Financial technology company SoFi (SOFI) recently reported impressive second-quarter (Q2) results, demonstrating significant growth. The company’s solid execution has led to a substantial increase in its member base and product offerings, resulting in its highest quarterly revenues to date. Additionally, SoFi raised its revenue outlook for the full year, reflecting confidence in its future growth trajectory.
Despite its solid back-to-back quarterly performances, SoFi stock has not seen the positive momentum one might expect. Investors appear hesitant to reward the company’s substantial growth, as evidenced by the stock’s recent performance.
Since announcing its Q2 financials on July 30, SoFi stock has been trading in the red, exacerbated in recent days by rising fears over a U.S. economic slowdown that are pulling stocks lower across the board. Longer term, the stock is down approximately 32% year-to-date, and has plummeted over 70% from its three-year high of $24.65.
Given SoFi stock’s recent struggles, let’s examine the factors that could influence its future trajectory.
The Bull Case
Despite the stock’s underperformance relative to broader markets, SoFi has demonstrated resilience in a challenging environment, particularly by diversifying its revenue streams amid prolonged high interest rates. Management’s effective execution has resulted in significant growth across various business segments. Here are key positives from Q2 that support SoFi’s bull case:
- Diversification and Revenue Growth: SoFi's strategy of diversifying its business model is paying off well, enabling the company to build a resilient revenue stream. In Q2, SoFi delivered a record adjusted net revenue of $597 million, marking a 22% year-over-year increase. This growth was particularly notable given the modest 5% growth in adjusted net revenue from the Lending business. The diversification strategy has shifted the revenue mix significantly. Financial Services and Tech Platform revenue grew by 46% year-over-year, and now account for 45% of total adjusted net revenue, up from 38% a year ago. Lending, while still a significant component of its overall revenue, has decreased to 57% of adjusted net revenue from over 70% two years ago. This shift underscores the success of SoFi’s efforts to build a balanced and resilient revenue stream.
- Member and Product Growth: SoFi’s growing member base and product offerings are key indicators of future revenue growth and profitability. In Q2, SoFi added 643,000 members, bringing the total to 8.8 million, a 41% year-over-year increase. Product growth was equally impressive, with the addition of 946,000 products, totaling 12.8 million, up 43% year-over-year. Notably, nearly 40% of new products were opened by existing members, and almost 30% of new members opened a second product within 30 days, demonstrating the efficacy of SoFi’s upselling strategy. This consistent growth, with Q2 marking the 20th consecutive quarter of over 30% growth in members and products, sets a strong foundation for future financial performance.
- Profitability and Credit Performance: SoFi also managed to improve its profitability substantially. The company’s EBITDA grew by 80% year-over-year to $138 million. Furthermore, credit performance exceeded expectations, with delinquent loan adjustments peaking in March. The 90-day personal loan delinquency rate decreased to 64 basis points from 72 in Q1. This improvement in credit quality, coupled with the company’s ability to scale loan sales, augurs well for future growth.
- Solid Deposits Base: SoFi’s deposits totaled $23 billion in Q2, an increase of $2.2 billion from the previous quarter. This growth is particularly significant as 90% of these deposits come from customers with direct deposit relationships, showcasing customer loyalty and account stickiness. The expansion of SoFi’s deposit base presents a strategic advantage for the company. By leveraging this low-cost funding source, SoFi can finance a larger portion of its loan portfolio, resulting in substantial cost savings. This approach also reduces the company’s dependency on external funding sources.
The Bear Case
Despite SoFi’s impressive growth in its member base and product offerings, as well as its revenue diversification efforts, several factors could limit the upside potential for its stock. Here’s a closer look at the key challenges SoFi is facing:
- Slowing Revenue Growth: SoFi’s revenue growth is showing signs of moderation. In the second quarter of 2024, the company’s adjusted net revenue growth rate decreased to 22%, down from 26% in the first quarter and 34% in the fourth quarter of 2023. Although SoFi has raised its revenue guidance for 2024 to a range of $2.425 to $2.465 billion - $35 million above the previous forecast -this still translates to a year-over-year growth rate of 17% to 19%. This projection suggests a continued slowdown in revenue growth in the upcoming quarters. Additionally, SoFi has revised its outlook for its Tech Platform segment, which is now expected to experience growth in the mid-to-high teens rate. This is a downward adjustment from the earlier guidance of 20% growth.
- Macro Uncertainty: The broader economic environment presents additional risks. While the economy has shown resilience, the persistence of high interest rates and ongoing macroeconomic uncertainties could impact SoFi’s loan origination activities and future growth prospects. These factors also raise concerns about the company’s credit quality, which could further weigh on its performance.
The Bottom Line on SoFi Stock
While SoFi’s positives outweigh the negative ones, Wall Street remains cautious, with some skeptics citing the potential for macroeconomic concerns to impact its loan originations and credit quality. Out of 18 analysts in coverage, four rate it as a “strong buy,” one as a “moderate buy,” 10 as a “hold,” and three suggest “strong sell,” resulting in a consensus rating of “hold.”
The average price target for SOFI stock is $8.89, suggesting a potential upside of nearly 32% from its current levels.
On the date of publication, Amit Singh did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
