Summary
- SoFi, a recent addition to the stock market, is attempting to build the Amazon of banking
- As its user numbers grow fast, the stock is looking attractive after a 30% pull-back
Tell us about yourself, Michelle
I’m a structured credit analyst. All equity market experience has been for my personal portfolio and I’m very much learning on the job!
What’s the pitch?
A 10 year-plus, long-term investment in SoFi Technologies.(ticker: SOFI).
What does SoFi do?
SoFi has morphed from being a provider of student loans to a full-service fintech platform offering a suite of consumer financial services including lending, cash management, robo-advisory, crypto trading, insurance, credit scoring, and personal financial advice. SoFi’s technology platform is focused on serving other financial services companies and boasts 70 of the top 100 fintech companies as customers – including Robinhood, Chime, Monzo, and Wise.
What’s your investment thesis?
SoFi joined the stock market in June when it merged with one of Chamath Palihapitiya’s special purpose acquisition companies (SPACs). The stock has since tanked from its initial $24 to around $17. The fall was to a large extent driven by its unusual lock-up provision, which allowed early investors to sell their stock almost immediately. At its current price it offers an interesting opportunity given the potential of the business.
Although still small, SoFi is seeing exponential growth in users, which increased by 110% in the previous quarter. While most of its revenue is driven by the lending business, it’s taking advantage of the opportunities for cross-selling other consumer business lines, thereby increasing revenue at minimal customer acquisition cost.
SoFi’s competitive advantage to traditional banks is its wide product range spanning various consumer finance products. As well as its unique innovations, it has to a large extent gamified its banking app, which is proving to be extremely attractive to their target market.
SoFi’s Galileo acquisition, which provides financial technology infrastructure to competitors through Application Program Interfaces, leads the company to be viewed as the Amazon of banking by analysts who compare Galileo to Amazon Web Services in terms of its revenue capabilities. Derek White, the ex-vice president of global financial services at Google Cloud, has been appointed as Galileo’s CEO to grow this banking-as-a-service (BaaS) initiative.
Anthony Noto, SoFi’s CEO, is an ex-army captain that evolved to become a highly regarded CFO of both Twitter and the NFL as well as having led Goldman Sachs’s technology, media, and telecommunications investment banking segment. Under his leadership he has turned SoFi around from being merely a lender to a one-stop digital banking platform as well as expanding its offering into the highly lucrative and sticky BaaS arena.
What are the key events you’re watching?
- SoFi acquired a regional bank in March to speed up obtaining a national banking charter, which it had also directly applied for in 2017. The approval of this charter will enable SoFi to accept customer deposits and use these for lending purposes without the cost of another bank intermediary or having to sell off loans. I will look out for this having been granted as it should be a big positive for the bottom line.
- Continuing growth in Galileo’s members, which grew by 130% in the first quarter to reach 70 million – and a concomitant increase in revenue from this business line.
What’s the upside potential if your thesis is correct?
SoFi has a market capitalization of around $13.5 billion. Analysts are seeing that value climb to 3-4x that as the thesis plays out over the next four years or so. This could imply a 20-25% annual return at the low end of their estimations.
What are the big risk factors you’ve spotted, and how do you plan to mitigate them?
- The upside potential is based on some punchy revenue predictions which rely to a large extent on consumer membership growth, cross selling, obtaining a banking charter and growing out the Galileo BaaS platform. Competitors or poor execution would impact the thesis.
- The company is still very much finding its footing with investors and it's clear there are going to be some volatile times ahead in the share price. I believe in the thesis and the vision and plan on hanging in for the long term and not getting swayed by unjustified share price movements.
This insight was submitted by a community member for information and educational purposes. It doesn't represent the views of the Finimize team and shouldn't be taken as financial advice.
