SoFi Technologies (SOFI) became publicly traded through a SPAC merger in June 2021. Year-to-date, its shares have outperformed, having gained about 90% versus the S&P 500’s (SPY) return of approximately 25%.
SoFi is a financial services company, offering a large variety of lending and financial services products, from student loans to personal loans, mortgages, credit cards, banking services, and investment accounts. The main goal of SoFi is to become a one-stop shop for your finances.
Its third-quarter results for 2021 showed very strong revenue and member growth. However, SoFi is an unprofitable company, which is one of the reasons why I am bearish on its stock. (See Analysts’ Top Stocks on TipRanks).
The other two reasons why I am bearish on SOFI stock is because the company has a weak balance sheet, with a cash-to-debt ratio of 0.18, and a debt-to-equity ratio of 0.61. For a company that is not profitable and is burning cash, I consider this to be too risky.
Q3 2021 Earnings: Enthusiasm and Challenges Ahead
SoFi delivered a very strong quarter in plenty of metrics, namely revenue growth and members growth, but not in profitability. Management appeared to be very enthusiastic, with the company’s CEO stating, “I believe we’ve accomplished more at SoFi across our uniquely diversified platform of mobile-first financial services products over the past year than many other companies will achieve in a lifetime.”
The main highlights from Q3 earnings were record revenues, a fifth consecutive quarter of positive adjusted EBITDA, total year-over-year member growth of 96% to 2.9 million, and 377,000 new members added, which was the second-highest quarterly increase in company history.
There was an increase in total revenue to $272,006,000, compared to $200,787,000 for the same period last year, an increase of 35%. The net loss reported was $30,047,000, which narrowed in comparison to the loss of $42,878,00 for the same quarter one year ago. My concern is that with such a strong quarter, SoFi is still far from being profitable.
The fact that for a fifth consecutive quarter there was growth for both members and products is a milestone. Total members grew 96% year-over-year to 2.9 million, from 1.5 million. Total products more than doubled year-over-year, to 4.3 million from 2.1 million, representing SoFi’s fifth consecutive quarter of triple-digit annual growth.
Although the Financial Services segment has more products, it’s the Lending Segment that is the main driver of revenue.
The Lending segment reported total net revenue of $210,291,000 in Q3 2021, an increase of 30% compared to total net revenue of $162,112,000 for Q3 2020. The contribution profit of $117,668,000 was an increase of 14% on a yearly basis.
Related to lending originations, it’s notable that there was a spike in personal loans of 166%, followed by an increase of 26% for home loans, and a decline of 6% for student loans. In addition, home loans witnessed the largest percentage growth in the number of products, an increase of 75%.
It will be interesting to monitor if this large increase in home loans was caused by the belief that mortgage rates are about to increase in 2022, as the Fed has already announced the tapering of its bond-buying program.
The Technology Platform segment witnessed an increase of 80%, with total accounts rising to 88,811,022 compared to 49,276,594 in Q3 2020. There was a 29% increase in revenue to $50,225,000 from $38,818,000, but a 34% decline in the contribution profit to $15,741,000 from $23,986,000 should be viewed as a warning sign.
The Financial Services segment seems to be a problematic one. Although it witnessed an increase of 290% in revenue to $12,620,000 in Q3 2021 compared to $3,237,000 in Q3 2020, its contribution loss widened to $39,465,000 compared to $37,467,000 in Q3 2020.
I consider SoFi’s strategy of increasing the number of products to be a very aggressive one, especially since the company is struggling to become profitable.
Valuation: Is SOFI Stock Cheap?
On a valuation note, SOFI is overvalued based on its price-to-book value ratio of 4.3x compared to the U.S. Consumer Finance industry average of 1.7x.
Positive Factors: A Bank Charter Is Pending
SoFi may soon get a bank charter. This will be a very positive factor that is expected to lower its cost of capital and sustain increased growth in lending. On top of that, cross-selling opportunities can also help fuel further revenue growth.
Wall Street’s Take
Turning to Wall Street, SoFi has a Strong Buy consensus rating, based on five Buys and one Hold assigned in the past three months. The average SoFi Technologies price target of $25.58 implies 9.5% upside potential.
Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.
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