SoFi (SOFI) – Bank Sponsor, SoFi at Work & Fitch – March 30, 2024
Bank Sponsor
SoFi posted job listings this week for roles including “bank sponsorships.” Twitter was all over it, so thank you to the several accounts that called it to my attention. Fintechs without charters must partner with a bank to secure the licensing needed to conduct banking services. These sponsors will share their licensing, their risk management/compliance guardrails and often their technology too – for a fee. SoFi is the only bank in the USA that combines the needed charter with next-gen payment processing and multi-core banking APIs. It’s the only vendor that can provide point solution consolidation as fintechs seek out these sponsorships and tech stack perfection. 1 of 1. This makes it the perfect candidate to thrive in this niche. It has the ability to win here. Why not create another high margin revenue stream from the charter? Why not give yourself more potential to cross-sell Galileo APIs? There was no reason not to pursue it, and now it will.
SoFi at Work
SoFi at Work is a program offered to clients like Nvidia, The New York City Bar Association, Tesla & Amazon, Meta, Chipotle etc. It’s an employee benefit, providing education, financial planning help and SoFi’s suite of products. This is a newer program that I haven’t really written about much. SoFi’s primary structural growth bottleneck is brand awareness. How do you turbocharge brand awareness and spread it far and wide more seamlessly? Through programs like this. I don’t think it will directly bolster results materially, but I do think it will ease this bottleneck to help growth indirectly.
Financial education for the millions of employees part of this program will be a SoFi financial education. Want to get your money right, Mr. Brilliant Nvidia Software Engineer? Get it right with SoFi. That potential will now become supremely obvious to a large chunk of employees who still don’t know what SoFi even is. Not everyone watches the NFL or NBA. Most of the country hears “SoFi” and thinks “a popular female name.” This is a more efficient means of building brand awareness among massive employee bases in one foul swoop. It’s a somewhat similar idea to CrowdStrike being a preferred channel partner for AWS, Progyny being a preferred partner for Blue Cross Blue Shield, or Lemonade Pet Insurance being a preferred partner for Chewy.
Fitch
Fitch also published some new data on 2024 personal loan vintages for SoFi. On March 8th, it assigned a 5% base case default rate for loan trust 2024-1. On March 18th, it assigned the second 2024 vintage a 5% base case default rate as well. Why does this matter? Considering an average loan term of 18 months, this places the life of loan loss rates for 2024 vintages right at the midpoint of SoFi’s 7%-8% guidance. Notably, the report called out improvements in the most recent loan pools Fitch has observed. That offers a nice piece of evidence, yet it refrained from baking this into its base case. This provides more confidence in 7%-8% truly representing peak life of loan loss rates for this cycle – just like management said (shocker).
Mindset
SoFi the stock continues to aggressively chop around. Company metrics are improving on a straight line but the stock isn’t representing that. As I’ve said frequently, I expect that to continue for now – both to the upside and the downside. And I’m entirely fine with that. Sofi has a team that consistently meets or beats targets. That’s what I care about. Despite a loan moratorium, a historic rate hike cycle, and regional banking chaos… They deliver or over-deliver. Even through the SPAC & free money age in which firms offered multi-year targets & failed miserably to meet them… it bucked the trend and delivered. All I care about is that it continues its strong, strong track record of fulfilling all of its promises. Namely, I care about it meeting its 2026 $0.67 GAAP EPS promise (at the midpoint of its range).
I’ll squarely focus on the ingredients that will allow that to happen. Strong underwriting, capital market access at healthy gain on sale margin, ramping profits to feed book value & capital ratios, rapid growth & leverage for fin services, and a convincing tech platform revenue growth acceleration. The rest is noise.
Where do I see SoFi stock going if it does continue to execute? I see a range of most likely outcomes (which are inherently uncertain as always):
- Meets $0.67 2026 guidance with profit compounding at a 30% multi-year, forward-looking clip (beyond 2026). Trades at a PEG ratio range of 0.6x-1.0x (18x – 30x earnings), which yields a price range of $12.06 – $20.01.
- Meets $0.67 2026 guidance with profit compounding at a 40% multi-year, forward-looking clip (beyond 2026). Trades at a PEG ratio range of 0.6x-1.0x (24x – 40x earnings), which yields a price range of $16.08 – $26.80.
- Earns $0.80 in 2026 (high end of the guidance range). Profit compounds at a 30% multi-year, forward looking clip (beyond 2026). Trades at a PEG ratio range of 0.6x-1.0x (18x – 30x), which yields a price range of $14.40 – $24.00.
- Earns $0.80 in 2026 (high end of guidance range). Profit compounds at a 40% multi-year, forward looking clip (beyond 2026). Trades at a PEG ratio range of 0.6x-1.0x (24x-40x), which yields a price range of $19.20 – $32.00.
I realize that my PEG ratio assumptions are very pessimistic. I’ve used more optimistic PEG assumptions here in the past. For now, I think 0.6x-1.0x is appropriate given SoFi’s material credit risk, the tech platform uncertainty and fair value accounting skeptics. These real risks are why SoFi is roughly 6% of my portfolio today, rather than 10%+ like for Meta, Amazon and Uber. It is objectively more speculative, regardless of how optimistic I am. So? It needs to be a bit smaller today.
And as you can see, the pessimism doesn’t impact robust multi-year returns from now to then. For now? If strong execution continues… if the fundamental ingredients remain tasty… I’ll keep adding into volatility. If the fundamental execution worsens for whatever reason… I won’t. I won’t stop supporting a company because the stock is now up less over the past year than it had been. That is missing the forest for the trees.
