SoFi Technology Gets No Respect

January 28, 2025 | Premium Service | As Q4 2024 earnings unfold, the story with many financials seems to be driven by the surge in production and market activity in Q3 and into Q4, but the end of the year was largely a swoon. Yet as we prepare to rebalance the WGA Bank Top 100 for Q1 2025, the exemplars are, well, still excellent and the rest of the large bank group continues to give ground from the Trump Trade peaks of early January 2025.

The top performing bank stock in the past year was SoFi Technology (SOFI), a bank holding company that prefers the language of Silicon Valley in its marketing materials and disclosure. We were skeptical of SOFI early on because of the fintech blah-blah and the sky high overhead costs. Banks generally don't focus on EBITDA. Yet SOFI is growing revenue and profitability and somehow is maintaining very low credit losses.

For SOFI, the resurgence of popularity represents a rebirth of sorts for a four-year old story. The all-time high for the stock was in 2021 over $25, but in November of that year SOFI got crushed and fell down to $5 per share. It traded in a range below $10 until September 2024, when it went straight up along with many other financials. Unlike many stocks that have benefited since the election of Donald Trump, however, SOFI is delivering fintech style revenue and user growth after a couple of years wandering in the wilderness. 

Source: YahooFinance (01/27/25)

The Q4 earnings from SOFI were hardly a disappointment, yet the market sold off sharply yesterday, with SOFI closing down just above $16.00. The guidance from SOFI for 2025 is for continued revenue growth ~ 25%, but the better profitability may ultimately be a turn-off for momentum oriented equity managers. Like many names in the fintech space, growing profits and earnings are usually an indication that a stock is exiting the period of maximum price appreciation. The arrival of profitability means that SOFI may be losing that special something that makes equity managers buzz. 

Source: Bloomberg (01/28/25)

“2024 was SoFi's best year ever," said Anthony Noto, CEO of SoFi Technologies, Inc. "Our ability to deliver durable growth and strong returns throughout the year was once again the direct result of our relentless focus on innovation and brand building. SoFi set new records in revenue, profit, members, and products in 2024, and we look forward to continuing to build momentum on this in 2025."

Below we see the cash flow table from SOFI, which is how management likes to look at the business. We find pretax income more useful for banks, but by any measure SOFI is doing well in terms of achieving profitability and also growing engagement with customers. The impairment expense for 2023 is gone and SOFI enjoyed an income tax benefit in this year. Share based expenses were equal to half of GAAP net income.

SOFI | 12/31/2024

We like the profitability, but the credit performance of SOFI is the big point of differentiation in our book. The chart below shows net losses for SOFI and other consumer lenders through Q3 2024. Notice that SOFI and Axos Financial (AX) are below the average losses for all of Peer Group 1.

Source: FFIEC

The bank has only been profitable for about a year and the efficiency ratio fell below 100% earlier this year, but Buy Side managers loved it – at least until yesterday’s earnings release. The chief reason for the attraction is double-digit revenue growth in an industry where such movement usually indicates a problem in gestation. The financial performance of SOFI has been improving as the bank grows, which for most people is a positive.

In the world of equity managers, however, being a $40 billion asset bank is not so exciting, even with the Silicon Valley tilt in the disclosure and the focus on EBITDA instead of earnings. The strong growth rates seen at SOFI seem likely to continue, but as the bank grows the rate of change in assets and revenue will likewise slow. Like PayPal (PYPL) and Block Inc. (XYZ), the story will become relevant instead of highly differentiated. And yes, Block Inc. did change its ticker symbol from "SQ" to "XYZ" on January 21, 2025, one of the stranger examples of corporate branding in consumer finance.

The real questions with SOFI remain the same as when the stock first went public in 2021. First, how big is this market niche created by Noto & Co LT? Second, can SOFI maintain its strong credit performance through a real economic downturn? Since the Federal Open Market Committee has not allowed a true economic and credit downturn since 2008, for SOFI, AX and many other high-flying banks the answer to these questions lie ahead.

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