Quarterly earnings writeup for SoFi (SOFI)
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In this post I’m going to cover the recent earnings report for Sofi (SOFI), with my thoughts on the reported numbers and guidance (if they give any) plus my current estimates (with updated investment model), current valuation using different metrics, my 12-month price target and whether my investment thesis is still in tact.
My investment strategy is to own 20-30 of the best growth stocks with the best fundamentals at the most reasonable valuations — if the fundamentals begin to disappoint or the valuation no longer looks compelling then I’m trimming or selling my position. I don’t own stocks, I rent them, and I keep renting them as long as the fundamentals still look good, the valuation still looks good and my investment thesis still looks good. I want stocks that have at least 50% upside within 1-2 years and at least 100% upside within 3-4 years. If I buy stocks that are too expensive or the fundamentals aren’t good enough or my investment thesis is weak — I’ll never hit my investment targets.
Over the next week I’m planning to send out similar earnings commentary for Celsius (CELH), Transmedics (TMDX), Shift4 Payments (FOUR), Palantir (PLTR), Toast (TOST), Coupang (CPNG), Unity (U), Hims (HIMS) and maybe a couple others if I have the time. These earnings analysis writeups are only for paid subscribers.
SOFI — SoFi — 2.87% position — $8.17 per share
I’ve been in and out of SOFI for the past couple years, I don’t remember exactly when I jumped back into SOFI with my current position but I believe it was in November in the $7 range (could be off by a few weeks).
SOFI really has me puzzled. I keep wondering if I’m missing something because the company continues to deliver strong quarterly results (better than expected) with strong guidance (above current estimates) leading to the stock popping 10-15% premarket only to watch the stock fade into the close and then give up all those gains over the next week. It happened after Q3 earnings and it happened again a few weeks ago after Q4 earnings.
There are several bullish analysts with price targets above $11 but there’s just as many bearish analysts with price targets below $7
Obviously I’m bullish on SOFI at these prices or I would not own the stock. In terms of fintech companies, I still prefer NU, FOUR and SQ over SOFI which is why those first three are larger positions in my portfolio.
After we get FOUR earnings this week I’ll put together a spreadsheet comparing 8-10 fintechs including PayPal (PYPL), Dlocal (DLO), Adyen (ADYEN) and a few others so we can see how they stack up against each other. Obviously these companies are not all the same but we can still look at growth rates and valuation multiples to get a rough idea of which ones might look the most compelling at current prices.
I’ve read through many of the bearish analysts commentary and they mostly talk about slowing growth (we already know this) and possible hiccups with credit quality in the loan portfolio (definitely something to watch) plus continued concerns about the student loan business returning to pre-pandemic levels.
I am a little concerned about the revenue growth deceleration in 2024 compared to 2023, however it’s not like SOFI is a high multiple stock and that deceleration still needs to get priced in — I think it’s already happened.
Here is the SOFI earnings report… https://s27.q4cdn.com/749715820/files/doc_financials/2023/q4/SoFi-Q4-2023-Earnings-Release.pdf and the SOFI investor presentation… https://s27.q4cdn.com/749715820/files/doc_financials/2023/q4/Q4-23-Investor-Presentation-2.pdf
SOFI was a high-growth company in 2022 (+52.5%) and 2023 (+34.6%) but that’s no longer true with revenue growth expected to be just 15.1% in 2024. SOFI is turning into a slower-growth, more mature company which is why margin expansion is so important. Just like we’re see NU’s margins expanding, we need to see the same from SOFI in order to keep earnings growth high which will be good for the multiple and stock price.
SOFI continues to add new members (now at 7.5+ million) and cross-sell new products to existing members (11.1+ million products) which means the average member has 1.5 products. I would love to see this number get closer to 2.5 over the next few years which increases ARPM (average revenue per member) and helps drive lower-cost revenues — because they don’t need to acquire that customer from scratch (zero CAC) which is great for profit margins and EPS.
In Q4, revenues came in at $594M (up 34% YoY) and adjusted EBITDA came in at $181M (up 158% YoY), both better than expected but none of that matters anymore because investors are looking forward to 2024 estimates.
SOFI provided good guidance for Q1 (page 8 of earnings report) but I’ll focus on full year guidance. They are saying $585M of adjusted EBITDA (for 2024) with GAAP net income of $100M. SoFi is also guiding to 2.3 million new members, from 7.5 million members at the end of 2023 which is 30.6% growth.
If SOFI grows members by 30% this year, I’ll be very surprised if they only do 15.1% revenue growth although it always depends when those members are onboarded and how many products they are signing up for. If the majority of those new members are coming in the back half of 2024 then it’s possible they’ll have less impact on 2024 full year numbers.
Anthony Noto (CEO of SOFI) likes to be conservative with his guidance because he wants to know he can beat & raise every quarter (PS: he’s also a big shareholder). If he’s saying $580-590M of EBITDA for 2024, then I’ll be surprised if we don’t see full year EBITDA closer to $645M (or maybe higher) which would be 10% above the guidance midpoint. If the US economy and labor markets remain strong it’s certainly feasible that full year revenue growth could be closer to 20% (~$2.5 billion) and full year EBITDA could be $700-750 million (if SOFI hits their 30% EBITDA margin target — although they did say 30% by year end so hard to know where EBITDA margins will be throughout the year). If SOFI does $2.5 billion and $700 million respectively then the stock is very undervalued at $8.17 per share. Right now these are just hypothetical estimates, we’ll need to see how it all plays out and adjust accordingly, it’s possible that $700M+ for EBITDA is too optimistic so I’m certainly not banking on it.
FWIW, last January when SOFI reported 2022 Q4 numbers and gave 2023 guidance [click here] they said revenues would be $1.9-2.0 billion and EBITDA would be $260-280 million. They beat the revenue number by 6.3% (from midpoint) and beat the EBITDA number by 59.9% (from the midpoint).
In terms of current valuation, it depends if we’re using 962M shares (non-diluted) or 1.029B shares (fully diluted) or 945M shares (weighted average at end of 2023). I’ll go with 962M shares, which means market cap is $7.86 billion and I believe they have approx $2.2 billion of net debt so enterprise value is around $10.06 billion. If we use their current EBITDA guidance of $580-590M, it means the stock is trading at 17.2x 2024 EV/EBITDA which looks good to me if EBITDA is expected to grow at a 42.9% CAGR for the next 3 years.
However, what if SOFI does grow revenues this year by 20% and hits those 30% EBITDA margins? Now we’re using the same $10.06B enterprise value by dividing by $700-750M so the stock would be trading right now at 13.8x 2024 EV/EBITDA (using $725M midpoint) but the EBITDA growth rates for next 3 years would be higher than a 42.9% CAGR which means the stock is very undervalued at these prices. I can play around with the revenue and EBITDA numbers; if I’m using 16-20% revenue growth and 25-30% EBITDA margins, in all cases SOFI is trading right now below 20x 2024 EV/EBITDA which is less than half the expected EBITDA growth rates for next 3 years which looks good to me.
SQ popped 16% on Friday because they reported earnings on Thursday and said EBITDA for 2024 would be much higher than where the consensus estimates were. If SOFI is just being super conservative and they end up crushing guidance even half as much in 2024 and they did in 2023 (vs the guidance from January 2023) then the stock should have at least 60-80% upside over the next 12 months.
If we look at SOFI on non-GAAP EPS it still looks very reasonable. Right now the 2024 EPS estimates are $0.14 which means the stock is trading at 58x 2024 EPS, that would be high if EPS was expected to grow by 20% the next few years, but it’s not. Analysts are looking for a EPS go hit $0.52 in 2026 (might be low) — it’s impossible to calculate a 3-year CAGR because they had negative EPS in 2023 but even going from $0.14 in 2024 to $0.52 in 2026 is 271% EPS growth in 2 years.
If you’re a value investor that buys stocks with 6% EPS growth, trading at 10x earnings then SOFI might look expensive at 58x earnings but it’s not in the context of these estimates. Now, could these estimates be wrong? yes of course but looking at these numbers, if SOFI hits them, then the stock is undervalued by a decent margin because if they do $0.52 in 2025, you throw a 42x multiple on that and we have a $21.80 stock which is a 3-year CAGR of 38.7% from current prices. FWIW, I’ve seen a couple analysts suggest that SOFI can get to $1 of EPS in 2028 or 2029, now we’re talking about a $30 stock most likely which is 270% upside form current prices (but that’s a long time from now so let’s just focus on the next 6-12 months)
Here is my updated investment model which I will need to tweak many times throughout the year as we get new quarterly numbers and guidance from SOFI…
I do like that SBC has been coming down, it was $306M in 2022 and $271.2M in 2023 however if you divide by the current market cap ($7.86B) it’s approximately 3.4% dilution which is still too high. It does look worse with the stock in the $8s, if the stock rallies over the next 6 months into the $12s then the SBC would be closer to 2.2% but I won’t be happy until it’s under 2% annual dilution.
Okay I’ll end it there, since we’re at 2,000+ words and it’s almost 11:30pm.
Best regards,
~Jonah Lupton, CEO/CIO of Lupton Capital
You can follow me on Twitter at @JonahLupton
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