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2021-08-18

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SoFi Technologies: Why The Market Got It All Wrong

Summary SoFi just reported strong Q2 2021 financial results with accelerating growth across its usa

SoFi Technologies: Why The Market Got It All Wrong

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{"i18n":{"language":"zh_CN"},"data":{"magic":2,"id":833420719,"tweetId":"833420719","gmtCreate":1629256526631,"gmtModify":1633686167401,"author":{"id":3586519067840195,"idStr":"3586519067840195","authorId":3586519067840195,"authorIdStr":"3586519067840195","name":"cxseah","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"userType":1,"introduction":"","boolIsFan":false,"boolIsHead":false,"crmLevel":1,"crmLevelSwitch":0,"individualDisplayBadges":[],"fanSize":5,"starInvestorFlag":false},"themes":[],"images":[],"coverImages":[],"extraTitle":"","html":"<html><head></head><body>Like pls</body></html>","htmlText":"<html><head></head><body>Like pls</body></html>","text":"Like pls","highlighted":1,"essential":1,"paper":1,"likeSize":4,"commentSize":2,"repostSize":0,"favoriteSize":0,"link":"https://laohu8.com/post/833420719","repostId":1181607588,"repostType":4,"repost":{"id":"1181607588","kind":"news","pubTimestamp":1629256236,"share":"https://www.laohu8.com/m/news/1181607588?lang=&edition=full","pubTime":"2021-08-18 11:10","market":"us","language":"en","title":"SoFi Technologies: Why The Market Got It All Wrong","url":"https://stock-news.laohu8.com/highlight/detail?id=1181607588","media":"seekingalpha","summary":"Summary\n\nSoFi just reported strong Q2 2021 financial results with accelerating growth across its usa","content":"Summary\n<ul>\n <li>SoFi just reported strong Q2 2021 financial results with accelerating growth across its usage metrics, most of which grew by &gt;100%.</li>\n <li>Adjusted revenue for the quarter climbed 74% YoY and was based on a diverse revenue mix from SoFi’s three core business segments.</li>\n <li>However, investors got spooked by a net loss of &gt;$150 million for the quarter and a muted guidance for H2 2021.</li>\n <li>Management made it clear that net loss was impacted by a deferred tax liability from Galileo, while guidance was reiterated despite a $40M headwind from the CARES Act prolongation.</li>\n <li>SoFi is diversifying its business and makes significant progress in terms of multi-product adoption, which will be key for future growth. The 15% drop in shares is a clear overreaction.</li>\n</ul>\n<img src=\"https://static.tigerbbs.com/fe3e6f7bf5e8cff3ceb162bee495437a\" tg-width=\"1536\" tg-height=\"910\" width=\"100%\" height=\"auto\">ipopba/iStock via Getty Images\nSummary\nSoFi Technologies (SOFI) is a fintech company that offers a multitude of digital financial services to customers under its three key business segments, i.e.:\n1) Lending, which includes personal, home, and student loans;\n2) Financial Services, including savings, spending, investment accounts, as well as various debit and credit card services;\n3) Financial technology, which primarily consists of Galileo, a market-leading financial technology infrastructure provider thatSoFi acquired in May 2020.\nThe company aims to become a one-stop-shop for digital financial services and is well on its way to do so.\nSoFi just reported its first set of financial results since becoming a public company, and results were quite strong for the Q2 2021 quarter:\n<ul>\n <li>The company showed accelerating growth across its usage metrics, most of which grew by &gt;100%;</li>\n <li>Revenues also grew triple-digits at 101% year over year (YoY) to $231.3 million, while adjusted net revenue for the quarter climbed 74% YoY and came in well above guidance of between 58 to 61% YoY growth;</li>\n <li>Growth in members and products accelerated as well, all growing by triple-digit percentages, and marking the 8th consecutive quarter of accelerating YoY growth in total members forSoFi.</li>\n <li>In addition, the company generated $61 million of positive EBITDA over the past 12 months, a significant improvement from the $149 million of losses experienced for the full year of 2019.</li>\n</ul>\nBut these numbers were not enough to satisfy investor appetite. In fact, investors rushed out of the stock and shares ofSoFi plunged as much as 15% after the release of results. The stock is now down around -37% over the past 6 months at a market capitalization of around $12 billion.\n<img src=\"https://static.tigerbbs.com/3534b25722128f58c73322ad0b9b2001\" tg-width=\"635\" tg-height=\"417\" width=\"100%\" height=\"auto\">Data by YCharts\nSeemingly, most of the negative reaction to the Q2 results was based on the fact that the company's net loss increased significantly during the quarter. In addition, the company issued guidance for the second half of 2021 that was&nbsp;below what analysts had predicted.\nWe believe the market's reaction toSoFi's numbers is well overblown as both factors, the net loss, as well as the guidance can be attributed to one-time impacts or non-cash items, which we'll explain in more detail below.SoFi's CEO Anthony Noto made it clear on the conference call that the company is accelerating its business across almost every metric. And while it may take some time for investors to understandSoFi's competitive advantage and growth runway, we believe that at current levelsSoFi shares are way oversold.\nThis article won't focus on a detailed description of the business, but will highlight the most recent financial results. For a deep-dive into the company's business model, opportunities and risks, go visit&nbsp;our previous article&nbsp;on SoFi.\nThe Numbers\nSoFi reported very strong Q2 financial results:\nAdjusted Revenue for the quarter climbed 74% YoY, way above management's initial guidance of between 58 to 61% growth, and well above analyst expectations. Furthermore, the company had another quarter of positive EBITDA, which reached $11 million for the quarter, up $35 million YoY from negative ($24) million in Q2 2020.\n<img src=\"https://static.tigerbbs.com/f2326005d2400bf2a6257b4b187d2bc8\" tg-width=\"640\" tg-height=\"284\" width=\"100%\" height=\"auto\">Source:SoFi\nOn an annualized basis,SoFi achieved to bring in $852 million in adjusted net revenue and $61 million in adjusted EBITDA, despite some one-time headwinds in the quarter and alongside aggressive investments in the future growth of the company.\n<img src=\"https://static.tigerbbs.com/dad9c230f84bb4059516cd54c4a45f45\" tg-width=\"640\" tg-height=\"283\" width=\"100%\" height=\"auto\">Source:SoFi\nMost importantly, activity onSoFi's platform is accelerating across all areas.SoFi reported the 8th consecutive quarter of accelerating YoY growth for their total members, which reached 2.56 million for the quarter, up from 1.2 million in the Q2 2020 quarter (representing growth of 113%), and up 12% sequentially from Q1.\n<img src=\"https://static.tigerbbs.com/0fb7e3b27b52cca163a823c883e4af0a\" tg-width=\"640\" tg-height=\"304\" width=\"100%\" height=\"auto\">Source:SoFi\nThe quarter also showed continued accelerating YoY growth in Products, which were up 123% to reach 3.7 million.SoFi added more than +2 million products on a YoY comparison, representing 123% YoY growth.\n<img src=\"https://static.tigerbbs.com/024d45093cab2fb40cba8ab7d9bd4744\" tg-width=\"640\" tg-height=\"297\" width=\"100%\" height=\"auto\">Source:SoFi\nGalileo, their financial technology platform, reached 79 million accounts, up from 36 million, representing growth of 119% in the quarter as the company added 42.9 million new accounts to their financial technology offering.\nGalileo now posted greater than 100% YoY growth for the last four quarters for Galileo. The platform is a key cornerstone forSoFi's future growth and the fact that they are growing triple-digits and, for the first time, crossed $100 billion of annualized payment volume in July, shows that the business not only has significant scale already but also has a real competitive advantage as reflected by the YoY growth.\n<img src=\"https://static.tigerbbs.com/a1b72ef771e256023ab2cc56f48f9a10\" tg-width=\"640\" tg-height=\"281\" width=\"100%\" height=\"auto\">Source:SoFi\nLastly,SoFi's business is diversifying in a significant way. Overall member growth for the business was driven by significant expansion in the Financial Services segment, withSoFi Invest andSoFi Money more than tripling the number of Financial Services segment products, to nearly 2.7 million, up from approximately 783,000 vs. Q2 2020. In the most recent quarter Financial Services segment products were nearly three times the number of Lending Products which shows how strongly the business is diversifying away from its initial lending arm (notwithstanding that loan originations still increased by a very strong 66% YoY). The 3x greater scale supported to drive a 1.7x increase in the number of products that were cross-bought by members already active on the platform in comparison to Q2 2020, as noted by the CEO during the conference call.\n<img src=\"https://static.tigerbbs.com/cd0fb00ddf2b10ee7226b966df927eb7\" tg-width=\"640\" tg-height=\"271\" width=\"100%\" height=\"auto\">Source:SoFi\nThe Number That Spooked Investors\nThe one thing that let many investors to sell the stock ofSoFi after the earnings report was that the company reported a significant net loss of $165.3 million compared to a still positive net income of $7.8 million in the prior year quarter. However, as the company&nbsp;explained during the conference call, this was largely due to a one-time item in relation to the business combination with Galileo, as well as non-cash items like stock-based compensation (SBC):\n<blockquote>\n We remeasured our valuation allowance during 2020 as a result of the deferred tax liabilities recognized in connection with our acquisition of Galileo, which decreased the valuation allowance by $99.8 million. The absence of that tax benefit, together with significant non-cash stock-based compensation expenses and fair value changes in warrants primarily related to the fair market value ofSoFi stock, were the largest contributors to the current period net loss.\n</blockquote>\n<img src=\"https://static.tigerbbs.com/ae29dddc9bc00f8fa31eb7cbee8ca3d5\" tg-width=\"640\" tg-height=\"219\" width=\"100%\" height=\"auto\">Source:SoFi\nIn addition to management's remarks, investors should take a closer look atSoFi's income statement, where it becomes clearer what drove the net loss. The&nbsp;SEC filing&nbsp;shows that management's cost management is actually very prudent as non-interest expenses, including investments into technology and products, sales and marketing, as well as operating costs only increased by 45%, 48%, 46% respectively which is much lower than the company's +74% revenue growth. Only general and administrative expenses more than tripled during the quarter. Digging deeper into the SEC filing reveals that the big chunk of G&amp;A expenses came from aforementioned $99.8 million in deferred tax liabilities as a result of the acquisition of Galileo, and stock-based compensation as a result of being a public company (see items marked below).\n<img src=\"https://static.tigerbbs.com/1d9473db3f6390b5bfb72b27246d0601\" tg-width=\"640\" tg-height=\"409\" referrerpolicy=\"no-referrer\" width=\"100%\" height=\"auto\">\n<img src=\"https://static.tigerbbs.com/e0113b16a7131123dee0e6ebaf065ebb\" tg-width=\"640\" tg-height=\"215\" width=\"100%\" height=\"auto\">Source:SoFi\nIf you exclude the one-time item of deferred tax liabilities of $99.8 million, and adjust for three months of SBC with around half of the previous six months SBC expense, thenSoFi's net loss would have only been around negative $(20) million for the quarter (note that this is based on the author's rough estimates and should not be regarded as an accurate reflection of the actual numbers).\nWith that back-of-the-envelope calculation in mind, we are not particularly worried about the net loss that was reported for the quarter relative to the strong top-line growth thatSoFi reported.SoFi's numbers clearly indicate that the business is accelerating in growth, diversifying its services rapidly, while we see cross-selling activity ramping up within its customer-base which should provide some important efficiency gains in the future in terms of reduced customer acquisition costs and improved margins. This aspect becomes much clearer when we also take a look at the results from the individual business segments and the respective contribution profit metrics:\n1) Lending Segment-SoFi generated adjusted net revenue of $172 million, growing 47% YoY, with a contribution profit of $89 million. The increase was largely driven by personal loan originations, which grew by 188% YoY. In addition, contribution profit (marked below) increased by 80% YoY and respective margins improved to 52% compared to a 42% margin in the prior year quarter - and that was alongside an incremental increase of investment into the business of +$15.3 million for the quarter. Margin improvement was driven by operating efficiencies (e.g. more than 50% of personal loans were fully automated vs. less than 30% one year ago) alongside prudent spending in marketing that has brought cost per funded loan down.\nSoFi highlighted in the conference call that growth in this segment was achieved despite noticeable headwinds in the student loans business from the government's CARES-act prolongation, with $859 million in origination volume in the quarter representing less than half of pre-CARES levels.\n<img src=\"https://static.tigerbbs.com/cf0b085e6372cd1774f4feac9ca4e2d0\" tg-width=\"640\" tg-height=\"289\" referrerpolicy=\"no-referrer\" width=\"100%\" height=\"auto\">\n<img src=\"https://static.tigerbbs.com/3c4af0c2068e800edbbe1728761f863b\" tg-width=\"640\" tg-height=\"165\" referrerpolicy=\"no-referrer\" width=\"100%\" height=\"auto\">\n<img src=\"https://static.tigerbbs.com/15729a0e43c025e7ab40d6017ff0f259\" tg-width=\"640\" tg-height=\"148\" width=\"100%\" height=\"auto\">Source:SoFi\n2) Financial Services Segment- net revenue for this segment for the 2nd quarter reached $17.0 million vs. $2.4 million in Q2 2020, representing growth of a mind-blowing 602% YoY. With a 6x growth rate there is not much doubt that the business is successfully attracting customers, while making significant progress also in terms of cross-selling and multi-product-adoption, which will be an important aspect in reducing customer acquisition costs and driving higher lifetime value per customer. Another important aspect is that the incremental YoY revenue increase is offsetting the increased costs attributable to the segment, which was a $8.5 million YoY increase in expenses vs. a $14.6 million increase in revenue vs. Q2 2020, resulting in an improved contribution metric where losses decreased by 20% YoY.\nThe Financial Services Segment also showed strong product growth across all offerings as total products in this segment grew by 243% YoY.SoFi doesn't rest on its laurels as the company has just launched a new equity capital markets and advisory business in the second quarter, which will be interesting to watch.\n<img src=\"https://static.tigerbbs.com/0049b49eeb97244d71a3c9e5e580b1bb\" tg-width=\"640\" tg-height=\"147\" referrerpolicy=\"no-referrer\" width=\"100%\" height=\"auto\">\n<img src=\"https://static.tigerbbs.com/72aecb1a11aaee4636651095b20bd195\" tg-width=\"640\" tg-height=\"181\" width=\"100%\" height=\"auto\">Source:SoFi\n3) Technology Platform- this segment primarily reports results fromSoFi's financial technology offering Galileo, which saw total net revenue increase by 138% YoY reaching $45.3 million vs. $19 million in the prior year quarter. Total Galileo accounts reached 79 million accounts, up from 36 million, representing growth of 119% in the quarter. Galileo also just crossed $100 billion of annualized payment volume in July as noted during the&nbsp;conference call.\n<img src=\"https://static.tigerbbs.com/c567a3c581104d33cb959ebe63c33606\" tg-width=\"640\" tg-height=\"148\" width=\"100%\" height=\"auto\">Source:SoFi\nSoFi is aggressively investing to position Galileo for strong future growth, e.g. by moving operations from on-premise to the cloud, while nearly doubling its headcount and expanding into new geographies. Management mentioned that they are nearing completion of building out a new cloud computing environment for Galileo which is supposed to replace the on premises environment, including the preparation of migrating existing clients to the cloud in Q3. While this contributed to a significant increase in expenses and impacted the resulting contribution profit for this segment,SoFi was still able to show YoY growth in contribution profit of 8%. It is important to see that management is pursuing all efforts to continue to accelerate growth in one of their key differentiating business segments, which Galileo clearly represents. What Amazon did for retail or the cloud with pioneering its AWS offering, could be replicated through Galileo as they are on track to position it as the leading financial technology offering and backbone to the global financial technology industry.\nManagement Guidance\nFor the third quarter of 2021SoFi's management expects adjusted net revenue of $245 million to $255 million, representing only around 15% growth vs. the prior year quarter, which is markedly lower than the $270.2M&nbsp;average estimate from two analysts. Adjusted EBITDA is expected to come in between negative $(7) million to positive $3 million. The expected top-line growth seems to be quite conservative but has surprised many investors who expected much higher growth rates, especially afterSoFi just reported a +74% growth in the most recent quarter.\nWhile the guidance was a significant factor contributing to the sell-off inSoFi's shares, we believe that investors shouldn't put too much focus on the headlines of „missed\" guidance. The fact thatSoFi is sticking to its initial guidance of adjusted net revenue of $980 million and adjusted EBITDA of positive $27 million is the most important take-away.Management was able to reiterate its guidance despite a significant negative expected planning impact on student loan refinancing revenues of negative $40M following the government's extension of the CARES Act moratorium&nbsp;on student loan payments from Sept. 30, 2021 to Jan. 31, 2022. The company now expects a rebound in the student loan refinancing business early next year while, so far, management had planned for the CARES Act to end on September 30 in its initial guidance. In addition, the company also expects a smaller negative impact from the reduced Technology Platform revenue estimate of $12 million based on the minority stake in APEX thatSoFi bought bac (contribution from the investment ended in January 2021).\nEven despite this significant $40 million negative revenue impact toSoFi's original guidance, plus the originally included $12 million of expected 2021 revenue from the equity investment in APEX, the company did not lower its guidance but was able to reassure investors that the other business segments can outweigh these headwinds, which is a strong validation ofSoFi's diversified business, which will enable the company to maneuver through even difficult periods that may affect one of its business segments from time to time.\nLastly, management pointed out a clear cost management strategy relative to its growth prospects which should re-assure investors that at some point the company will be back to positive net income alongside robust topline growth:\n<blockquote>\n ...we continue invest aggressively in our business to fuel compounding growth, while still delivering profitability to our shareholders. This combination is not easy, but we are committed to contributing around 30% of incremental revenue to the bottom line and reinvest the remaining 70% in bolstering our product innovation to drive decades of compounding growth. Even as we invest aggressively in technology, marketing and people, we continue to realize cost efficiencies, which is beginning to drive real operating leverage. By leveraging cross buying and better gaining realization and targeting we've reduced sales and marketing as a percentage of revenue and customer acquisition cost meaningfully year-over-year.\n</blockquote>\nLastly, investors were also keen to hear any updates on the anticipated Bank Charter thatSoFi is pursuing. CEO Anthony Noto mentioned during the conference call that the company is working closely with the Federal Reserve Bank and the OCC in a „constructive process\", but they also reiterated that there's not a definitive timeline to the process itself - so we are still waiting for an update on the bank charter. As previously reported,SoFi filed for a banking charter&nbsp;in July 2020.SoFi's career postings suggest they are building out senior management and teams for the much-anticipated banking division, includingrecent job postingsin compliance, software engineering or auditing.\nConclusion\nThere was a lot to like inSoFi's first quarterly report as a public company. We believe the sell-off in the company's shares is an overreaction. The muted guidance, or to put it more positively, the fact that management was able to reiterate its initial guidance for FY 2021 despite the significant negative $40 million impact from the prolongation of the CARES act as management no longer expects a tick-up in the student loan financing business in 2021, should actually be seen as a positive sign that the company's business is building up an important diversification of its business as the other business segments can compensate for these headwinds. While there is a risk that the government may continue to prolong the CARES act moratorium, which would negatively impactSoFi's student loan business, the company is now well diversified to outweigh any negative impact, and the set-up also creates some opportunity for upside surprises as we head into 2022, where the company now expects the tick-up in student loan refinancing to happen.\nIn conclusion,SoFi is diversifying its business and is making significant progress in terms of cross-selling and multi-product-adoption amongst its customer base, which will be an important aspect in reducing customer acquisition costs, better margins and driving higher lifetime value per customer. We are encouraged to see how short-term headwinds are compensated by other fast-growing business segments. We remain long the stock.","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>SoFi Technologies: Why The Market Got It All Wrong</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nSoFi Technologies: Why The Market Got It All Wrong\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-08-18 11:10 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4450048-sofi-technologies-market-got-it-wrong>seekingalpha</a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\nSummary\n\nSoFi just reported strong Q2 2021 financial results with accelerating growth across its usage metrics, most of which grew by >100%.\nAdjusted revenue for the quarter climbed 74% YoY and was ...\n\n<a href=\"https://seekingalpha.com/article/4450048-sofi-technologies-market-got-it-wrong\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"SOFI":"SoFi Technologies Inc."},"source_url":"https://seekingalpha.com/article/4450048-sofi-technologies-market-got-it-wrong","is_english":true,"share_image_url":"https://static.laohu8.com/e9f99090a1c2ed51c021029395664489","article_id":"1181607588","content_text":"Summary\n\nSoFi just reported strong Q2 2021 financial results with accelerating growth across its usage metrics, most of which grew by >100%.\nAdjusted revenue for the quarter climbed 74% YoY and was based on a diverse revenue mix from SoFi’s three core business segments.\nHowever, investors got spooked by a net loss of >$150 million for the quarter and a muted guidance for H2 2021.\nManagement made it clear that net loss was impacted by a deferred tax liability from Galileo, while guidance was reiterated despite a $40M headwind from the CARES Act prolongation.\nSoFi is diversifying its business and makes significant progress in terms of multi-product adoption, which will be key for future growth. The 15% drop in shares is a clear overreaction.\n\nipopba/iStock via Getty Images\nSummary\nSoFi Technologies (SOFI) is a fintech company that offers a multitude of digital financial services to customers under its three key business segments, i.e.:\n1) Lending, which includes personal, home, and student loans;\n2) Financial Services, including savings, spending, investment accounts, as well as various debit and credit card services;\n3) Financial technology, which primarily consists of Galileo, a market-leading financial technology infrastructure provider thatSoFi acquired in May 2020.\nThe company aims to become a one-stop-shop for digital financial services and is well on its way to do so.\nSoFi just reported its first set of financial results since becoming a public company, and results were quite strong for the Q2 2021 quarter:\n\nThe company showed accelerating growth across its usage metrics, most of which grew by >100%;\nRevenues also grew triple-digits at 101% year over year (YoY) to $231.3 million, while adjusted net revenue for the quarter climbed 74% YoY and came in well above guidance of between 58 to 61% YoY growth;\nGrowth in members and products accelerated as well, all growing by triple-digit percentages, and marking the 8th consecutive quarter of accelerating YoY growth in total members forSoFi.\nIn addition, the company generated $61 million of positive EBITDA over the past 12 months, a significant improvement from the $149 million of losses experienced for the full year of 2019.\n\nBut these numbers were not enough to satisfy investor appetite. In fact, investors rushed out of the stock and shares ofSoFi plunged as much as 15% after the release of results. The stock is now down around -37% over the past 6 months at a market capitalization of around $12 billion.\nData by YCharts\nSeemingly, most of the negative reaction to the Q2 results was based on the fact that the company's net loss increased significantly during the quarter. In addition, the company issued guidance for the second half of 2021 that was below what analysts had predicted.\nWe believe the market's reaction toSoFi's numbers is well overblown as both factors, the net loss, as well as the guidance can be attributed to one-time impacts or non-cash items, which we'll explain in more detail below.SoFi's CEO Anthony Noto made it clear on the conference call that the company is accelerating its business across almost every metric. And while it may take some time for investors to understandSoFi's competitive advantage and growth runway, we believe that at current levelsSoFi shares are way oversold.\nThis article won't focus on a detailed description of the business, but will highlight the most recent financial results. For a deep-dive into the company's business model, opportunities and risks, go visit our previous article on SoFi.\nThe Numbers\nSoFi reported very strong Q2 financial results:\nAdjusted Revenue for the quarter climbed 74% YoY, way above management's initial guidance of between 58 to 61% growth, and well above analyst expectations. Furthermore, the company had another quarter of positive EBITDA, which reached $11 million for the quarter, up $35 million YoY from negative ($24) million in Q2 2020.\nSource:SoFi\nOn an annualized basis,SoFi achieved to bring in $852 million in adjusted net revenue and $61 million in adjusted EBITDA, despite some one-time headwinds in the quarter and alongside aggressive investments in the future growth of the company.\nSource:SoFi\nMost importantly, activity onSoFi's platform is accelerating across all areas.SoFi reported the 8th consecutive quarter of accelerating YoY growth for their total members, which reached 2.56 million for the quarter, up from 1.2 million in the Q2 2020 quarter (representing growth of 113%), and up 12% sequentially from Q1.\nSource:SoFi\nThe quarter also showed continued accelerating YoY growth in Products, which were up 123% to reach 3.7 million.SoFi added more than +2 million products on a YoY comparison, representing 123% YoY growth.\nSource:SoFi\nGalileo, their financial technology platform, reached 79 million accounts, up from 36 million, representing growth of 119% in the quarter as the company added 42.9 million new accounts to their financial technology offering.\nGalileo now posted greater than 100% YoY growth for the last four quarters for Galileo. The platform is a key cornerstone forSoFi's future growth and the fact that they are growing triple-digits and, for the first time, crossed $100 billion of annualized payment volume in July, shows that the business not only has significant scale already but also has a real competitive advantage as reflected by the YoY growth.\nSource:SoFi\nLastly,SoFi's business is diversifying in a significant way. Overall member growth for the business was driven by significant expansion in the Financial Services segment, withSoFi Invest andSoFi Money more than tripling the number of Financial Services segment products, to nearly 2.7 million, up from approximately 783,000 vs. Q2 2020. In the most recent quarter Financial Services segment products were nearly three times the number of Lending Products which shows how strongly the business is diversifying away from its initial lending arm (notwithstanding that loan originations still increased by a very strong 66% YoY). The 3x greater scale supported to drive a 1.7x increase in the number of products that were cross-bought by members already active on the platform in comparison to Q2 2020, as noted by the CEO during the conference call.\nSource:SoFi\nThe Number That Spooked Investors\nThe one thing that let many investors to sell the stock ofSoFi after the earnings report was that the company reported a significant net loss of $165.3 million compared to a still positive net income of $7.8 million in the prior year quarter. However, as the company explained during the conference call, this was largely due to a one-time item in relation to the business combination with Galileo, as well as non-cash items like stock-based compensation (SBC):\n\n We remeasured our valuation allowance during 2020 as a result of the deferred tax liabilities recognized in connection with our acquisition of Galileo, which decreased the valuation allowance by $99.8 million. The absence of that tax benefit, together with significant non-cash stock-based compensation expenses and fair value changes in warrants primarily related to the fair market value ofSoFi stock, were the largest contributors to the current period net loss.\n\nSource:SoFi\nIn addition to management's remarks, investors should take a closer look atSoFi's income statement, where it becomes clearer what drove the net loss. The SEC filing shows that management's cost management is actually very prudent as non-interest expenses, including investments into technology and products, sales and marketing, as well as operating costs only increased by 45%, 48%, 46% respectively which is much lower than the company's +74% revenue growth. Only general and administrative expenses more than tripled during the quarter. Digging deeper into the SEC filing reveals that the big chunk of G&A expenses came from aforementioned $99.8 million in deferred tax liabilities as a result of the acquisition of Galileo, and stock-based compensation as a result of being a public company (see items marked below).\n\nSource:SoFi\nIf you exclude the one-time item of deferred tax liabilities of $99.8 million, and adjust for three months of SBC with around half of the previous six months SBC expense, thenSoFi's net loss would have only been around negative $(20) million for the quarter (note that this is based on the author's rough estimates and should not be regarded as an accurate reflection of the actual numbers).\nWith that back-of-the-envelope calculation in mind, we are not particularly worried about the net loss that was reported for the quarter relative to the strong top-line growth thatSoFi reported.SoFi's numbers clearly indicate that the business is accelerating in growth, diversifying its services rapidly, while we see cross-selling activity ramping up within its customer-base which should provide some important efficiency gains in the future in terms of reduced customer acquisition costs and improved margins. This aspect becomes much clearer when we also take a look at the results from the individual business segments and the respective contribution profit metrics:\n1) Lending Segment-SoFi generated adjusted net revenue of $172 million, growing 47% YoY, with a contribution profit of $89 million. The increase was largely driven by personal loan originations, which grew by 188% YoY. In addition, contribution profit (marked below) increased by 80% YoY and respective margins improved to 52% compared to a 42% margin in the prior year quarter - and that was alongside an incremental increase of investment into the business of +$15.3 million for the quarter. Margin improvement was driven by operating efficiencies (e.g. more than 50% of personal loans were fully automated vs. less than 30% one year ago) alongside prudent spending in marketing that has brought cost per funded loan down.\nSoFi highlighted in the conference call that growth in this segment was achieved despite noticeable headwinds in the student loans business from the government's CARES-act prolongation, with $859 million in origination volume in the quarter representing less than half of pre-CARES levels.\n\n\nSource:SoFi\n2) Financial Services Segment- net revenue for this segment for the 2nd quarter reached $17.0 million vs. $2.4 million in Q2 2020, representing growth of a mind-blowing 602% YoY. With a 6x growth rate there is not much doubt that the business is successfully attracting customers, while making significant progress also in terms of cross-selling and multi-product-adoption, which will be an important aspect in reducing customer acquisition costs and driving higher lifetime value per customer. Another important aspect is that the incremental YoY revenue increase is offsetting the increased costs attributable to the segment, which was a $8.5 million YoY increase in expenses vs. a $14.6 million increase in revenue vs. Q2 2020, resulting in an improved contribution metric where losses decreased by 20% YoY.\nThe Financial Services Segment also showed strong product growth across all offerings as total products in this segment grew by 243% YoY.SoFi doesn't rest on its laurels as the company has just launched a new equity capital markets and advisory business in the second quarter, which will be interesting to watch.\n\nSource:SoFi\n3) Technology Platform- this segment primarily reports results fromSoFi's financial technology offering Galileo, which saw total net revenue increase by 138% YoY reaching $45.3 million vs. $19 million in the prior year quarter. Total Galileo accounts reached 79 million accounts, up from 36 million, representing growth of 119% in the quarter. Galileo also just crossed $100 billion of annualized payment volume in July as noted during the conference call.\nSource:SoFi\nSoFi is aggressively investing to position Galileo for strong future growth, e.g. by moving operations from on-premise to the cloud, while nearly doubling its headcount and expanding into new geographies. Management mentioned that they are nearing completion of building out a new cloud computing environment for Galileo which is supposed to replace the on premises environment, including the preparation of migrating existing clients to the cloud in Q3. While this contributed to a significant increase in expenses and impacted the resulting contribution profit for this segment,SoFi was still able to show YoY growth in contribution profit of 8%. It is important to see that management is pursuing all efforts to continue to accelerate growth in one of their key differentiating business segments, which Galileo clearly represents. What Amazon did for retail or the cloud with pioneering its AWS offering, could be replicated through Galileo as they are on track to position it as the leading financial technology offering and backbone to the global financial technology industry.\nManagement Guidance\nFor the third quarter of 2021SoFi's management expects adjusted net revenue of $245 million to $255 million, representing only around 15% growth vs. the prior year quarter, which is markedly lower than the $270.2M average estimate from two analysts. Adjusted EBITDA is expected to come in between negative $(7) million to positive $3 million. The expected top-line growth seems to be quite conservative but has surprised many investors who expected much higher growth rates, especially afterSoFi just reported a +74% growth in the most recent quarter.\nWhile the guidance was a significant factor contributing to the sell-off inSoFi's shares, we believe that investors shouldn't put too much focus on the headlines of „missed\" guidance. The fact thatSoFi is sticking to its initial guidance of adjusted net revenue of $980 million and adjusted EBITDA of positive $27 million is the most important take-away.Management was able to reiterate its guidance despite a significant negative expected planning impact on student loan refinancing revenues of negative $40M following the government's extension of the CARES Act moratorium on student loan payments from Sept. 30, 2021 to Jan. 31, 2022. The company now expects a rebound in the student loan refinancing business early next year while, so far, management had planned for the CARES Act to end on September 30 in its initial guidance. In addition, the company also expects a smaller negative impact from the reduced Technology Platform revenue estimate of $12 million based on the minority stake in APEX thatSoFi bought bac (contribution from the investment ended in January 2021).\nEven despite this significant $40 million negative revenue impact toSoFi's original guidance, plus the originally included $12 million of expected 2021 revenue from the equity investment in APEX, the company did not lower its guidance but was able to reassure investors that the other business segments can outweigh these headwinds, which is a strong validation ofSoFi's diversified business, which will enable the company to maneuver through even difficult periods that may affect one of its business segments from time to time.\nLastly, management pointed out a clear cost management strategy relative to its growth prospects which should re-assure investors that at some point the company will be back to positive net income alongside robust topline growth:\n\n ...we continue invest aggressively in our business to fuel compounding growth, while still delivering profitability to our shareholders. This combination is not easy, but we are committed to contributing around 30% of incremental revenue to the bottom line and reinvest the remaining 70% in bolstering our product innovation to drive decades of compounding growth. Even as we invest aggressively in technology, marketing and people, we continue to realize cost efficiencies, which is beginning to drive real operating leverage. By leveraging cross buying and better gaining realization and targeting we've reduced sales and marketing as a percentage of revenue and customer acquisition cost meaningfully year-over-year.\n\nLastly, investors were also keen to hear any updates on the anticipated Bank Charter thatSoFi is pursuing. CEO Anthony Noto mentioned during the conference call that the company is working closely with the Federal Reserve Bank and the OCC in a „constructive process\", but they also reiterated that there's not a definitive timeline to the process itself - so we are still waiting for an update on the bank charter. As previously reported,SoFi filed for a banking charter in July 2020.SoFi's career postings suggest they are building out senior management and teams for the much-anticipated banking division, includingrecent job postingsin compliance, software engineering or auditing.\nConclusion\nThere was a lot to like inSoFi's first quarterly report as a public company. We believe the sell-off in the company's shares is an overreaction. The muted guidance, or to put it more positively, the fact that management was able to reiterate its initial guidance for FY 2021 despite the significant negative $40 million impact from the prolongation of the CARES act as management no longer expects a tick-up in the student loan financing business in 2021, should actually be seen as a positive sign that the company's business is building up an important diversification of its business as the other business segments can compensate for these headwinds. While there is a risk that the government may continue to prolong the CARES act moratorium, which would negatively impactSoFi's student loan business, the company is now well diversified to outweigh any negative impact, and the set-up also creates some opportunity for upside surprises as we head into 2022, where the company now expects the tick-up in student loan refinancing to happen.\nIn conclusion,SoFi is diversifying its business and is making significant progress in terms of cross-selling and multi-product-adoption amongst its customer base, which will be an important aspect in reducing customer acquisition costs, better margins and driving higher lifetime value per customer. We are encouraged to see how short-term headwinds are compensated by other fast-growing business segments. We remain long the stock.","news_type":1},"isVote":1,"tweetType":1,"viewCount":824,"commentLimit":10,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"symbols":[],"verified":2,"subType":0,"readableState":1,"langContent":"EN","currentLanguage":"EN","warmUpFlag":false,"orderFlag":false,"shareable":true,"causeOfNotShareable":"","featuresForAnalytics":[],"commentAndTweetFlag":false,"andRepostAutoSelectedFlag":false,"upFlag":false,"length":7,"xxTargetLangEnum":"ORIG"},"commentList":[],"hasMoreComment":false,"orderType":2}

SoFi Technologies: Why The Market Got It All Wrong

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