SoFi Technologies (SOFI) had an incredible third quarter, and it might finally tip the scale for investors. At the current price, it’s a great deal. If you have $500 to invest right now, this could be the ultimate investment for your dollars.
“The strongest quarter in our history”
Let’s start out by noting that SoFi Chief Executive Officer Anthony Noto called this “the strongest quarter in our history.” That’s a hefty boast, considering that SoFi has reported some excellent quarters. Here’s what happened, and what it means for the company.
Total revenue increased 30% year over year to $697 million, beating analyst estimates of $630 million by a wide margin. Earnings per share (EPS) were $0.06, marking the fourth-straight quarter of net profits, and beating Wall Street’s expectations of $0.04.
SoFi continues to add new members at high rates. It gained 756,000 customers in the quarter, a 35% year-over-year increase, and it added 1.1 million new products, a 31% increase.
Management raised its full-year revenue outlook after the report from $2.45 billion to $2.54 billion, implying growth of 22% instead of 18%. Much of that revision comes from the rebound in its lending business; management had cautioned that lending revenue would be lower than in 2023, but now it says it will be at least 100% of last year’s level. The company also raised its EPS forecast from a range of $0.09 to $0.10 to a range of $0.11 to $0.12.
More than a loan company
Most of the growth is happening in the company’s financial services segment, which comprises all the individual services outside of loans. SoFi also has a smaller segment called “Tech Platform” that functions as a generic white-label financial services infrastructure business. This is the result of SoFi’s expanded platform strategy, which it has used to diversify away from being strictly a loan company during the past few years. It has been working, but the effects were impressive in the third quarter.
Together, the non-lending segments accounted for 49% of total revenue, up from 39% last year. That’s been especially important as the loan business has been under pressure from high interest rates.
The non-lending segments also make up an increasing share of profit. Financial services sales rose 102% in the third quarter, and contribution profit increased from $3.3 million to $99.8 million. Tech Platform revenue increased 14%, with contribution profit up 2%.
SoFi’s strategy is to hook customers with its low fees, high rates, and abundance of services, and get them to engage with more products on the platform. That’s what’s fueling growth right now.
But loans are heating up
Investors have been wary of taking Noto’s word for it when he doubled down on his premise that the expansion strategy would create a much stronger company. Lending has remained SoFi’s core business, and its performance was teetering for a while.
But not only are the other segments picking up and playing a much more important role in the total business, but lending itself is picking up again too. Lending revenue increased 14% year over year to $396 million in the quarter, and contribution profit was up 17% to $239 million. That’s about 1.4 times the financial services segment’s contribution profit, down from nearly four times that amount in the second quarter.
With management’s revised projections for lending revenue to remain at last year’s levels or grow, investors can feel more confident in the company’s future.
Buy yourself a present for the holidays
As of this writing, SoFi stock is slightly down after its earnings release. That’s likely because it has been rising since interest rates were cut and in anticipation of a good report. Over the past few quarters, it has quickly shot up only to come right back down or worse. But it has reached higher levels during the past few weeks, and there was little to dislike about the earnings release.
SoFi has a phenomenal business that’s attracting new members at a high rate. It’s still a small player in banking, and it has a long growth runway as it captures market share.
If it continues to fall, don’t worry too much; it will be an even better deal. The market will eventually recognize its value, and if you buy and hold, you’ll thank yourself in a few years.
— Jennifer Saibil
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Source: The Motley Fool