SoFi: The banking charter is a game-changer (NASDAQ: SOFI)

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We discussed SoFi (SOFI) shares several times, each time successfully exchanging the name. Over the past couple of weeks, the stock, and really the whole specialty tech/innovation space, has been decimated. Just today, we told members of BAD BEAT Investing that SoFi was a buy just above $12 with a bank charter as the catalyst for the upside. As of this writing, the stock is up 15% after hours. We believe this could trigger short-term compression, with short interest now over 10%. You have to imagine that there is coverage on this news following the major declines of the last few weeks. Now, by traditional metrics, the stock is overvalued, even at $12, but over the next few years SoFi should see a massive acceleration in its fintech side of the business and that’s where Street has maintained the company at a high valuation. . A bank charter, however, will provide immense flexibility to operate more profitably, and a few moments ago the charter application has been approved by the Office of the Comptroller of Currency and the Federal Reserve. We think the stock is a buy on this news.


For years, this company was used as an alternative to banking. They offer products that a bank offers, without being a bank per se. This actually increases the costs for the business in terms of how much it has to pay to get financing. The business is popular and successful. That’s because they have attractive rates and terms and are considered ‘people finance’, at least in messaging and company roots. We believe SoFi now represents the next generation of banking and plays a role in a growing fintech industry. We still love traditional banks, but SoFi now has its charter, in addition to being a fintech.

Look, while banks suffered a bit this week on earnings, Fintech stocks have been crushed in recent weeks. It’s true. Simply pull on the chart of one of the popular space tickers. They all look the same and the stocks have all lost huge value in just a few weeks. Every day it seems to get worse. No doubt space has been oversold, but remains very expensive. However, SOFI’s stock valuation, while stretched, is justified in that it not only has massive fintech growth, but also had a catalyst waiting in that chart. The sale was an opportunity as we saw today.

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. The company was doing well margin-wise with its loan, and the higher loan rates are a big plus, at least for earnings per loan. The other side of the coin is that higher rates could reduce the demand for loans, which should be remembered. That said, you have a business with a very low customer acquisition cost with low value finance products and high value loans on the same app, and now the cost of finance is about to come down because they can keep the money in it. This is why obtaining this license is essential. SoFi will now be able to use its money market and other deposits to fund its own loans. Loans are SoFi’s primary source of revenue and profit. At this time, the money is borrowed, which limits the spread. This will significantly reduce the cost of funds and immediately increase margins. We are talking about a possible profit margin of $1 billion over the next few years.

Now, it is not because it has a charter that it becomes a bank. In order to truly “become a bank”, you may recall that SoFi is considering acquiring the California community lender known as Golden Pacific Bancorp and will operate its banking subsidiary as SoFi Bank. the the case was announced last year and is expected to close in about a month.

This enhances the strength of the company. In previous articles, we have covered the financial performance of the stock. point out that SOFI continues to accelerate its growth year over year, both for its members and for all of its products. It is really essential to understand. In the last quarter, SoFi saw the total number of members increase 96% year over year to 2.9 million, from 1.5 million at the same time last year, and the total number revenue increased 105% to 3.3 million at the end of the quarter from 2.3 million. at the same time last year.

Make no mistake, there has been continued strength in all three of SoFi’s business segments thanks to this growth, resulting in a 35% revenue increase in the third quarter. So, with the fourth quarter now complete and due to be released in a few weeks, we expect growth to accelerate with $270 million to $282 million in adjusted net revenue, up 47% to 55% year over year. other. The company is expected to generate between $3 million and $5 million of adjusted EBITDA on top of revenue growth. So it’s worth reminding you that despite the stock falling week after week, the company beat and raised its guidance after the third quarter.

However, investing is not without risk. SoFi Invest is a popular product, and there are regulatory concerns that popular trading options on SoFi and other investment site platforms may be restricted by the government.

The company isn’t exactly profitable yet, although it has very positive financial metrics for growth. That said, there’s over $2 billion in debt on the balance sheet, and that’s a risk to keep in mind.

As a lender, and now a sort of bank, the competition is immense. While the company has done a terrific job of acquiring customers and cross-selling its products to existing customers, it competes with other investment sites, other banks, other lenders.

Look forward

In the future, being able to fund all of the loan products they offer at a lower cost could result in the company offering even more competitive rates than they normally would. While this may have a short-term impact on margin per customer, better rates could easily increase loan application volume and new customer sign-ups, offsetting any margin erosion.

Additionally, being a bank allows the company to now offer a variety of savings and checking account products, which can help increase the deposit base from which to draw, but also push customers to invest in products or to invest in savings and checking products. They might even offer high-interest savings accounts to attract deposits to use for loans.

We also want to point out that even though it has been delayed many times, this spring we have another catalyst coming. Raised loan repayments will be fixed to start. This will immediately fuel revenue in 2022 once repayments begin. Student loan refinancing is a big draw for SoFi. But, if someone comes in through a student loan refinance and then takes out a personal loan, the company saves 100 hours of customer acquisition costs. With all reimbursements due to restart in May, following the approval of this charter, this is a good time for SOFI.

We will soon have fourth quarter earnings, and that will be a catalyst for the stock.

Bring back home

At these levels, the stock is a buy. It’s a good buy under $15, but a great buy at $12+ where our members bought today. Yes, the stock is expensive on current growth, but with the future of fintech and the banking charter now in hand, we believe stocks are rising. Buy the stock because stocks have a strong risk-reward ratio from this level.

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