SoFi Earnings: Tale Of 3 Trends, Customer, Revenues, Profits

Investment Thesis

SoFi Technologies, Inc. (NASDAQ:SOFI) is one of the most closely followed fintech companies. With both its passionate bulls and equally vehement bears. But I don't see Q2 as being a win for either camp.

The negative aspect that surfaced in the quarter is that its customer adoption curve is showing signs of deceleration. And similarly, SoFi's outlook for the remainder of 2023 indicates SoFi's revenue growth rates could exit 2023 at around 30% CAGR, a material slowdown from this last year.

On the other hand, a significant positive element from the quarter is the pace at which SoFi is increasing its profitability.

For my part, I remain neutral on this stock.

The Most Important Indicator: Adoption Curve

I've often stated that the single most insightful aspect of the health of a business is its customer adoption curve.

This time last year, SoFi's member growth rates reached 69% y/y. And yet, this time around, its member growth rate decelerated to 44% y/y. With around 6 million members, I don't believe that we are seeing a slowdown due to the law of large numbers.

In actuality, I believe, given the higher interest rate environment, SoFi is no longer the only fintech company offering depositors high savings rates, and given the greater availability of product choice, competition for depositors is now rapidly increasing, which weighs down on SoFi's appeal as the ''default'' consumer digital financial services super app.

Revenue Growth Rates Upwards Revised A Meager Amount

SoFi bullishly upwards revised its full-year outlook by approximately $30 million. Perhaps, by the time 2023 is completed, SoFi's full-year revenues will be around $2.2 billion versus the current guidance of around $2.0 billion.

One way or another, I believe the message is clear, that SoFi's revenue growth rates are decelerating. I don't believe that investors should expect on SoFi to exit Q4 2023 growing its revenues by more than 40% y/y.

Particularly given that Q4 of last year is such a high hurdle for SoFi to cross. Even if we presume that SoFi's Q4 2023 adjusted net revenues reach $570 million, this would put SoFi's Q4 revenues growing at around 30% CAGR. A significant drop from the 57% y/y reported in the same period a year ago.

What's more, for this $570 million of adjusted net revenues, I've presumed that H2 is meaningfully weighted towards Q4.

Is that such a bad outcome? It truly depends on what the market is fundamentally expecting from SoFi?

If the market has come to terms with the fact that SoFi's revenue growth rates are slowing down, the fact that SoFi is about to exit Q4 2023 with a 30% CAGR, could be enough to reignite its share price beyond the $10 per share handle which it has several times hit only to retrace its steps.

Profitability Profile Is Improving

Put aside the contentious issue of SoFi's growth rates, we can see beyond doubt that SoFi's underlying profitability is surely set to improve. Indeed, consider this:

For Q2 2023, SoFi's EBITDA reached close to $80 million. Yes, we could make the argument that Q3 2023 is guided for $60 million, which is a sequential decline from Q2 2023, but investors will be hoping that SoFi is lowballing its Q3 guidance so that it could end up positively surprising investors down next quarter.

Indeed, it could be the case that Q3 could ultimately report around $90 million of EBITDA. And that's meant to be SoFi's weakest quarter, with Q4 2023 earmarked for around $130 million of EBITDA.

Simply put, SoFi is doing everything in its power to demonstrate to investors that even if its growth rates are slowly down, SoFi is now more focused on balancing growth with profitability.

SOFI's Valuation -- Fairly Valued Stock

If I were to highlight one further bullish aspect, I would be that SoFi's balance sheet now holds about 30% of its market cap as cash on its balance sheet. In other words, its balance sheet is significantly stronger than it was just 6 months ago.

All that being said, if we make some heroic assumptions about 2024, and make the case that SoFi could indeed reach $450 million of EBITDA, this would see the stock being priced at around 20x next year's EBITDA. That's not a stretched valuation, but it's hardly cheap.

Particularly when we spend a few moments inspecting SoFi's EBITDA line. Some people have said that profits are in the eye of the beholder.

But where SoFi sees profits I see costs. Case in point, the bulk of its adjusted EBITDA comes from depreciation and amortization, and stock-based compensation. Will those costs ever go away? No.

So what we are left with is a company that is still largely unprofitable, albeit improving, and with slowing revenue growth rates.

The Bottom Line

In Q2, SoFi witnessed a deceleration in its customer adoption curve and forecasts a material slowdown in revenue growth rates for the remainder of 2023.

While profitability is improving, revenue growth rates are showing signs of decline.

Despite a bullish upwards revision of its full-year outlook, SoFi's revenue growth rates are expected to be around 30% CAGR by the end of 2023, a significant drop from previous periods.

The company is now focusing on balancing growth with profitability, and its stronger balance sheet holds about 30% of its market cap as cash.

However, the valuation, assuming optimistic assumptions for 2024, leaves the stock fairly priced, considering the company's still largely unprofitable and decelerating revenue growth rates.

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