SoFi Technologies (NASDAQ:SOFI) has seen its shares skyrocket lately, undergoing a blistering rally that has resulted in gains of over 100% since May 15, when shares hit a swing low. The trendy personal finance solutions company has managed to sustain an impressive rate of growth, which was once again demonstrated in its most recent Q1 results.
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More importantly, however, the company has been making steady progress toward reaching profitability. With improving cost management and softer stock-based compensation over time, SoFi may be GAAP profitable by the end of this year. This could be a strong catalyst for the stock, which would help it sustain its current rally. That said, I do remain cautious regarding the stock’s investment case, as the company still has a lot to prove. Thus, I am neutral on SOFI stock.
Kicking Off Fiscal 2023 on a High Note
SoFi kicked off its Fiscal 2023 on a high note, sustaining an outstanding pace of growth. This is not 2021, when social investing was exploding with new investors fueled by stimulus checks and an excess of cash. Yet, SoFi’s member count and overall activity in its product line continue to proliferate. Despite the discouraging capital market landscape, SoFi’s member count in Q1 rose by 46% year-over-year to nearly 5.7 million. The company also posted its eighth consecutive quarter of record adjusted net revenue, which landed at $460 million, up 43% year-over-year.
Growth was powered by record revenue in Lending and Financial Services, as well as continued strength in tech platforms. In Lending, specifically, net interest income revenue (NIM revenue) was $201 million and was actually higher than SoFi’s Lending non-interest income of $136 million.
With interest rates on the rise, it’s a bit surprising to see SoFi’s lending products perform well. Indeed, the company’s Home Loans faced macro headwinds from rising rates. However, these headwinds were more than offset by SoFi’s Personal Loans business which preserved its momentum in Q1, achieving record originations of roughly $3 billion, up 46% from $2 billion in the same period last year.
Shifting our focus to the realm of Financial Services, we witnessed an impressive surge in net revenue, amounting to $81 million, marking a staggering 244% increase compared to the previous year. This remarkable growth can be attributed to the record-breaking revenue generated by SoFi Money, alongside the sustained robust contributions from SoFi Credit Card, SoFi Invest, and lending-as-a-service. Within this segment, the process of monetization has displayed consistent improvement, as evidenced by the consecutive quarterly rise in annualized revenue per product.
The figure currently stands at $45, which is twice the amount recorded in the previous year of $20, and reflects a 15% quarter-over-quarter increase from $40. Moreover, the company has expanded its range of financial services products to 7.1 million, indicating a noteworthy 51% year-over-year rise. In addition, management continues to observe a strong influx of new products, with 584,000 potential offerings on the horizon.
Based on the company’s Q1 results and its ongoing growth momentum, management expects that SoFi will end Fiscal 2023 with net revenues of $470 million to $480 million, implying a year-over-year increase of 32% to 35%. While this implies a deceleration further into the year, it’s still a very impressive pace of growth during such a tough macro environment.
A Step Closer to Profitability
Besides the company’s robust growth, SoFi’s Q1 results showcased the company’s gradual steps toward reaching profitability. The combination of growing revenues and disciplined cost management has allowed the company to improve its margins over time, leading management to believe that GAAP profitability will be reached by the end of the year.
For instance, with SoFi unlocking economies of scale following the rapid growth in financial services, as I just mentioned, the company was able to drive cross-buy and marketing efficiencies in Q1. Evidently, the segment’s sales and marketing spend as a percentage of net revenue was 51% versus 60% in the prior-year period.
The company’s overall margin improvement is best illustrated through its adjusted EBITDA, which landed at $76 million, implying a margin of 16%. This represented 14 points of year-over-year margin improvement, demonstrating the substantial operating leverage of the business as it scales.
In addition to its adjusted EBITDA margin expansion, SoFi recorded a meaningful development against stock-based compensation as a percentage of net revenues, which was at 14% in Q1, down from 16% in Q4 2022 and 24% in Q1 2022. This should be music to investors’ ears, who can hope that dilution eases over time.
Given these improvements, SoFi was able to narrow down its net losses to just $34.4 million in Q1, notably lower than $110.3 million last year. Hence, management’s target of reaching GAAP profitability by Q4 doesn’t sound far-fetched at all.
Is SOFI Stock a Buy, According to Analysts?
Turning to Wall Street, SoFi Technologies has a Moderate Buy consensus rating based on eight Buys, five Holds, and one Sell assigned in the past three months. At $7.39, the average SoFi Technologies stock price target implies 19.3% downside potential.
The Takeaway
In conclusion, SoFi Technologies demonstrated impressive growth and made significant strides toward profitability in its recent Q1 results. The company’s sustained pace of expansion, with record net revenues and member count, is a positive sign for its future. In fact, despite facing macro headwinds, SoFi’s Lending and Financial Services segments have performed well, contributing to its overall success.
By improving cost management and reducing stock-based compensation, SoFi’s goal of achieving GAAP profitability by the end of the year seems rather attainable, which is likely to sustain the stock’s ongoing rally. Still, I choose to remain on the sidelines until the company can prove it can post profits on a sustainable basis, as the fintech industry remains highly competitive.
