and create an account.
On the surface, it may seem a little strange to download an app and explore an entire library of financial services. Historically, banking -- from opening a checking account to getting a mortgage -- took place inside physical locations. But SoFi's tech-only approach appears to be working.
Image source: Getty Images.
Resilient in the face of headwinds
SoFi's roots, and its bread and butter, are in student lending. Although the company generates revenue from both personal and home loans as well, SoFi reports revenue for financial services and technology platform services. Financial services include SoFi's personal finance offerings, such as savings accounts and credit cards, while technology platform services mainly means Galileo, which SoFi acquired three years ago. For context, the thesis behind the deal was to combine Galileo's APIs (application programming interfaces) with SoFi's mobile-first platform, providing a way to market products to both commercial clients (from Galileo) and consumers (from SoFi).
During the first-quarter earnings call, Noto stated: "Student loan refi continues to be impacted as federal borrowers still await clarity on the end of the moratoria and federal student loan payments. Home loans face macro headwinds from rising rates while we continue the process of integrating Wyndham Capital Mortgage, which we acquired at the beginning of Q2 2023."
That sounds as if two of SoFi's three core lending segments are facing their share of challenges at the moment. To quantify Noto's statement, student loan origination volume was down 47% year over year for the quarter ended March 31, while home loan origination volume was down 71%. Yet despite these declines, total origination volume was up 7% year over year, driven by a record $3 billion in personal loan origination volume, which was a 46% increase year over year.
Personal loans were not the only things that shone during Q1. Technology platform revenue increased 28% year over year to $79 million, while financial services increased an eye-popping 244% to $81 million. These two business units -- combined with the company's lending segment, which generated $337 million in revenue during Q1 -- contributed to an impressive 43% annual growth rate for total revenue in Q1.
Growing the top line is always nice to see. But as an investor, I tend to keep a close eye on profitability. How did that look?
Valuation looks like a bargain
For the quarter ended March 31, SoFi reported total revenue of $472 million. On the other side of the equation, it reported $508 million in total expenses, representing 16% growth year over year. As pointed out above, SoFi's total revenue grew 43% annually, nearly three times as much as expenses. It's always encouraging to see revenue gains far outpacing costs.
SoFi reported a net loss of $34 million in Q1 2023. By comparison, the company's net loss in Q1 2022 was $110 million. This is a dramatic improvement year over year.
Because SoFi isn't yet profitable, valuation metrics such as price-to-earnings (P/E) are not useful. On the other hand, the company's trailing 12-month price-to-sales (P/S) ratio is pretty interesting. SoFi now is trading at about 3 times P/S. For reference, SoFi was trading around 4.4 times P/S this time last year.
Fundamentally speaking, this is a little convoluted. The company is increasing its top line over 40% year over year, while also narrowing its net losses significantly. Moreover, SoFi has been able to do this in the face of a challenging interest rate environment. Yet, the stock's valuation is lower than a year ago. Perhaps this dynamic is one reason Noto keeps buying the company's shares.
Although insider buying often is a good sign, it is not a reason to buy the stock. The bull case for SoFi is clear: Despite a challenging environment for student and home lending, the company's investments, namely spearheaded by Noto's vision, are paying off.
SoFi is becoming a clear market leader in digital-first banking. Moreover, investors should remember that the macro challenges in the lending market will subside. The company's differentiated product suite, coupled with its strong growth profile, should encourage long-term investors to scoop up shares in SoFi.
It could be argued that SoFi is oversold, and its future growth in lending, among its other products, is likely not accounted for in the current stock price. Now looks like a great opportunity to build a position in the stock.
