SoFi Technologies (SOFI +1.22%) recently reported solid first-quarter earnings as its lending business slowed, while two of its newer revenue streams boosted it. The company beat analysts' estimates and raised its annual earnings guidance, but that didn't stop the stock from falling more than 10% after its announcement. The dip could prove to be an opportunity for long-term investors. Here's why.
NASDAQ: SOFI
Key Data Points
SoFi has historically relied on lending
Early on, SoFi focused on helping people refinance their student loans, which was its bread-and-butter business until the pandemic hit in early 2020. When the federal government placed a moratorium on student loans, many lenders like SoFi were forced to reevaluate their entire business.
One area SoFi pivoted into was personal lending. From 2020 to 2023, SoFi's personal loan originations went from $2.6 billion to $13.8 billion.
One concern among investors is SoFi's growing loan volumes, given the current economic backdrop. In the first quarter, SoFi's lending segment revenue declined 2% from the same period last year. The company also projects that lending segment revenue will decline 5% to 8% from last year as the company takes "a more conservative approach in light of macroeconomic uncertainty," according to CEO Anthony Noto.
SoFi's credit quality is another thing to keep an eye on. In the first quarter, its net charge-off (NCO) ratio was 3.45% on its $15 billion personal loan portfolio, an increase from 2.97% in the first quarter of last year. There are concerns over SoFi's loan book and the potential revaluation of loans if credit losses continue to rise, ultimately weighing on its bottom line.
Expanding revenue from other sources will make 2024 a "transition year" for SoFi
Despite the slowing loan business, SoFi posted its second consecutive quarterly profit. It also raised its annual revenue forecast by $25 million and its generally accepted accounting principles (GAAP) net income guidance by $70 million above its previous estimates.
SOFI Revenue (Quarterly) data by YCharts
The two segments that are helping power that growth are technology and financial services, where the company forecasts 20% and 75% growth, respectively.
SoFi's lending business will continue to be a part of its growth story, but it is no longer the focal point of the business, which is why Noto called 2024 a "transition year" for the fintech.
How SoFi plans on being the AWS of fintech
Over the years, SoFi has invested heavily in acquiring Galileo and Technisys, which provides the back-end infrastructure that helps power the operations of many fintechs and neobanks. Because many fintechs don't have banking charters, Galileo allows them to process payments, such as credit cards or ACH transactions, leveraging SoFi's platform to do so.
Technisys is a next-gen banking system that replaces decades-old legacy systems. Legacy systems made it hard to innovate quickly, but Technysis can help support multiple products at once, runs on the cloud, and allows banks to process and analyze data in real time. With this technology stack, SoFi hopes to become the "Amazon Web Services (AWS) of fintech."
The technology platform has bloomed into a solid business for SoFi that can also be a source of stability thanks to its use of long-term contracts. In the first quarter, SoFi's technology platform segment revenue grew 21% as the company looks to "diversify growth and pursue larger, more durable revenue opportunities."
Image source: Getty Images.
SoFi has also become a one-stop financial services shop for consumers
Financial services is another strong performing segment for SoFi, which was made possible by SoFi's acquisition of Golden Pacific Bancorp in 2022. By acquiring Golden Pacific, SoFi obtained a banking charter and evolved into a one-stop shop for customers' financial needs, offering loans, checking and savings accounts, credit cards, investments, and other products.
The banking charter also allows SoFi to collect deposits from customers, providing it with a funding base to hold some of its loans on its books and capitalize on the higher interest rates in the form of net interest income.
In the first quarter, SoFi's financial services segment raked in $150 million, or 86% more revenue than it did in the same period last year. The strong growth was driven by higher interest rates, member growth, and deposits that increased 16% in the past year.
Image source: SoFi Technologies.
SoFi's pivot should make the business more resilient
SoFi has done an excellent job of pivoting away from its lending-heavy business and becoming a one-stop shop for customers' financial services.
It's also greatly improved its technology capabilities, providing banking-as-a-service (BaaS), which could prove to be a runway for growth. According to a report by Grand View Research, the BaaS market could grow by 16.2% annually through 2030.
There remain concerns about SoFi's valuation and execution risk. The stock trades at a forward price-to-earnings (P/E) ratio of 96 and 1.94 times its tangible book value, which is an expensive valuation relative to other banks. However, SoFi has done a solid job attracting customers to its platform, and its higher growth rate compared to traditional banks warrants a higher valuation.
Is SoFi right for you?
Investing in SoFi isn't for the faint of heart. The stock's high valuation could leave it vulnerable to higher volatility, especially during its "transition year."
With that in mind, I like the company's growth potential over the next several years and think the stock presents a good opportunity for risk-tolerant, patient investors today.
