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SoFi Technologies: So-Finely Transitioning to a Neo Bank

SoFi Technologies (SOFI), founded in 2011, offers a suite of personal financing and banking options through its platform. The company made its debut on NASDAQ on June 1, following its SPAC merger with Social Capital Hedosophia.

I am bullish about SoFi. (See SoFi Technologies stock charts on TipRanks)

SoFi’s lending services include student loan refinancing, and personal and home loans. Its technology platform, Galileo, provides various services, including an authorization application programming interface (API) to financial and non-financial institutions.

The company also offers insurance services under SoFi Protect, a SoFi Credit Card, and Lantern Credit, a financial services marketplace.

Q2 Results

SoFi delivered a strong second quarter. The company’s total revenues soared 101% year-over-year to $231.3 million, while adjusted net revenues jumped 74% to $237 million.

The company’s loss came in at $0.48 per share, 44 cents worse than analyst estimates of a loss of $0.04 per share.

SoFi uses the adjusted net revenue metric where total net revenue in its Lending segment is adjusted for “the fair value changes in servicing rights and residual interests classified as debt due to valuation inputs and assumption changes (including conditional prepayment and default and discount rates).”

Anthony Noto, SoFi Technologies CEO, commented on the Q2 results, “We drove our eighth straight quarter of accelerating member growth, with even faster growth in cross-buying from existing members, increased our Galileo account base to nearly 79 million, and raised nearly $2 billion in our successful transition to a public company.”

Q3 and FY21 Outlook

The company’s management expects adjusted net revenues to range between $245 million to $255 million, while adjusted EBITDA is projected to vary from a loss of $7 million to a profit of $3 million.

For FY21, SoFi anticipates adjusted net revenues of $980 million and adjusted EBITDA of $27 million.

Analyst’s Take

On Tuesday, Mizuho Securities analyst Dan Dolev initiated coverage of the stock with a Buy rating, and a price target of $28 (84.9% upside) on the stock.

Dolev believes that SoFi is in the midst of a transition to a full-fledged neobank. Elaborating more on this, the analyst pointed out that in FY20 the company generated 83% of its sales from student and personal loans and mortgage originations.

However, Dolev expects that the company’s sales mix will shift towards “neobanking services such as mobile-first cash management, trading & brokerage, robo-advisory and crypto services (exp. 30-35% of sales by 2025), as well as next-gen issuer processing (exp. 25% by 2025).”

The analyst expects that this shift will drive user engagement and nurture “a flywheel effect of more users taking advantage of SoFi’s multiple services driving additional growth and operating leverage,” and drive the company’s valuation higher.

Dolev estimates that the total addressable market (TAM) for bank accounts in the U.S. to be close to 500 million accounts.

Moreover, based on the analyst’s bottom-up analysis, Dolev expects SoFi’s average revenue per user (ARPU) to exceed $200 per user.

Other positives for the stock, according to Dolev, are that its key performance indicators (KPI) including revenue per lending product and the number of products and users are showing an upward trend.

Turning to the rest of the Street, analysts are bullish about SoFi Technologies, with a Strong Buy consensus rating, based on three Buys and one Hold.

The average SoFi Technologies price target of $24.38 implies 61.2% upside potential from current levels.

Disclosure: At the time of publication, Shrilekha Pethe did not have a position in any of the securities mentioned in this article​.

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