We discussed SoFi (NASDAQ: SOFI) stock a number of times and have traded it both long and short. It was difficult to be optimistic. We have been optimistic since the charter application has been approved by the Office of the Comptroller of Currency and the Federal Reserve. The title took a nose dive with the entire market, but also with fintech, which was decimated. With the stock falling, the valuation improved with this massive retracement. The stock price performance has been absolutely horrific. More and more, you’ll see complaints like “I hate this stock” in reference to SoFi. As sentiment becomes more bearish, we like to buy.
For years, this company was used as an alternative to banking. They offer products that a bank offers, without being a real bank until very recently. We felt that getting the charter was absolutely essential. Not having it made the loan costs much higher than the banks. This increased the costs for the company in terms of how much it had to pay to obtain financing. SoFi now has its charter, in addition to being a fintech. The charter means that the company will pay much less to lend to customers. This combines with the already very low cost to acquire customers. All in all, the huge downtrend makes no sense as far as operational growth is concerned. In terms of valuation, it is expensive even after the retracement, but not prohibitively so. SoFi has a very low customer acquisition cost with low value financial products and high value loans on the same app. Loans are SoFi’s biggest source of revenue and profit and with the charter we’re talking about a potential $1 billion in profit margins over the next few years. We like it because it builds on the existing strength of the business.
Strong growth in revenue and EBITDA
In the last quarter, revenue growth accelerated and the company posted record adjusted net revenue of $280 million, up 54% year-over-year. compared to the same period of the previous year. It was also well within management’s forecast of $272 million to $282 million and slightly above consensus estimates. Adjusted EBITDA of $5 million also lived up to expectations, it really stood out as a big strength. Keep in mind that for all of 2021, SOFI achieved just over $1 billion in adjusted net revenue, up 63% year-over-year, while adjusted EBITDA was of $30 million in profits for the year, well up from losses of $45 million in 2020. Win.
Loan growth but mixed margins
This comes despite the continued extension of the student loan repayment moratorium. Please keep in mind that it can be extended again in an effort to relieve high food and gasoline prices. That remains to be seen, but it’s a near-term risk that continues to weigh on earnings. The good news is that once again growth accelerated in all 3 reporting segments. In the lending business, fourth-quarter adjusted net income increased 30% year-over-year to $208 million, from 21% in the third quarter of 2021. driven by demand for improved housing and refinancing activities. Despite the moratorium, student loan activity grew just over 50% year-over-year to $1.5 billion, also driven by refinancing before the moratorium expired.
Margins were a bit mixed in lending. The lending business reported a profit of $105 million from a 51% margin, down from 53% margins a year ago. Some of this was due to a decline in loan demand, but overall dollar volume was still up 23%. For the full year, adjusted net lending revenue increased 42% to $764 million and the segment generated a profit of $400 million with a 52% margin.
It’s exceptional growth no matter how you look at it. The growth cannot be denied. The bears will focus on the lack of profit, but that’s part of why we’re so bullish on the bank charter as a game changer.
Growth of the technological platform supported by Galileo
Let’s not forget the strength of SoFi’s technology platform, where revenue of $53 million in the quarter was up 42% from a year ago. Galileo has seen great growth, seeing a 67% increase in accounts year over year. There are now about 100 million. Thanks to heavy investment in the construction of the platform, however, profits have fallen. It makes the bears scratch. Profit was $20 million on margins of 38%. Although this was down from a year ago, it was an increase from the third quarter of 2021. Over the whole of 2021, SoFi grew revenue by 102% in the segment technology platforms at $195 million, with overall margins of 33%. Nice growth indeed. Growth will continue and the company plans to save money with its recently concluded deal for Technisys.
Financial services lose money
Finally, the Financial Services segment reported fourth-quarter revenue of $22 million, up 74% sequentially and 450% from a year ago. Growth is strongly seen in the SoFi Invest product as well as in SoFi Money. We expect continued growth here with the recent rollout of free cryptocurrency on auto investments. This will allow customers to get fee-free crypto purchases on direct deposits. This can attract a large number of customers and cross-sell other products. Of course, this segment is gaining momentum and expenses are increasing. Thus, losses were $35 million for the quarter and $135 million for the year.
SoFi’s balance sheet
This company has a sizable balance sheet of $9.2 billion. The company has seen significant expansion here in recent years due to strong loan growth. The company ended its fourth quarter with $1.6 billion drawn on its credit facility. It still has nearly $5.5 billion of cash available on its facilities. By not borrowing too much, the cost of funds has been well managed. The company has raised several additional billions of capital. With the new charter in place, the ability to reduce the cost of funds has improved. The book value is now $4.7 billion and the company’s shares are now trading at well under 2x the pound. This is significantly cheaper than what the stock has traded for previously. The expansion in book value is also welcome.
The banking charter is huge. The company is still in the process of transitioning operations to have loans originated through the bank, but that should be done by the second quarter. The student loan repayment moratorium is expected to end in May 2022, but it could be extended again, keep that in mind. Without loan repayments, SoFi is missing between $30 million and $35 million in revenue.
As we expect for the first quarter, we are looking for revenue of $281-284 million. During the conference call, we learned that management expects “$280-285 million in adjusted net revenue, up 30-32% year-over-year and $0-5 million dollars of adjusted EBITDA”. For full year 2022, our team is looking for SoFi to deliver 53%-60% year-over-year revenue growth. While the timing of rate hikes will impact this, we also expect adjusted EBITDA of $175-190 million. Several recent developments factor into our full-year guidance. If SoFi Bank manages to contribute more strongly in the first quarter, we believe that the first quarter figures will be exceeded. But the bank has to be the one issuing the loans in order to see the big benefits of the charter. It will take another few months to ramp up.
As for the stock, the action has been horrible. As an investor, you must love the strength of revenue growth. The expansion into new markets and business areas is impressive. EBITDA is improving. At the end of the day, we want to see the company progress towards truly positive earnings. We predict this could happen in 2023, in a more sustainable way. With stocks selling off hugely for a myriad of reasons, we think you take the opposite view and start buying when everyone is this negative.