One of the most crowded industries today is fintech. The rise of neobanks, peer-to-peer payment applications, and buy now, pay later services is challenging traditional financial services.
At one end of the spectrum are legacy banks like Wells Fargo or JPMorgan Chase, which largely rely on brick-and-mortar locations to attend to customer needs. While going to the bank to deposit a check or review a mortgage application is entirely appropriate, newer entrants to the market are bringing these financial services entirely online.
One of the pioneers of digital banking is SoFi Technologies (SOFI 3.69%). Following a blowout report for its third quarter, Ark Invest founder and Chief Executive Officer Cathie Wood scooped up almost a half-million SoFi shares.
Let's check the earnings report and assess whether the stock looks like a good buy right now. While there was a lot to like, there are some concerns, which may explain the current valuation. Nonetheless, long-term investors could view this as a lucrative opportunity to buy the dip.
Another smashing quarter, but...
As with all companies, SoFi's revenue and profitability profile are important measures to use to gauge business performance. However, SoFi's operation is a little more sensitive to broader movements in the macroeconomy, given the current state of high interest rates. Moreover, student loans represent a huge part of the company's business, and with prolonged pauses in these payments due to legislation, sometimes quarterly results can be a little challenging to digest.
By looking at the bigger picture, investors should be able to see a general theme. SoFi has built a flywheel business model. This means that the company seeks to acquire users and then cross-sell a variety of different products and services. In theory, if user satisfaction remains high, people will stay on the app longer. This allows SoFi to allocate expenses toward other areas, as opposed to constant customer acquisition and retention. While this all sounds good, is it actually working?
On the surface, SoFi appears to be successfully penetrating its customer base. For the quarter ended Sept. 30, SoFi boasted roughly 7 million users on its platform, up 47% year over year. Unsurprisingly, SoFi reported its 10th consecutive quarterly revenue increase, with the September quarter coming in at $531 million, up 27% from a year earlier.
What I personally found most encouraging from the call was the status update on Wyndham Capital Mortgage. SoFi is active in mergers and acquisitions, and earlier this year it acquired Wyndham in an effort to bolster its mortgage segment. Investors learned that home loan volume increased 64% year over year during Q3, thanks in large part to contributions from Wyndham.
Student loan origination volume doubled from last year. SoFi's technology segment also grew revenue 6% year over year as the company continues onboarding new customers through its acquisitions of Technisys and Galileo.
With such a prolific product suite and active user base, it's not hard to understand why SoFi is growing across its diversified business. However, despite its record revenue generation, there still seems to be one thing standing in the way of the stock going parabolic.
Image source: Getty Images.
...one thing in particular is holding the stock down
Getting distracted by the allure of high-flying revenue can blind investors to the bigger picture. This is why I urge thorough analysis of the income statement and balance sheet to get a better idea of how well the business is performing.
A look at line items below revenue on SoFi's income statement will show one glaring issue. The company has a history of operating losses. For the quarter ended Sept. 30, SoFi reported a net loss of $267 million.
There is something crucial to point out about this. The company booked a non-recurring goodwill impairment charge in the amount of $247 million in Q3. If you remove this from the income statement, SoFi's net loss really would have been in the ballpark of $20 million for the quarter -- much more manageable. However, even for the nine months ended Sept. 30, SoFi's net loss is $349 million on a reported basis, and about $102 million on an adjusted basis when normalizing for the goodwill impairment.
Valuing SoFi stock is tricky
Even with mounting losses, SoFi should get some credit. Compared to 2022, SoFi's adjusted net loss of $102 million is much better than last year's burn of $280 million through the first nine months of the year. Moreover, given that Q3's net loss was actually more like $20 million, the company appears to be closer to breakeven than ever.
Data source: YCharts
The chart above benchmarks SoFi against other players in the fintech market, including Upstart, Paypal, Block, Adyen, Bank of America, Wells Fargo, and JPMorgan. Given the varying sizes, maturity, and depth of product offerings of each of these names, I think this cohort includes enough data to make an informed decision. The metric that I chose to use for this valuation is the price-to-book (P/B) ratio.
Investors can see that SoFi's P/B of about 1.4 is near the bottom of the group. It's trading much more in line with Wells Fargo, JPMorgan, and Bank of America than with the other names. This tells me that the capital markets view SoFi as a bank, and therefore it trades like one. While Block, Adyen, PayPal, and Upstart all offer some banking services, these companies are much more technology-enabled and therefore trade similarly to software companies.
But what about SoFi being a pioneer in digital banking? To me, SoFi is more of a technology company than a traditional bank -- sort of like how Tesla could be viewed as a software business rather than just a car company. I think the chart above is really telling in that many misunderstand SoFi. As a technology platform, the company has the ability to reach lots of people around the world much faster than a legacy bank could. Moreover, despite a history of operating losses, it's narrowing its cash burn and moving in the right direction.
With SoFi stock down 70% from all-time highs, now looks like an amazing opportunity to dollar-cost average at dirt-cheap levels. I think the stock is a bargain, and soon, more people will begin to realize that the business model is working.
