SoFi offers new investment opportunities for investors

Fintech provider SoFi Technologies Inc. NASDAQ: SOFI is a one-stop shop for financial services conveniently accessible 24 hours a day through its mobile-first and online platform. The financial services company targets millennials and Gen Z customers, courting them at the start of their financial journey with student loans and offering banking, lending, investing, financial planning and wealth management services throughout their careers, promoting generational clients. Sofi expects compound revenue growth of 20% to 25% from 2023 to 2026.

Sofi has a similar FDIC bank charter Block Inc. NYSE: sqm and competes with traditional banks like Bank of America NYSE:BAC AND Wells Fargo & Co. New York Stock Exchange: WFC as well as neobanks such as Chime, Current and Financial Ally Inc. NYSE: ALLY Ally Invest.

$750 million convertible debt offering mops up shares

The company scored another solid earnings boost for its fourth-quarter 2023 earnings report. Shares initially rose as high as $9.42, a gap of more than 20%, but have since fallen below below pre-earnings levels, offering another potential buying opportunity for investors. The decline accelerated after the announcement of $750 million in unsecured convertible senior notes. They will be offered privately.

The unsecured, unsubordinated notes will bear interest of 1.25% per annum payable semiannually in arrears beginning on September 15, 2024. The purchaser has the option to purchase up to $112.5 million of the notes within 13 days from the first issue of the bonds. The notes mature on March 15, 2029. The initial conversion price is approximately $9.45 per share of SOFI Commons stock.

Breaking records all-around

On January 29, 2024, SoFi reported its first GAAP EPS of 2 cents, beating consensus analysts’ expectations by 2 cents. Adjusted EBITDA increased 159% year-over-year to $181 million and met its year-end target margin of 30%. Positive GAAP net income was $48 million. Revenue rose 35% year-over-year to $615.4 million, beating analysts’ estimates of $572.02 million.

Sofi added 585,000 new members in the fourth quarter of 2023, increasing total membership 44% year-over-year to more than 7.5 million. Total product additions increased 41% year over year to 11.1 million. Deposits grew 19% from $2.9 billion to $18.6 billion. A diversification milestone was achieved with 40% of fourth quarter 2023 adjusted net revenues from the technology platform and financial services segment. Its technology platform posted record net revenues of $96.9 million in the quarter and $352.3 million in 2023.

Sandbagging and raising the bar

SoFi expects first-quarter 2024 revenue of $550 million to $560 million, below consensus analyst estimates of $577.52 million. Investors did not accept the bearish guidance and did not bid up the shares. Full-year 2024 EPS is expected between 7 and 8 cents versus consensus estimates of 5 cents.

The network effect drives the flywheel

Cross-selling Sofi brand products on a single platform is the synergy that turns the flywheel. Customers who take out student loans or personal loans or SoFi Credit Cards can set up direct deposit and banking services through SoFi Money, which then takes them to Sofi Invest and financial planning services and the SoFi Relay budget planner and money tracker to keep Track all your money in one place. SoFi Relay users increased 74% year over year. Users may be interested in insurance services through SoFi’s partnership with Lemonade Inc. NYSE:LMND. This is underlined by the fact that 30% of all products purchased come from existing customers.

Some hidden concerns regarding charges

While the numbers are enticing, a deeper analysis of some segment metrics raises concerns among analysts. While the company claims the higher quality of its customers’ FICO scores, averaging 745 on deposits, it’s worth noting that surging charge-off rates for personal loans rose to 3.4%, up from 1 % in 2021. Average outstanding personal loans increased from $2 billion in 2021 to $13 billion in 2023.

Chargebacks on credit card charge-off loans increased to 17%, up from 4% in 2021, as outstanding loans rose to $239 million in 2023 from $48 million in 2021. Sofi also has a feature where borrowers can buy back the interest rates on their loans with an advance payment. This has the potential smell of channel stuffing as the fees are upfront and look great upfront, but can impact financial income over time.

SoFi CEO Insights

SoFi CEO Anthony Noto commented on the network effect: “More than half of newly funded SoFi Money accounts are setting up direct deposit by day 30, which has had a significant impact on debit spending, which has exceeded 1, $5 billion in quarterly debt transaction volume and nearly tripled from the prior year, representing more than $6 billion in annualized debt transaction volume. Importantly, as anticipated, we also benefit from continued and strong cross-buy trends from this attractive member base into lending products and other financial services.”

Noto noted that its demand for loans is very strong despite high interest rates and inflation. Because its customers tend to have higher credit quality and higher incomes, they tend to be less affected by financial hardship.

Morgan Stanley downgrades SoFi

Morgan Stanley downgraded shares of SOFI to Underweight from Equal-Weight, lowering its price target to $6.50 from $7.00 based on slowing revenue growth and rising execution on its path to ‘2026 EPS. The same analyst who upgraded SOFI after Q3 2023 earnings downgraded the stock after its 20% price increase since then. Analyst Jeffrey Adelson believes that “… the stock is pricing in excessive optimism.” Adelson believes there is more downside risk than upside gain in the medium-term outlook.

SoFi Technologies analyst ratings and price targets can be found on MarketBeat. SoFi Technologies’ peers and competitive stocks can be found with MarketBeat Stock Screener.

Daily breakdown of the ascending triangle

The daily candlestick chart on SOFI has formed an ascending triangle pattern breakdown. The ascending (upward) lower trendline formed at $7.45 on February 5, 2024. Pullbacks were supported on higher lows, closing the channel with the flat upper trendline at $9.18. After several failed breakout attempts, the stock collapsed on March 5, 2024, below the ascending trend line as the stock proceeded to sell off after another failed rebound attempt, peaking at $7.95.

The daily relative strength index (RSI) lost momentum back to the 36 band. Pullback support levels are at $6.91, $6.63, $6.10, and $5.59.

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