SoFi Technologies: Not So Deep Dive
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(Ryan) What they do: The first line in their S-1 is, “We are a member-centric, one-stop-shop for financial services that allow members to borrow, save, spend, invest and protect their money.” Essentially, they’re trying to be a neobank and integrate tons of personal financial features into a single app. So to give an illustration of the different offerings embedded in the app, when I open the app and make an account my home screen has 5 tabs across the bottom. Home, Money (You can open a basic checking account either solo or joint and can send money via email), Credit card (this is the credit card they offer and it has a bunch of different perks), Invest (a bunch of different products in here. There’s IPO investing, a learning center, watchlists, etc), and lastly is Loans (and I’ll mention what all is included there in a sec). So that’s the mobile layout. A lot like the Cash App, with a few additional things.
From SoFi’s view, they break down their products into 3 different segments: Lending, Financial services, and Technology Platform.
Lending: Here they offer student loans, personal loans, and home loans. With student loans, they primarily focus on the refinancing space for grad students. For personal loans, it’s pretty standard. They have their own algo for assessing risk and optimal rates. Then home loans, also pretty standard. They offer full blown mortgages as well as refinancing. Now for student loans and personal loans, SoFi does its own servicing. This allows members to do everything through the app over the life of the loan.
Financial Services: SoFi money (this is that cash management product I mentioned). SoFi invest (this is their brokerage services, no commission just payment for order flow arrangements. They also have their own ETF’s and robo-advisory stuff here. There was actually push back from the SEC here because they were pushing robo advisory members towards their own ETFs without proper disclosure. There are some expense ratios on those). And then other which has a whole bunch of different stuff attached to it (insurance, credit card, there’s a lot of small features included here).
Technology Platform: This primarily consists of their Galileo platform which they acquired in 2020. Galileo (and I could be getting this partly wrong) is like a white-label neobanking solution. So, a financial institution wants to build a digital offering, they can use Galileo API’s to do it. I’m not sure what competition there is here, but these are often multi-year contracts with bigger businesses.
(Ryan) History: SoFi was founded in 2011 by 4 students who met at Stanford grad school and the initial product was meant to help make student borrowing more affordable. They started this with a $2 million loan program that was actually funded by 40 alumni. Then within a year they raised their first round with Baseline Ventures. And that was basically their bread and butter, raise money, offer reduced rate student loan refinances to students from eligible schools, cash out, bro down. But their first endeavor into other areas came in 2015 with their entrance into personal loans. Since then they’ve obviously added tons of products, received tons of VC funding, and hired Anthony Noto as CEO in 2018. And then on June 1st of 2021, they finally closed their SPAC merger with one of Chamath Palihapitiya’s blank check companies.
Since they hammer that they are trying to be a “one size fits all” finance app, they compete with almost everyone else in the financial services industry (except maybe Visa and Mastercard)
This includes banks, credit card issuers, brokerages, credit evaluators (like Upstart)
So they compete with Square, Paypal, Robinhood, Schwab, Bank of America, etc.
I can’t find a comprehensive TAM number but look at the market cap of their competitors and you can see the market opportunity is large
(Ian) Management and Ownership:
The current CEO is Anthony Noto
West Point to Military
CFO of NFL
Back to Goldman
Led Twitter IPO
Year later hired as COO of Twitter
$53mm in comp last year
Owns about $32mm in stock <1% of the company
Galileo Founder owns almost 7% of the company
Softbank is the largest shareholder ~8%
Market cap of $12 billion, ticker SOFI
P/S of 15 (trailing)
P/GP of 20.8
Expect shares outstanding to rise steadily with the amount of options activity I saw in the 10Q, but they are so early to the public markets it is hard to tell
Total members grew 113% YoY to 2.56 million
GAAP Net revenue for the quarter grew 101% to $231M
Galileo accounts grew by >100% as well
Revenue from lending grew by 73% YoY (and still makes up 72% of overall revenue)
They report a 54% contribution margin in this segment
Financial services revenue grew quickly, but is operating at a substantial loss right now.
Management expects just under $1B in net revenue for the year with about 3% adj. EBITDA margins
EBIT margin for H1 2021 was -80%
Did have $82M in OCF for H1, but that’s negative if you include SBC.
I know there are people that listen that like this company, and I’d love to paint these numbers in a good light, but the financial report was riddled with adjustments and I never like that. Good news is, they have cash to burn.
(Ian) Balance sheet and liquidity:
Cash of $462mm
Almost $1B in goodwill related to Galileo
About $4.7B in loans receivable
Probably should keep an eye on this balance sheet
(Ryan) I downloaded the app, but didn’t really have any need to do so. Heard you can get 25% off stadium food at SoFi stadium. Kind of a nice acquisition strategy.
(Brett) I have zero temptation to download the app.
(Ian) LMU held graduation at SoFi stadium this past year...
Future growth opportunities:
(Ryan) Adding Roth IRAs to the SoFi invest segment. This isn’t a huge one and I’m not sure what the regulatory hurdles are to getting it done, but at least it leads members down the right direction. Other than that, I don’t have any big ones because they’re obviously iterating constantly and if I’ve thought of it, they’ve probably tried to do it.
(Brett) Galileo. This is the Technology Platform they bought at the start of the pandemic last year. This is a B2B API/software services company that SoFi was actually using before. It helps companies easily build digital banking products, issue cards, and process payments (for example, Wise is a customer). Accounts grew 119% YoY last quarter to 79 million. $167 million in LTM revenue growing pretty quickly with $69 million in contribution profit.
(Ian) Bank charter. Received preliminary approval last October and announced an acquisition of Golden Pacific Bancorp to speed up process. The acquisition should be closed by the end of the year. This would allow SoFi to lend out member deposits rather than contract external underwriters. Makes SoFi more profitable in theory and they claim will help with efficiency of deposits and lending.
Highlights and lowlights:
(Ryan) Highlights: Operating the entire lifecycle of student loans from underwriting to servicing from a single mobile experience gives them a pretty good market position in terms of attracting young members. This obviously makes growing new features easier because they can cross-sell instead of having to start from square 1. Lowlights: I get worried that these neobanks can grow as fast as they want by simply taking on more risk. I know they’re being funded by 3rd parties right now, but they’re trying to move into this on their own and they haven’t really given me any reason to believe that they’ll be conservative in their underwriting. All the outstanding lawsuits add up to be a red flag as well.
(Brett) Highlights: Galileo. The lock-in of consumer finance apps/products (we all know the switching costs of your personal bank). Lowlights: App store rankings. SoFi is ranked #65 in the finance category on Google Play (behind Allstate mobile), and a similar spot on the App Store. Cash App, which is their biggest competitor, is number 3 overall (higher than Instagram). That is very concerning. Also, I think the fastest growing parts of the business (Invest, personal finance) are in a great operating environment right now that I’m uncertain will continue. Lastly, obviously, the stadium deal was idiotic.
(Ian) Highlights: Mission statement makes sense, “To help our members achieve financial independence to realize their ambitions.” I understand the problem that they are trying to solve. Cares act is a only small blip. Lowlights: Execution. It’s trying to move fast and iterate like a software startup, but people expect
(Ryan) There’s not really anything sneaky here. Each additional function that SoFi adds to its platform helps attract more and more members. If this reaches north of 10 million members, and the company acts conservatively on the lending front, I have to imagine it would be a very good investment.
(Brett) Three things I think need to happen: Accounts hit 8 - 10 million, product usage grows quicker than active accounts, and Galileo keeps growing at a steady clip. That could build a business
(Ian) For years, I have said that I expect that I will not walk down to a bank to open a bank account with my kids like I did as a kid. SoFi makes that a reality. They grab a significant share of the financial services market and become one of the major financial institutions. 10x+ to major institutions.
(Ryan) They feel like the only way to win among the neobanks is to do something that hurts them in the end. Ie, taking on too much risk. It’s hard enough to pull people away from their banks, and doing something crazy to make it happen doesn’t feel like the right path.
(Brett) No one is downloading the application.
(Ian) People stick around with traditional banks. They move at the right pace with the majority of the population. Improving enough to keep their customers leaving little room for SoFi to keep putting up absurd growth numbers, important at 15x sales.
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Disclosure: The author and podcast guests are not your financial advisors. Ryan Henderson and Brett Schafer are general partners and portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this show.