SoFi - Millennial Money Management
Two weeks ago, I covered the fancy new world of FinTech, which seems to be the in-vogue space for entrepreneurs and venture capitalists alike. In that piece, I covered the rise of an entirely new space in finance, the no-credit check miniature loan world of "Buy Now, Pay Later" which looks set to transform parts of the credit industry. But what about FinTech companies that don't really invent anything new? What about ones that just look at the typical banking model and say "we can probably do that better and cheaper?" Luckily, there are plenty of those going around, both in the public and private spaces. Today, I'm going to dig into the grandpappy of the banking disruptors to figure out what it is, why it exists and see if I consider it worth your investment. This is a deep dive into SoFi Technologies.
Top-Line Numbers
2020 FY Revenue: $565.53 million (+27.76% YoY)
2020 FY Net Income: -$224.05 million (+6.53% YoY)
Q2 2021 Revenue: $230.79 million (+100.77% YoY)
Q2 2021 Net Income: -$165.31 million (-2,217.24% YoY)
Current Market Capitalization: $15.75 billion
What's The Business?
SoFi is effectively a millennial one-stop-shop for finances. It offers money services via a hybrid-style checking and savings account, credit score checks, investing, cryptocurrency services and credit services like mortgages, student loan refinancing and credit cards. It also offers tools to help organize your money, like in-app budgeting and savings tools to automatically shift your money from checking to savings to investing and so on. Finally, they offer their "members" (customers) no-cost add on's like career planning services and financial planning.
How Did They Get Started?
Like every other damn company I seem to cover (shout out to Walt Disney for being from the Midwest), this company was started by: say it with me now a group of Stanford business school students. Rather than this one being founded out of a garage, however, it was founded in the most elitist way imaginable: a project created by Stanford students, funded by a group made up of Stanford alumni. Awesome. The fund basically worked by 40 alumni forming a venture group, amassing about $2 million in capital doled out to 100 students at about $20,000 per student. Four of those students went on to create SoFi, with the mission of making more affordable options for those that needed debt in order to fund their education, effectively restructuring student loans in lower interest packages.
From there, things accelerated quickly. In 2012, they raised another $77 million, picking up former Bear Sterns executive Ron Suber as a key early-stage investor. Then they raised another $500 million in 2013 via a mixture of debt and equity, before raising another $80 million in equity financing in 2014 after the announcement of a deal with Barclays and Morgan Stanley which created the securitization of SoFi's peer-to-peer loan program.
In 2015, the company moved beyond student loans and began offering personal loans. This led to the first U.S FinTech funding round of $1 billion, led by SoftBank. This was on the back of SoFi announcing over $4 billion in loans funded, a record for a private market FinTech company.
Finally, the company launched into money management and investment products in
2019, which led to the company reaching their one millionth customer in 2020. After reaching this milestone, the company announced they would be going public in conjunction with SPAC-lord Chamath Palihapitiya, eventually hitting the markets via SPAC in Q1 2021 at a $9 billion valuation.
So Will I Invest?
Relative Position to Traditional Finance
SoFi is basically the oldest and best known "super-app" looking to disrupt the consumer banking model, and the industry has noticed. In my Affirm write-up, I noted that both Affirm and PayPal are both looking to capitalize on the super-app trend of consumer banking and investing products without the overhead of being an actual bank. They don't have branches and huge headcounts to pay for, which lets them cut down on the back-end fees, which in turn allows them to offer lower rates than traditional banks due to the margin spread. As the world moves to a digital-first environment, traditional banks are looking to catch up. Just look at the new ad PNC Bank is running for their new low-cash and budgeting features:
So why are big, traditional banks looking to catch up to FinTech companies like SoFi? Because it works! SoFi has been growing at a genuinely impressive rate since the beginning, but especially in the last two years. This year, they've grown their user base 113% year over year, meaning they've officially crossed the 2 million customer mark. This has also led to pretty striking product growth in the last two years. They've seen product growth over the last seven quarters of 71%, 85%, 89% and 101%, and very little of this growth is coming from the lending products. It's actually mostly coming from the consumer banking products, and that's unreal, as they still have so much more room to grow when you compare them to their most direct competitor: Block (formerly Square).
Block currently has over 70 million transacting users in their Cash App, and they're growing fast. This September announcement about their user numbers puts them right in the slipstream of Venmo, which at last count has about 75 million users. The Cash App is also an extremely profitable revenue driver for Square, generating about $1.8 billion in profit over the last four reported quarters. It's not a stretch to say that SoFi could continue its rapid acceleration to steal some of this market share, with similar profitability. However, the stickiness of the product, and the ability to cross-sell, is something that puts SoFi, I think, in a better profitability position to capitalize on their ever-expanding user base.
Product Expansion and Cross-Selling
When you compare the user-base numbers reported from SoFi and product usage numbers, you can figure out that the average SoFi customer has 1.5 products with them. This really isn't that surprising, considering the number of products they have overall.
It's actually staggering. Not only do they have their bread-and-butter loan services, but they have now officially branched into spending and investing in a big way. They actually beat Robinhood to the punch on IPO investing and fractional shares, and also have retirement accounts, something else Robinhood can't claim. In the investing space, they've also split their product into two different services: one focused on self-directed investing in stocks, ETF's and crypto, and the other a robo-advisor service with no advisory fee, something pretty much any other brokerage cannot offer. They've also wholeheartedly embraced crypto, now even offering cryptocurrency rewards as an option on their credit card, directly taking on Gemini, BlockFi and Coinbase offerings.
Along with the product offerings, the service offerings are also pretty robust. Though this app primary appeals to millennials and Gen-Z types, SoFi is instructing them (correctly I might add) to focus on their future. With that, they offer financial planning and estate planning discounts to customers, as well as rate reductions on certain loan products. All of this cross-selling and interlinking within the service itself allows for expansion of fee revenue generated by SoFi without incurring customer acquisition costs, further strengthening that revenue margin.
Visually, SoFi has NAILED the millennial aesthetic, in not only look, but in tone and function. First of all, this company is app-first. No one wants to sit at a computer and use a username and password into a Charles Schwab account like their dad used to do. Use your face and unlock that thing! From there, you're greeted by large, fun text, bright colors and stock imagery of young people having fun.
Finally, they offer something many millennials are pretty familiar with: affiliate marketing! The company uses referral codes and bonuses to grow the user base. Couple this with their invite-only "experiences" like a private membership club at SoFi Stadium in Los Angeles, and you have a FinTech truly geared towards young people.
Acquisitions for Future Growth
SoFi isn't just expanding their offering suite through internal builds and partnerships, however. They are on the offensive, and this shows via their acquisition of Galileo Financial Technologies in 2020 for $1.2 billion. Galileo provides the infrastructure for transactions, including account setups, funding, direct deposit, authorizations and processing that typically go along with checking account feature sets. This explains SoFi's recent announcement to members that they are able to get paid two days early with direct deposit into a SoFi checking account.
Business Risks
They Aren't Actually a Bank
Notice above that I never referred to SoFi as a "bank." Despite offering banking products and services, the company is not, and does not claim to be, a bank. They actually form strategic partnerships on the back end with multiple banks ranging in size from MetaBank to Wells Fargo, which allows them to be able to offer FDIC insurance up to $1.5 million (versus the typical amount of $250,000). This may change soon, however, with the recent news that SoFi is looking to obtain their own banking charter.
They Aren't Profitable (Yet)
As noted in the top-line numbers at the beginning of this piece, this company isn't actually profitable yet. While they generate a fair amount of revenue (with that number rapidly expanding), this company still appears to see themselves as an early-stage growth company by the way they spend on marketing and customer acquisition. However, analysts are actually quite bullish on the company's path to profitability, given its expanding revenue and the aforementioned bank charter. Jefferies analyst John Hecht noted that the bank charter would drive down the overall cost of funding for the company, again growing that revenue margin. This led him to slap the stock with a "Buy" rating and reiterating his stance that the company should be profitable in 2024, along with a price target of $25.
Competition is Heating Up
As mentioned before, the main competitors to SoFi in the FinTech and banking spaces are....everyone. Traditional banks like PNC are introducing new features to take on companies like SoFi. Goldman Sachs acquired Clarity Money and rolled out Marcus, which is a direct shot across the bow of SoFi's products. In the smaller sphere, PayPal is looking to release their feature set within Venmo, and Square is looking to do the same inside of Cash App. It's going to get harder and harder to differentiate yourself in the space, and SoFi has quite a bit of catching up to do in the market share department. You could typically look at an industry and say "OK what is the Pepsi to this company's Coke?" In this case, it looks like PayPal is Coke, Square is Pepsi and SoFi is...RC Cola? Kirkland?
The Bottom Line
I tried really hard to find something I don't like about this company, I really did. I just think that this company is incredibly well positioned to continue its rapid ascent in the next few years, and the 2024 profitability target is the icing on the cake. We all know how annoying it is to change banks, and SoFi is making themselves even stickier with their massive suite of products and services that make their value proposition too hard to ignore. This company seems in phenomenal shape, and I actually wouldn't rule it out as an acquisition target for a traditional financial services company that wants a more robust product offering. At a $15 billion valuation and 40% below its all-time highs of September 2021, this could be an excellent entry point into a position in SoFi if you're interested.
Short-term: Long
Long-term: Long
The following article is for entertainment and informational purposes only. Do not take the following article as investment advice. For individual situations, please contact a financial professional. The author currently has a long position in SoFi Technologies.
