💲 Can SoFi Grow The Amazon Way?

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💲 SoFi: The Amazon Way?

Personal finance company SoFi Technologies Inc. (SOFI) issued upbeat guidance for the year’s second half. It plans to convince investors of its diversified business model. At the same time, a key shareholder is planning an exit. Will that sour sentiments or just act as a blessing in disguise?

Flying Off The Flywheel

Starting as a student loan origination company, SoFi is pivoting its business model to Amazon’s flywheel effect. The strategy involves lowering the business’s cost structure, lower prices, and improving customer service, leading to more traffic.

SoFi is losing money in its financial services product to attract and satisfy customers. It invests to increase the number of products offered while ensuring their high quality. It now provides free products like credit cards, high-yield checking accounts, savings accounts, brokerage accounts, etc.

Through a diversified business model, SoFi wants to ensure that it does not depend on a particular economic cycle. It currently offers three different types of loans, home, personal, and student loans. The home loan segment led the growth during a booming economy and housing market. With student loan moratoriums currently ongoing and the housing market struggling, SoFi’s personal loan segment is holding the fort, growing 151% in Q1 and 91% in Q2.

The strategy appears to be paying off as SoFi’s quarterly revenue beat estimates during the April-June period, which is the first full quarter since the company received its bank charter. Although it remains loss-making, the Loss per Share came in narrower than expected.

Key Highlights From Q2:

Revenue: $356.1M Vs $340.9M expected
Loss Per Share: $0.12 Vs $0.14 expected
Net New Members: 4.3M Vs 2.56M Year-on-Year

For the second half of 2022, the company has guided for 49%-50% revenue growth with an average Adjusted EBITDA of $75M-$80M. The bank charter also helped SoFi increase its deposits to $2.7B, thereby reducing the cost of funds.

SoFi has also launched a new thematic ETF which will focus on Web3, expanding access to crypto and blockchain investing. The ETF will pick 40 of the highest ranking stocks across four categories – NFTs & Tokenization, Blockchain Technology, Metaverse, and Big Data & AI. Meta, Roblox, Hive, and Amazon are some stocks that will be part of the ETF.

Underlying Troubles

Despite the modified business model and upbeat guidance, multiple challenges demand SoFi’s attention. First, it paid $80M in stock-based compensation in Q2 (22% of revenue) after spending $239M for the same in 2021. The company’s total outstanding shares have increased from 800M in July 2021 to 922M, implying significant shareholder dilution.

Since becoming a bank, SoFi has grown deposits by $1.6B in three months. The company offers an annual yield of 1.8% for members using direct deposits, which is 60x the national average on savings accounts. Customers who choose SoFi strictly for the yield will be the first to jump ship for higher yields elsewhere. As interest rates rise, the company will need to keep raising deposit pricing to retain customers.

Repayments for $1.7T in student debt have been under a moratorium since March 2020. The Biden administration previously extended the pause on loan repayments until August 31. With the deadline drawing closer, there is no word yet on whether The White House will extend the same and, if so, for how long.

The President intends to spend $321B to forgive $10K from each student’s loan and eliminate a third of all current student loans. However, there has been no official word yet on the same.

SoFi is one of the biggest private lenders of student loans and its guidance for the second half assumes that the moratorium will remain in place until January 2023. The company has previously lobbied with Congress to resume loan repayments in March but to no avail.

One of SoFi’s most prominent investors, SoftBank, plans on selling part or the entire 9% stake in the company. The move comes after its Vision Fund reported a record $23B loss in Q2. SoftBank sold 5.4M shares of SoFi at $7.99 apiece last Friday, followed by another 6.7M shares on Monday at $8.17 apiece. SoftBank owned 83.2M shares of SoFi as of June 30.

Some analysts cheered SoFi’s growth in deposits, stating that it will reduce the company’s reliance on high-cost wholesale borrowers. In addition, they highlighted student loans as a key concern and that incremental deposit funding has benefited margins despite the rising interest rates.

Shareholders did not welcome SoftBank’s plans as the stock declined on Tuesday. Shares are down 52% this year. The company has to take quick steps to address the concerns at hand while the student loan moratorium remains an overhang. Unless it has a clear path to profitability, it won’t take long for shareholders to put the revenue beat and strong guidance in a vault they cannot access.

Market Reaction
SOFI ended at $7.39, down 7.39%.

Company Snapshot 📈

SOFI 7.39 -0.59 (7.39%)

Analyst Ratings (13 Analysts) BUY 61% HOLD 39% SELL 0%

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Later Today 🕒

The Walt Disney Co. Earnings (DIS)
Alpha and Omega Semiconductor Ltd. Earnings (AOSL)
Bumble Inc. Earnings (BMBL)
Coupang Inc. Earnings (CPNG)
Marqeta Inc. Earnings (MQ)
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CyberArk Software Ltd. Earnings (CYBR)
6:00 PM IST: Consumer Price Index & Core CPI
11:30 PM IST: Federal Budget

Today’s Fun Fact

More than 5 million videos were uploaded in just 24 hours, when Instagram introduced videos

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