SoFi (SOFI): Brace For Impact

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SoFi Technologies Acquires Technisys SA For $ 1.1 Billion

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On Tuesday afternoon, we will receive fiscal fourth quarter results from credit services firm SoFi Technologies (SOFI). Investors are curious to see if its revenue can continue rising to record highs. But in addition to just tracking its top-line figure, investors may also want to monitor its member count, its number of products sold, its segment financials and its management’s outlook for FY22 in light of rising interest rates. These items are likely to have a bearing on where its shares head next. Let’s take a closer look at it all.

Operating Performance

Let me start by saying that SoFi’s management has done a terrific job at growing their business rapidly over the past couple of years. Its revenue has more than quadrupled in the last 7 quarters alone which is a commendable feat and an enviable position to be in. But as we approach FY22, we’re yet to ascertain if the company has sufficient momentum to continue growing at its breakneck rates as seen in the past. We’ll assess this by tracking the company’s financial breakdowns and by examining its operating metrics.

SoFi reports two items in particular that provide us insights about its customer traction. First item here is its total member count. Its members are essentially all of its customers till date, who have a lending relationship with the company, opened a financial services account with it and / or signed up on the platform to view their credit scores. Our database at Business Quant reveals that SoFi’s total number of members has more than quadrupled over since Q1 2019 and the company is not showing any signs of slowing down on this front.

SoFi

Business Quant

I think it’s needless to say here but a rapidly growing member figure in Q4 would indicate that the end-market as a whole has not saturated yet, the company is still attracting new customers and it would also reassure investors that SoFi has not succumbed to competitive pressures. On the other hand, if SoFi’s member count plateaus or its pace of member addition slows down, then it would raise concerns about its competitiveness, its product distinctiveness and it might as well cast doubt on SoFi’s growth prospects.

Secondly, SoFi Technologies also discloses its product count every quarter. This is basically the number of products the company has sold. These products include home, personal and student loans along with its Money, Invest and Relay accounts. For the uninitiated, if SoFi gains one new customer which goes on to take a home loan and a personal loan, then the company’s member count would have increased by one and its product count increased by two. So, essentially, the total products count indicates how SoFi’s customers are transacting on its various platforms.

SoFi

Business Quant

There could be broadly two scenarios at play here. If the company’s product count grows faster than its member count, then it indicates that SoFi is successfully cross-selling and, perhaps, also upselling multiple products to its existing customer base. This is the ideal scenario for SoFi’s growth-seeking investors. However, if its product count grows slower than its member count, then that would indicate limited cross-selling transactions and it also implies that SoFi’s bouquet of products is losing its customer appeal.

Bifurcated financials

Having discussed the operating metrics, let’s now shift attention to SoFi’s financials. The company classifies its revenue into three reporting segments, namely Lending, Financial Services and Technology Platform.

SoFi

Business Quant

SoFi’s financial services segment is by far the smallest of all three. The segment consists of sales from Money, Invest, Relay and At Work products, and it contributed just 5% to the company’s total revenue in Q3. Its revenue had briefly surged in Q2 on the back of one-time events such as advisory and IPO underwriting fee collections. However, these events did not reoccur in Q3 and are unlikely to repeat in Q4. So, I’m estimating this revenue stream to, at best, grow at low-single-digit rates in Q4 on a sequential basis, with the segment’s revenue figure amounting to roughly $ 13 million.

Next, SoFi’s technology platform segment entirely consists of sales made through its Galileo platform, to financial and non-financial institutions, and it accounted for 18% of the company’s total revenue in Q3. There has not been any major catalyst of late that would cause a material fluctuation in this revenue stream in Q4. Also, this particular business generates its revenue from a handful of customers (65% of segment revenue comes from 5 customers) which means that SoFi is yet to tap its inorganic growth potential via rapid customer additions. So, for the time being, I estimate SoFi’s technology platform revenue to grow at high-single digit rates sequentially, with revenue equating to $ 53.7 million in Q4.

Lastly, SoFi’s lending business is its largest revenue driver, contributing approximately 77% to its overall top-line last quarter. The company’s management had explained in their last earnings call that their lending revenue surged 26% sequentially to reach new highs, on the back of strong loan originations. Simply put, people were taking out more loans before the interest rates are eventually hiked. From the company’s Q3 earnings call:

Our record lending segment adjusted net revenue of $ 215 million was driven by a 49% increase in funded volume to $ 3.4 billion in total. The largest contributor of the funded volume growth was our personal loans business, which grew a 167% or $ 1 billion year-over-year to $ 1.6 billion in originations for the quarter, a new high for us. Not only that, personal loans funded volume grew sequentially by 27% even as we stuck to our stringent credit standards finishing the quarter at a 105% above Q4 2019 pre-pandemic origination levels, a true fee.

As we close in on interest rate hikes, I contend that strong loan originations would catapult SoFi’s lending revenue to new highs in Q4. I’m estimating a 10% sequential growth in lending revenue, with the figure equating to approximately $ 231 million. This brings us to the company-wide Q4 revenue estimate of $ 298 million. It’s worth noting that this estimate is slightly higher than the Street’s estimates spanning from $ 272 million to $ 290 million.

SoFi

Business Quant

Lastly, investors may want to pay close attention to SoFi management’s revenue outlook for Q1 FY22 and for FY22 as well. It would reveal how its recent acquisition of Technisys and its bank charter approval, collectively, stands to drive the company’s overall sales going forward. SoFi’s shares are already trading at almost 9-times its sales at the time of this writing and a dull guidance is likely to send its shares plummeting, like it happened with LendingClub.

SoFi

Business Quant

Final Thoughts

SoFi has been surrounded by slowdown-related concerns and its shares are down almost 40% in the last 3 months alone. Its upcoming Q4 earnings report is an opportune time for its management to deliver some strong results, prove the bears wrong about its growth prospects and provide strong support to its plummeting stock price. Readers and investors may want to keep a close eye on SoFi’s member count, its number of products sold, segment financials and the management’s revenue guidance. These items will better highlight SoFi’s growth prospects in the near future and are likely to influence where its shares head next. Good Luck!



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