The share price of SoFi Technologies, Inc. (SOFI), a consumer-focused financial technology company, surged 14% following the release of strong third-quarter financial results on November 10. However, it has since declined more than 30%, primarily due to the negativity in the broad market.
The company has expanded its product offerings into personal loans, credit cards, mortgages, investment accounts, banking services, and financial planning, which suggests SoFi is well-positioned to revolutionize the financial services industry in the future.
The fintech company has a primary focus on young, high-income individuals that may be underserved by traditional full-service banks, and intends to solidify itself as a one-stop-shop that caters to all the financial needs of this client cohort.
I am bullish on SoFi Technologies as I believe the company could emerge as a full-service digital financial services company in the future. (See Analysts’ Top Stocks on TipRanks)
Earnings Recap
SoFi surpassed analyst estimates for revenue and earnings for the third quarter and reported a positive adjusted EBITDA of $10.3 million. The company reported a $30 million GAAP net loss for the third quarter, an improvement of nearly $13 million from the corresponding quarter last year.
Net revenue increased 35% year-over-year in the third quarter, aided by the addition of 377,000 new members during the quarter, which marked the second-best quarter in the company’s history. The personal lending business had a strong quarter as well, with total loan originations reaching $1.64 billion, registering a year-over-year growth of 166%.
Moving in the Right Direction
SoFi has expanded its product offering and shifted its focus to cross-selling financial products to its rapidly growing userbase, opening new avenues for growth. The company offers a full suite of financial services and products that includes everything from student loans to estate planning. This gives SoFi competitive advantages over its closest rivals as many pure-play fintech companies offer limited financial solutions.
In the third quarter, the company also launched a series of marketing campaigns to increase brand awareness, potentially leading to new member additions in the coming quarters.
SoFi Money, which is viewed as the primary entry point for new users to the company’s ecosystem along with SoFi Invest and SoFi Credit Card, drove 79% of new member growth in the last quarter and 73% of cross-purchase transactions. This suggests that the company’s growth is driven by the strength of its core products, which is a good sign.
The company’s student lending segment was the worst performer in the third quarter, which should have been expected as this business continues to be affected by the CARES act’s student loan forbearance program.
SoFi’s acquisition of Galileo last year has enabled the company to offer payment services for debit cards and further strengthen its presence in the payment processing market. Many investors and analysts criticized the decision to go ahead with the planned acquisition last year because of pandemic-related challenges. However, the company seems to have done the right thing, which is evident from the recent financial performance.
Key Risks to Monitor
The lending business from which SoFi generates the bulk of its revenue is structured as an originate-to-distribute model, making the company heavily reliant on the demand for new loans. Until SoFi receives a national banking charter – hopefully in the near future – its fortunes will depend on access to external capital to finance its lending business, which is the primary risk facing SoFi’s business today.
Student debt levels are a growing concern around the world as well, and the average student loan debt for recent college graduates is nearly $30,000 in the United States. Although this can be seen as an opportunity for SoFi, regulatory intervention to reduce student debt in the country and on a global scale could be an obstacle to the company’s continued growth.
Wall Street’s Take
Turning to Wall Street, SoFi has a Moderate Buy consensus rating, based on five Buys and two Holds assigned in the past three months. The average SoFi price target of $25.43 implies 55% upside potential.
Takeaway
SoFi is a fast-growing young company that has gained the attention of investors of late with its stellar financial and stock market performance. Despite some risks threatening the company’s future, SoFi seems to be moving in the right direction to deliver handsome returns to long-term-oriented investors.
Disclosure: At the time of publication, Dilantha De Silva did not own any shares mentioned in this article.
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