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Today I will be completing an in-depth analysis on SoFi Technologies, Inc. Within I will discuss the key factors and tailwinds that the company aims to benefit from, break down the company’s products and the value propositions they direct at their customers, perform a financial analysis on their most recent earnings, and discuss some positive and negative factors that both new and current investors should be wary of.
As always, the format of my research can be seen outlined below. Please don’t hesitate to skip ahead to the sections that you feel are the most valuable.
3.0 Value Proposition
4.0 Business Breakdown - Product and Services Offering
5.0 Financial Metrics
6.0 Q2’21 Earnings Analysis
8.0 Positive Developments
9.0 Risk Factors
Disclaimer: The information and research contained herein is all my own opinion and should not be used as a substitution for proper due diligence. Please consult your financial advisor and evaluate your financial circumstances before making any investments.
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With that in mind, let’s get started.
SoFi Technologies Inc., which I will denote as SoFi for the remainder of this report, can be best described as an operator and provider of digital financial services. The company operates through three unique and distinct segments, Lending, Financial Services and Technology. The Lending Arm has capabilities ranging from student loan refinancing, personal loans used for debt consolidations, loans for construction projects and home loans, to name a few. SoFi’s Financial Services Arm provides customers with borrowing, savings, spending, protection and investing related services. The Technology side of the company’s business is rooted in the operation of Galileo, a platform that offers services to financial entities and other fintech operators. The company also bolsters Apex, a platform that is centered around brokerage and custody services  . Each of these business segments will be broken down in-depth in later sections of this report, but now, since we know a little bit more about what SoFi does, let’s take a look at the opportunities SoFi aims to capitalize upon.
Since the early 2000s, the number of FDIC-Insured Financial Institutions has decreased steadily, with approximately 8000 unique operators in existence at the beginning of the century, and only 4978 entities operating today . The FDIC is one of the two agencies that provides deposit insurance to depositors in the US, which essentially equates to a protection guarantee of sorts for up to $250,000 of an individual’s total deposits. This insurance is an intrinsic protection so to speak, giving people the confidence to trust their money with a Financial Institution. Although the number of approved institutions has decreased, the concentration of accounts has funneled its way into a group of Large Banks. SoFi estimates that there are over 500M US Accounts in FDIC insured banks, with over 50% of these accounts being associated with the largest 15 US Banks. Oftentimes, the larger the institution, the more rigid their operations and products offerings. Banks are no different, and this phenomenon has led to individuals seeking out the financial services they need from multiple locations, with over 50% of Americans interacting with more than one bank on a regular basis. It appears as if, now more than ever, there is a real need for a single platform capable of offering customers services and solutions for all of their financial needs. With the Financial Services Market in the US valued at approximately $2T (Trillion) at the end of 2020  and the Global Financial Services Market expected to reach a value of $22.9T by 2025, growing at a CAGR of 6% between the 2021-2025 forecast period , there is an evidently compelling opportunity that appears ready for SoFi’s taking.
3.0 Value Proposition
SoFi aims its products and services at affluent users of financial services, of whom, by association, usually have both steady income flows and good credit scores to boot. This sounds fine and dandy, but you may be asking yourself how exactly the company aims to spur users to leave their current Financial Institutions and bring their business over with them. Banks today often suffer from the phenomenon of product and service fragmentation. In other words, the root cause of friction in the Financial Services sector is almost solely attributable to a disconnected product experience, of which leaves consumers trying to piece together a makeshift experience across many different entities on their own. SoFi, from inception, has focused on differentiating themselves from its peers by offering a digitized suite of products that cater towards any and all of a consumer’s financial needs. These products focus on four key differentiating factors, of which can be seen outlined below :
Fast: SoFi is headfast on becoming the go-to location for expedient services. More specifically, they aim to offer speedy loan application processes and associated funding, account openings, stock purchase/sale settlements and more. Being that the company’s products are digitized, they not only facilitate ease-of-use, but also leverage a continuous feedback loop of data to spur iterative improvements within their inherent processes.
Selection: The company’s technological capabilities and focus on the consistent betterment of customer experiences, leads to continuous additions being made to SoFi’s product roster. As of right now, SoFi offers customers different selections ranging from commission-less stock purchases, fractional shares, exclusive traded funds and a host of different cryptocurrencies. Going forwards, SoFi will continue to work on offering customers unique products that are sparse elsewhere.
Content: Despite the prowess of Educational Institutions, there exists a noticeable lack of financial knowledge within members of the general public. SoFi directs substantial effort at creating useful educational content, tools, consultations and directions that customers can use to alter their financial wellbeing for the better. The company incentivizes customers to engage with these offerings, through their inherent points/rewards system, of which are bestowed upon individuals for reaching content completions/milestones, and can then be redeemed within other sections of the company’s platform.
Convenience: Like most tech companies, UX is a primary focus of all of SoFi’s offerings. Products cease to be great if they are not coupled with equally abundant and readily available support and service, thus the company is adamant on providing 24/7 access to assistance, if needed, in comparison to the dreaded 9-5 availability of the financial services industry.
These four differentiating factors all work towards creating life-long relationships, of which possess an inherent long-form abundance of value. By exposing individuals to different products, all with a pleasant and responsive UX, SoFi believes customers are more likely to seek out additional assistance from their platform. What this results in is a Unit Economics Nirvana, i.e. the Average Revenue Per Customer (ARPC) increases across the total customer lifespan while total customer acquisition costs decrease as a result. This behavior ties into what SoFi labels as the Financial Services Productivity Loop, as seen outlined below, which the company believes they are in the early innings of cementing .
Of equal importance to SoFi’s Growth is the fact that the company is directing substantial efforts at opening their own National Bank Charter. This process was started in 2020, with SoFi submitting an application to open a De Novo National Bank. The term De Novo essentially refers to a newly chartered bank that has not been acquired via purchase . Flashing forward to October of 2020, SoFi was granted a preliminary and conditional approval by the OCC (Office of the Comptroller of the Currency) for their De Novo Application. Since then, the company has been directing capital and other resources at building out the infrastructure required to adequately abide by regulations. This process is not a short one by any means. Applicants are subject to intense scrutiny from both the OCC (the regulatory body that oversees National Banks) and the Federal Reserve. Regulatory reviews primarily consist of compliance checks regarding the institution’s managerial, financial and capital adequacy. Before granting the go-ahead to open the Bank itself, both the OCC and the Federal Reserve must be comfortable with the institution’s business plan and profitability trajectory, amount of capital raised in order to sustain operations and ability to cater towards the financial needs of the demographics they will be targeting. SoFi switched gears slightly In March of this year, announcing that they had acquired Golden Pacific Bancorp for approximately $22.3M  and would be changing their current De Novo Application to that of a Change of Control Application.
This application process, although it required an updated business plan to be submitted, is of relatively similar structure to that of the De Novo, and builds upon the existing relationships SoFi had with the OCC and the Federal Reserve. The company plans to operate Golden Pacific Bank’s existing three-location footprint while also directing ~$750M at developing an associated digital ecosystem. Although there is no definitive date as to when one should expect this process to be completed, management was adamant within their most recent earnings call that the process was going smoothly, and they were abiding by all of the regulatory ad-hoc requests that had been coming their way .
You may be wondering what this means for customers, and how exactly directing copious amounts of capital at creating Bank Charter will improve SoFi’s value proposition. Let’s use an oversimplified description of SoFi’s loan process to take this point home. The cash SoFi provides their customers for a loan is cash they have obtained from a bank themselves in the form of a loan, of which they have to pay somewhere along the lines of 2-3% interest on. If SoFi were to open a Bank Charter on the other hand, they would only be paying 10-20bps on the funds, and would thus be able to provide customers with better rates or increase profits/margins if so desired. The company would also be able to FDIC insure any deposited funds, a safety blanket of sorts that most definitely allows customers to feel more secure with where they are holding their money. This process is of undoubtable importance and would greatly improve the capabilities of SoFi as a corporation.
4.0 Business Breakdown - Products and Services Offering
As previously mentioned, the three main segments of SoFi’s business can be partitioned as follows: Lending, Financial Services and Technology. The products and services contained within each of these segments will be analyzed within this section of the report.
SoFi offers their customers a variety of loan options, of which can be classified within five different categories: Student Loan Refinancing, Private Student Loans, Personal Loans, Home Loans and Auto Loan Refinancing.
Student Loan Refinancing
SoFi offers the ability to refinance loans, providing individuals the opportunity to lock in a lower rate while still allowing them to keep their federal benefits. These loans are offered in either low fixed or variable rates, with example APR (Annual Percentage Rates) outlined in the table below:
The company is transparent about the repayment process, offering customers 5-20 year terms for both their fixed and variable rate loans with a minimum loan size of $5000. The approval process, occurring as a multi-stage screening on their website, is straightforward and consists of the following steps, posed as a questionnaire:
Primary goal of refinancing (either to lower interest rate/monthly payments, get out of debt faster, consolidate future loans or all of the above)
What type of student loans are being refinanced (Federal, Private or a mixture)
Current Loan Information (either link to your bank or manually enter the loan information)
Residence Information (do you live in your own home, rent or live with family/friends)
Education Details (highest degree completed, university, program etc.)
Employment (specify current job title/employer or declare any other forms of income)
It should be noted that SoFi’s is relatively exclusive with regards to who they offer loans to. In order to qualify, customers must have a minimum FICO score (i.e. the standard credit score that carries a substantial weight when determining whether an applicant is a credit risk) of 650, with the FICO origination coming in at 763 for Q2’21 .
The company also offers loans that cater towards more specific student situations, all with APR rates within the ranges contained within the table above. These additional refinancing options are:
Medical Resident Refinancing
Parent PLUS Refinancing (for parents that took out loans to pay for their child’s education)
Medical Professional Refinancing
Law & MBA Refinancing
Private Student Loans
Rather than originating their loans elsewhere, SoFi offers customers no-fee private student loans, with minimum loan size of $5000, terms ranging from 5-15 years and competitive rates, of which can be seen in the following table:
These Private Loans can be applied to four different scenarios:
Law & MBA Loans
SoFi originates personal loans for their customers for the sake of debt consolidation efforts (credit card consolidation, family planning, travel and weddings) or for home improvement projects. These products are only offered with fixed rates, with ranges outlined below, contain no origination fees, have unemployment protection, and have total loan values anywhere from $5,000 to $100,000 as well as 2-7 year terms.
These loans offer a host of benefits when compared to their debt consolidation and home improvement loan provider counterparts, as outlined by the following images:
SoFi’s Home Loan Products allow customers to finance the purchase of a new home, refinance an existing mortgage, cash-out refinance (provides lump cash some after refinance loan is closed), or obtain home equity loans (where cash is provided utilizing home equity as collateral). These loans vary in size from $100,000 to $548,250 for Normal Cost areas and go up to as high as $822,375 for High Cost Areas and are offered in 15 or 30 year terms. The fixed rate range can be seen outlined below:
Lastly, SoFi’s product comparison site (Lantern), of which can be used for a variety of different analyses, allows customers to examine different offers from a network of auto refinance lenders and choose an option that aligns best with their financial circumstances.
SoFi owns and operates a series of digital, financial services products that are contained under the SoFi Money, SoFi Invest, SoFI Relay, SoFi Credit Card, SoFi At Work and SoFi Protect umbrellas. Each of these products, and the fact that customers interact with them on a more frequent basis in comparison to the company’s lending offerings, work towards promoting the Financial Services Productivity Loop discussed earlier. This business arm is focused on providing a full Financial Services experience, much different from the fragmented nature of most bank offerings, and caters towards every stage of the customer lifecycle. Let’s take a look at each of these financial services subcategories in more depth.
SoFi Money, in essence, is a cash management account offered through the company’s registered broker dealer, of which is powered by mobile banking application and the SoFi Money Debit Card. These accounts have features such as overdraw protection, two-day early paycheck provision, simple savings which is an automated way for customers to save more money, and ability to earn interest on deposits.
SoFi Invest is a digital brokerage that allows customers to allocate capital towards a host of different financial instruments. Individuals can trade stocks and ETFs with no commissions, register to participate in IPOs and buy fractional shares of companies. The platform offers cryptocurrency trading for Bitcoin, Ethereum, Cardano and 17 other coins. Additional features such as Automated Investing and Robo Advisor allocations, Retirement Planning and free access to Certified Financial Planners, if desired.
This offering is a service made available within the SoFi application. Essentially, it is a personal financial management product, which allows for users to track all of their accounts on the SoFi platform, monitor their credit score, track spending and track financial goals that can be monitored/set by a financial planner.
SoFi Credit Card
SoFi offers customers their attempt at a unique credit card, of which has benefits ranging from no foreign transaction or annual fees to mastercard ID theft protection . The Credit Card’s Cash-Back System ties back into the Finance Productivity Loop, incentivizing customers to interact with other products. More specifically, the credit card offers 2% cash back on all purchases when customers redeem to pay down debt, save or invest with SoFi. Otherwise, the company offers 1% cash-back when redemptions are made towards a customer’s credit card statement.
SoFi At Work
This offering can be essentially be thought of as a comprehensive platform, of which employers can leverage in order to provide their employees access to SoFi-branded benefits plans, financial planning and tracking, student loan and 529 education plan contributions as well as a host of different educational resources. When a Employer engages with SoFi at work, they are then given access to its inherent dashboard, of which they can customize to provide employees easy-access to the aforementioned functionality:
SoFi has partnered with a series of providers in order to provide an easy-to-access aggregation of a variety of different insurances for their customers. The company currently has partnerships for the following “protection” types:
Auto Insurance (Gabi x SoFi)
Life Insurance (Ladder x SoFi)
Homeowners Insurance (Lemonade x SoFi)
Renters Insurance (Lemonade x SoFi)
SoFi’s Technology Business Arm is essentially wholeheartedly reliant on Galileo.
In April of 2020, SoFi announced their closing of a definitive agreement to acquire Galileo Financial Technologies, which can be simply described as a financial services API and payments platform. More specifically, Galileo offers turnkey B2B (business to business) and B2C (business to consumer) solutions that allow for the easy integration of complex payment card programs and digital banking capabilities within a Corporation. This business can be thought of as a Platform-as-a-Service (PaaS), with Galileo’s API powering functionality ranging from account set-up and funding, ACH transfers, early paycheck direct deposit, point of sale authorizations and much more . As a result, Galileo’s value proposition is unique and undeniable within the Fintech space. Similar in essence to what SaaS companies offer their customers, Galileo offers Fintech Companies the backbone of which they can build their operations off of. The capital and time resources that would be required to build similar functionality in-house are enormous, making it much easier for businesses to turn to Galileo than to their own developers for obtaining the digital banking mechanisms. The service is offered in three unique tiers, Instant, Pro and Payments, of which can be seen described below:
Galileo Instant offers the options for pay-per-use payments, with a $1000/fee per card product created and other small fees associated with cardholder accounts creation, disputes and due diligence. Galileo Pro and Payments on the other hand are more specialized and complex, and thus require terms to be decided alongside a sales representative.
On another note, some of Galileo’s Fintech use-cases can be seen described below:
Challenger Banking: Launch payment systems including accounts, physical/digital cards, and tailor-made mobile applications. Galileo allows for the provision of banking services without opening an actual bank 
Consumer Payments: Galileo allows for the launch of services, using the company’s API, that support any type of payment, are quick to scale and come jam packed with fraud prevention and associated analytics .
Gig Economy: Galileo’s payment services can be incorporated/tailor towards gig economy workflows and workers themselves, facilitating close-to-instant payments to physical or virtual cards 
Commercial Payments: Galileo helps customers penetrate the $1T commercial payments market, offering expedient and paperless B2B payment mechanisms.
Lending: Galileo API and back-office support allows businesses to offer the specific credit programs they desire while maintaining full control over the customer’s experience.
These use-cases, if you have been following the Fintech space at all, align very well with some of the key trends and happenings and will most likely be in high demand going forwards.
5.0 How SoFi makes $$$
Now that we understand the type of products that SoFi offers their customers, let’s take a look at how exactly they make money from them.
The company’s lending products are primarily gain-on-sale, which can essentially refer to the money being derived from the sale of a non-inventory asset for more than its value. SoFi originates their loans and recognizes gains on said loans once they are sold through either their securitization or whole loan channels. Securitization transactions occur when a loan is isolated in a trust and then sold to a bankruptcy-remote entity whereas whole loans are sold to financial institutions in excess of the cost incurred to originate the loans .
SoFi generates revenue from their various financial products through a series of fees, as outlined below.
Referral Fees: SoFi has a series of strategic partnerships, of which they derive value from by charging fees that are proportional to the activity facilitated through SoFi’s referral of the end-user to the company’s platform/service.
Payment Network Fees: These values are predominantly interchange fees that occur within SoFi Money and SoFi Credit Card services, less the cost of fees payable to the card associations / bank holding company.
Enterprise Service Fees: These fees are connected to the cost of usage associated with the customer’s use or provision of SoFi at Work services to their employees.
Brokerage Fees: SoFi generates revenue through this business segment by earning brokerage, exchange conversion and digital asset related fees, as well as from PFOF (payment for order flow) arrangements.
Underwriting Fees: Starting in the most recent quarter (Q2’21) SoFi earned money through underwriting syndicates (groups of investment banks/dealers) in initial public offerings.
Net Interest Income: the company generates a non-substantial portion of revenue from the account holdings within their SoFi Invest and Money products.
Revenue is derived from Galileo’s platform as follows.
Technology Platform Fees: These fees are dependent on the use-case but essentially exist as two sub-components, event pricing and partner pricing. Event pricing is the fees that are incurred for things such as account setup, API usage, card activations etc. Partner Pricing is back-end support by where Galileo provides customer service, credit reporting, fraud analysis etc. These fees point towards the power of the PaaS business model.
Program Management Fees: These fees are generated from Galileo performing card management services and collecting payment network and card program fees, less the cost of passing along a kick-back to the bank issuer and enterprise partner.
6.0 Q2’21 Earnings Analysis
It should be noted that all values mentioned from this point onwards will be in USD.
SoFi reported their second quarter earnings on August 12th. Some of the company’s consolidated highlights can be seen outlined below:
Total YoY Member Growth of 113%, recorded at 2.6M total members
Total Products (the number of lending and financial service products that members have utilized on the SoFi platform since inception) of 3.7M, up 123% YoY
Net Revenue up 101% YoY, Adjusted Net Revenue increased 74% YoY
Transitioned into a Publicly Traded company
Anthony Noto, SoFi’s CEO, made the following comments regarding their Q2’21 performance:
“We exceeded our financial expectations, delivering record adjusted quarterly net revenue and our fourth consecutive quarter of positive adjusted EBITDA. We drove our 8th straight quarter of accelerating member growth, with even faster growth in cross-buying from existing members, increased our Galileo account base to nearly 79 million, and raised nearly $2 billion in our successful transition to a public company. We accomplished all of this by focusing on our members and our mission to provide them with the right financial products, services, and advice for every major financial decision in their lives and every day in between.”
SoFi’s Net Revenue for the quarter came in at ~$231M for the quarter, marking a 101% increase on a YoY basis, as previously mentioned. The change in the company’s Revenue over the course of the last few quarters can be seen outlined below:
The percentage of Revenue attributable to Net Interest Income and Non-Interest Income, respectively, and the change in this cohort distribution on a YoY basis, can be seen outlined below:
As illustrated by the above figures, the percentage of Revenue attributable to Non-Interest Income was much higher for the most recent quarter in comparison to the same time last year. This phenomena was exacerbated primarily by the growth in the Non Interest Revenues attributable to the Technology Platform and Financial Services side of SoFi’s business.
To analyze Business Segment Growth, the percent distribution of Net Revenue linked to Lending, Financial Services and Technology and the YoY change can be seen below:
On a YoY basis, the percentage of Total Net Revenue attributable to Financial Services and Technology increased, with Lending decreasing as a result. This point is corroborated further when looking at the stellar YoY growth in each business segment’s Net Revenue, as seen within the following image:
SoFi’s business is evidently growing at a rapid rate. Although these values are linked to relatively favorable comps, the growth in Financial Services in particular, in my opinion, is testament to the effectiveness of the aforementioned financial services productivity loop, i.e. the likelihood for a customer to interact with additional SoFi products after initial exposure to the company. These phenomena can also be further corroborated when looking at Total Products (amount of products selected by customers since inception) and Total Accounts (KPI for Technology) attributable to each business segment, and their QoQ and YoY change respectively, as outlined by the following:
SoFi’s long term success is directly reliant on Total Members and Total Products, of which are essentially all-encompassing KPIs, have both improved on a YoY and QoQ basis and will likely continue to improve into the coming quarters:
On another note, Galileo, and the technological capabilities contained therein will be the main source of future growth in my opinion. I would not be surprised to see Technology as the primary constituent of Total Net Revenue in the future. The YoY and QoQ change in the number of Galileo accounts is testament to the industry-wide recognition of the platform’s power. When coupled with inherent stickiness, i.e. the lack of feasibility for developer teams to build similar digital banking solutions in-house, it is understandable why many are excited about this past acquisition’s value proposition.
Of equal analytical importance is how the disaggregated components of each reportable business segment have been functioning of late. Starting off with Lending, loan origination attributable to each loan type and the YoY change in these values can be outlined as follows:
Quite evidently, Personal Loan growth drove the YoY improvements in both Loan Originations and Loan Total Net Revenue. Macroeconomic conditions should drive a continued uptrend Personal Loans in the quarters to come. Although Lending Revenue is obviously the main driver behind the numbers SoFi has been posting, it is worth noting the resilient nature of SoFi’s business in relation to the macroeconomic environment. In high interest rate scenarios, personal loans perform really well whereas in low interest rate environments, home loan and student loan refinancing pick up the slack. Management attributed the Personal Loan success in the quarter to the rising rate environment of Q2.
The Revenue activity of the Financial Services business segment, and the YoY change can be seen outlined below:
The growth in the company’s Brokerage Revenue can be attributed to the heightened retail trading activity we have seen throughout the entirety of this speculative investment environment. Both Underwriting and Referral activities, testament to the positive lending environment and successfulness of the finance productivity loop encouraging more interaction with all of the products on the platform.
Lastly, the growth in Galileo has been rapid for the last 5+ quarters. Showing no sign of slowing down, the 119% growth in Galileo accounts helped fuel a 170% change in Technology Platform Revenue, as seen below. This pace should continue as long as the Fintech Industry maintains their path of attempted disruption.
SoFi’s Expenses, similar to its Revenue counterpart, can be split into two main subcategories; those related to Interest and Non-Interest generating operations. Interest expenses, mainly securitization and warehousing and corporate borrowing activities, these values decreased 35% on a YoY basis and are not of concern. Noninterest expenses are more similar to a standard company’s OPEX. These values, their percentage distribution attributable to each cohort and changes relative to the same time period last year, can be seen outlined below:
Technology and Product Development, S&M and Cost of Operations Expenses increased at a near identical pace, in the 45-48% range respectively. This growth relative to a ~113% and 123% growth rate for Members and Total Products, in my opinion, is testament to relatively ideal nature of SoFi’s Unit Economics. More specifically, their financial productivity loops, and the inherently low CAC will be useful as SoFi’s business expands and matures. On another note, G&A expenses accelerated at a nearly 221% rate, YoY. This increase can be attributed to an increase in SBC and employee benefits, as well as some non-recurring items such as changes in warrant fair value and activity attributable to the Business Combination (SPAC reverse-merger).
Margins and Profitability
The company’s Adjusted EBITDA, Contribution and Net Income Margins and their change relative to previous quarters can be seen outlined by the following table:
The (75)% change in the company’s Net Income is attributable to fees and activity associated with SoFi going public via Reverse Merger, Although these values are skewed, SoFi would not be profitable regardless, attributable to product development and expansionary efforts relative to the position in their growth trajectory. Being that as it may, it would still be worth noting that SoFi’s Net Income would be greater than (10)% were these nonrecurring items to be not considered. The company’s Adjusted EBITDA Margins increased slightly, indicative of profitability if a series of non-recurring incurred expenses were not taken into consideration. Contribution margin, defined as the net revenue for each segment less the expenses that are directly attributable to said segment, is healthy and appears to be stagnating in the 30% range as SoFi’s operations mature.
Of analytical importance is the manner in which each of SoFi’s reportable business segments fits within their Contribution Profit and it’s change YoY:
The majority of the company’s Contribution Profit is attributable to the growth in the Lending Segment, followed by the Technology Platform Contribution Margin growth which grew slightly, and the Financial Services value which is still very negative. Management attributes the growth in the Lending’s Contribution Profit to more efficient marketing and operations, which brought the cost per funded loan down significantly. In addition, Technology Platform values were slightly skewed negative as a result of investments being directed at technological improvements and cloud migrations. These values should improve in the coming quarters.
SoFi’s Asset position can be seen outlined by the following table:
The company’s assets are very liquid, as outlined by the proportions above and consist primarily of Loans (Used for Lending activities etc.), Cash and Cash Equivalents and Restricted Cash. Long Term Assets are in the form of Net Property Plant and Equipment, Goodwill and Operating Lease Assets. SoFi’s Liabilities are constructed as follows:
The company’s liabilities are primarily Long Term, mainly attributable to Debt linked to Variable Interest entities, of which are leveraged for loan originations. Overall, SoFi has a healthy and functional balance sheet that aligns well with their growth initiatives and capital requirements going forwards, at least for the next few quarters.
The change in the company’s various Cash Flows over the course of the last few quarters can be seen outlined below:
SoFi’s CFO came in positive at ~$41M for the quarter, attributable to the company’s Net Loss and Loan purchases/originations, which was mainly offset by Proceeds from sales and loan repayments, followed by Fair Value Changes in Warrant Liabilities, SBC and Depreciation/Amortization. CFF was very negative at $(439)M, attributable largely to the Repayment of debt and redemptions of stock, offset by proceeds from the business combination, PIPE and debt issuances. CFI was positive at ~$120M, linked to the proceeds and receipts from non-securitization investments, respectively, less the purchases of property and other assets.
The change in the company’s FCF can be seen outlined below:
FCF was positive for the quarter at ~$28M, attributable to CFO less SoFi’s relatively low Capital Expenditures. Management anticipates CAPEX to remain low relative to CFO and CFF in the near future. The company’s cash flow does not point towards any need for debt or equity raises to fund operations in the near future.
Management anticipates a strong Q3’21. The extents of the provided guidance for the coming quarter can be seen outlined below:
Adjusted Net Revenue in the $245-$255M range
Adjusted EBITDA in the $(7)-$3M range
The company also reiterated the following Full Year Guidance
Adjusted Net Revenue of $980M
Adjusted EBITDA of $27M
8.0 Positive Developments
Despite many analysts touting the negative effects of the CARE act, I am of a differing opinion, and believe that how the company is traversing through this headwind is testament to how well the rest of SoFi’s business is performing.
For the sake of clarity, the CARES Act is a stimulus bill that was passed by the United States Congress and Donald Trump in March of 2020. This act essentially suspended the repayment of and the accrual of interest on federal student loans. Being that many were not required to pay back their loans, SoFi’s revenue attributable to Student Loan Refinancing obviously took a hit. This Act was anticipated to come to an end at the end of this month (September 30th), however, the moratorium ended up being extended to January 31st, 2022. As a result, SoFi anticipates that they will see a $40M reduction in Student Loan Refinancing Revenue. Despite this fact, SoFi was able to maintain the Full Year Guidance they had previously given, made possible by the acceleration of SoFi’s other business segments.
Of equal importance to SoFi’s future success is the National Bank Charter; they are currently in the midst of attempting to open/run, as a result of their Change of Control Application. As previously insinuated, having a Bank Charter will allow for SoFi to greatly improve their Unit Economics. By cutting out the middle-man in the loan process so to speak, (i.e. another bank), as illustrated in the over-simplified lending process diagram below, the company will be able to improve the rates they offer their customers.
As a result, spurious improvements in the company’s previously discussed feedback loop should occur, the company’s customer acquisition costs should decrease (low rates require less marketing etc. to sell) and when coupled with the Lending Segments inherently high contribution margins and profit, the company should experience a sudden influx of value.
Lastly, the company’s Galileo Platform, in my opinion, should be one of the main drivers in SoFi’s future success. Galileo, to me, isn’t a competitor within the FinTech Industry, it is the Fintech Industry. Directed at customers ranging from Neo Banks to Startups, Galileo provides services that are both in-demand (as corroborated by the addition of 22 new partners in 1H’21), jam packed with inherent stickiness (costs to reverse-engineer similar services in-house would be disastrous) and like other data players, the more data they get from a customer the deeper their teeth sink in, as a result of ever-improving models and algorithms. The Total Number of Accounts, at the moment, shows no signs of slowing down, with a ~119% increase YoY and 13% increase QoQ, and should continue pace into the coming quarters. When combined with the 28-30% Contribution Margin range that the Technology Platform seems to be settling into, Galileo should both drive Income generation in the future and with volume, hopefully reduce the concentration risk in SoFi’s Net Revenue that is apparent as a result of strong lending operations.
9.0 Risk Factors
A topic of much discussion last week were the remarks Gensler (chair of SEC) made regarding payment for order flow practices.
More specifically, in an interview with Barron’s, Gensler raised the possibility that the SEC could ban PFOF, reasoning that it had created an evident conflict of interest and reduction in the clarity and fairness of market mechanisms  . Although this decision, if enacted, would most likely have disastrous consequences on market functionality (volume for example), similar laws have been made official in Countries ranging from Canada to Australia. Therefore, to me it doesn’t seem out of the question. This risk, though not pertaining to the most recent news occurrence, was mentioned in SoFi’s most recent 10-Q, confirming the fact that the company is evidently aware of the negative impact this would have on their business. If this risk were to come into fruition, revenue associated with SoFi Invest, and thus the Financial Services Business segment, would be materially affected.
Despite attempting to be unique on many different avenues, SoFi evidently suffers from a host of competition. Whether it be from the likes of fast-paced companies like Upstart and Robinhood (on the loan and trading fronts respectively), payment facilitators such as Stripe and Paypal and other crowd-favourites like Square, there is no doubt that SoFi has competition. To me, in order for one to be long SoFi, they must have the utmost belief that SoFi’s products are unique enough when compared with competitors in order to stomach this playing field. In my own opinion, Galileo is the distinguishing factor between SoFi and its counterparts, and the addition of its Bank Charter may prove to be a competitive advantage with some of its lending and financial service products. As of right now, I would prefer to wait to see the continuation of growth in Galileo’s customer base, how the Bank Charter application plays out and how the company’s refinancing business recovers once the CARES act ends before going long.
The company’s Enterprise Value at the time of writing and valuation metrics based upon the company’s high end of FY’21 projections for Adjusted EBITDA and Adjusted Net Revenue can be seen outlined below:
In my opinion SoFi is valued richly based upon these forward and idealized metrics (since they are adjusted values) and has a lot of grunt work/execution to do to settle into their EV.
Lastly, it is worth touching on the fact that SoFi may fall victim to their association with their SPAC counterparts and Chamath. Earlier this year SoFi went public via reverse merger with Social Capital Hedosophia V, a deal that then valued the company at ~$8.7B. With only approximately 20% of the companies that went public via SPAC merger trading above their $10 IPO price, SoFi may be one of the few that has escaped unscathed, however this may factor into in to investors not considering SoFi as a potential source of capital allocation regardless.
In summary, SoFi is a strong player within the FinTech Industry. With Lending Operations that are leveraged by a host of customers, Financial Services that make SoFi a one-stop-shop so to speak, and Galileo, of which is the backbone of an enormous amount of companies within the FinTech space, there is a lot to like. Being that as it may, there are a host of risks ranging from potential PFOF bans to steep valuations and evident market saturation. I am neither long nor short the company but will be watching closely in the next few quarters to see if the company’s ambitions come to fruition. Thank you for reading my research.
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