➡️ This is a step-by-step stock review to determine if SoFi (SoFi) stock is a good buy. In this article, we’ll help you understand the company, where the company is going, the competition, and the leadership. This way you can make a more confident investment decision.
SoFi is an online bank that provides personal loans, banking, credit scores, student loans, student loan refinancing, investing, mortgage loans, credit cards, insurance, and auto loan refinancing. They were founded in 2011 and headquartered in San Francisco, CA.
Table of Contents
- Step 1: Tykr Rating
- Step 2: SoFi Company History
- Step 3: SoFi Business Model
- Step 4: SoFi News
- Step 5: SoFi Competition
- Step 6: SoFi 4Ms
- Step 7: Is SoFi stock a good buy?
Step 1: Tykr Rating
➡️ Goal: When you look at a stock, the first step is to look at the financials. Fortunately, Tykr does this for us automatically. The higher the score, the stronger the financials and the safer the investment. The higher the MOS, the higher the potential returns you can make.
- Summary: On Sale
- Score: 50/100
- MOS: 85%
- Share Price: $5
- Sticker Price: $19
Step 2: SoFi Company History
➡️ Goal: It’s important to know the company’s history. This helps us understand the various revenue streams, if they acquired other companies, how they grew through difficult times, and how they separated themselves from the competition.
- In 2011, Mike Cagney, Dan Macklin, James Finnigan, and Ian Brady, four students who met at the Stanford Graduate School of Business, founded SoFi which is short for Social Finance. The original purpose of the platform was to help provide more affordable options for students to fund their education.
- In 2011, the pilot program was the lending of $2M to 100 students for about $20K per student.
- In 2012, SoFi raised $77M, led by Baseline Ventures with participation from DCM Renren.
- In 2013, SoFi announced it had raised $500M in debt and equity to fund and refinance student loans. The total funding amount came from $90M in equity, $151M in debt, $200M in bank loans, and the remaining capital from alumni and community investors.
- As of 2013, SoFi had funded $200M in loans to 2,500 borrowers at the company’s 100 eligible schools.
- In 2013, SoFi announced a deal with Barclays and Morgan Stanley to create a bond-backed peer-to-peer student loan product which is the first securitization of student loans.
- In 2014, SoFi raised $80M in a Series C round led by Discovery Capital Management with participation from Peter Thiel, Wicklow Capital, and existing investors. The additional funds were raised to expand the footprint of the company’s student loan refinancing business and expand into new products like mortgages and personal loans.
- In 2015, SoFi raised $200M with Third Point Management. That same month, the company officially began offering personal loans. At this time, they were offering mortgages in 20 US states, up from 10 in 2014.
- By 2015, SoFi had funded more than $2B in loans. To celebrate its $2B milestone, SoFi announced a contest, #2BillionTogeter, to pay off one of its customers’ student loans.
- In 2015, former SEC Chairman Arthur Levitt was added as an advisor.
- In 2015, SoFi raised $1B from SoftBank.
- In 2016, SoFi became the first online startup to receive a triple-A rating on Moody’s.
- In 2016, SoFi launched SoFi at Work, an employee benefit program to reduce student debt and build financial wellness.
- By 2016, SoFi had funded more than $12B in loans with 175,000 members.
- By 2017, SoFi raised $500M from Silver Lake.
- In 2017, CEO Mike Cagney announced he would resign due to allegations of sexual harassment. Anthony Noto, who previously served as COO at Twitter, joined SoFi to lead as CEO. Michelle Gill, who previously worked at TPG and Goldman Sachs, joined SoFi to lead as CFO.
- In 2019, the FTC prohibited SoFi from misrepresenting to consumers how much money consumers will save or have saved by using its products unless reliable evidence was provided.
- In 2019, SoFi raised $500M from Qatar Investment Authority.
- In 2019, SoFi inked a 20-year deal with two NFL teams, the Rams and Chargers.
- In 2020, SoFi acquired Salt Lake City payments firm Galileo for $1.2B.
- In 2021, SoFi merged with a SPAC to go public at a $9B valuation.
- In 2022, SoFi received approval from the OCC for a national bank charter.
- In 2022, SoFi purchased Gold Pacific Bancorp for $22.3M. This allowed SoFi to hold loans for investments as opposed to selling them to outside investors.
Step 3: SoFi Business Model
How does SoFi make money?
➡️ Goal: It’s important to know how a company makes money. A mature business model has multiple streams of revenue which allow the company to weather downturns in the economy.
SoFi sells the following products
- Checking accounts – Zero fees up to 1.25% annual return
- Savings accounts – Zero fees and up to 3% annual return vs the national average of .21%
- Credit cards – Up to 3% cash back
- Credit score – As a customer, you may view your credit score for free
- Investing – Trade stocks, fractional shares, crypto, ETFs, and IPOs
- Student loans – Obtain student loans
- Student loan refinancing – Refinance student loans for a lower interest rate
- Personal loans – Obtain personal loans for items such as home improvements, credit card consolidation, traveling, weddings, and more.
- Mortgage loans – Obtain a mortgage loan when buying a house
- Insurance – Obtain homeowners, renters, auto, and life insurance.
- Small business loans – Obtain loans for starting a small business
Here is a breakdown of the revenue by segment:
- Lending – 77%
- Financial services – 6%
- Other – 17%
Typically, lending products generate revenue in three different ways.
- Origination fees – When a consumer or business takes a loan, a .5% – 1% origination fee is added to the total loan price.
- Interest rates – This is the most popular way lenders make money as it produces ongoing revenue for the lender.
- Wholesaling – The primary lender will sell the loan to a third party. The primary lender makes money on the sale and the third party generates revenue through interest.
SoFi makes money from #2 and #3 with #3 being the primary method with their loan products.
With #3, the third parties are large institutions such as pension funds, insurance companies, and wealth management firms.
Here is a closer look at how #3 works.
- Whole Loan Sale – SoFi will group loans together in a “pool” and sell that pool to a third party.
- Securitizations – SoFi will group loans together in a “tranche” which is larger than a pool. Based on the volume, this option may be securitized meaning a wealth management firm can allow investors to buy the product in exchange for a fixed rate of return, which is similar to how a bond works.
Both options allow SoFi to offer a slightly lower student loan interest rate and SoFi tries to save students at least .25% on their student loans. That number doesn’t seem like much but if a student pays their loan over the full term, for example 20 years, the slightly lower rate can save some money.
Here is a comparison. These are round numbers, not the actual loan rates you can get today. This example is meant to show the cost savings.
This article from nitrocollege.com states that the average student loan in 2022 is about $37,000. We’ll use that number below.
Fixed-rate student loan with a traditional lending institution
- Loan: $37,000
- Term: 20 years
- Interest: 5%
- Monthly payment: $244
- Principle: $37,000
- Interest Paid: $21,604
Fixed-rate student loan with SoFi
- Loan: $37,000
- Term: 20 years
- Interest: 4.75%
- Monthly payment: $239
- Principle: $37,000
- Interest Paid: $20,384
Over the duration of 20 years, the student can save a little over $1,000.
Step 4: SoFi News
➡️ Goal: It’s important to highlight important company-specific news as well as industry-specific news over the last month and year. We don’t need daily news on a company to make buy or sell decisions because we’re investors, not traders. Overall, we want sufficient news to understand where a company and industry are heading over the next year or few years.
This article from cnbc.com states that SoFi allows retail investors to buy shares of private businesses right before a company goes public. This falls under their IPO product. IPO shares have historically been set aside for Wall Street’s institutional investors or high-net-worth individuals. Retail investors don’t have a way to buy companies before they go public. SoFi’s IPO product division now allows retail investors to buy this asset class and get involved with hot new stocks before they go public.
This article from investorplace.com lists 3 growth stocks that are expected to soar in 2023. Those stocks include SoFi, Pinterest, and Fiverr. SoFi is listed because of the expansion of its product ecosystem. In other words, they have various streams of revenue including loans, mortgages, and insurance. The article also states that SoFi’s revenue increased by 50% over the last quarter and member accounts increased by 61% over the last year.
This video from Matt Frankel, Certified Financial Planner and writer for The Motley Fool, states that SoFi has some pros and cons in 2022. Although he does highlight a con below, he does state that this stock could be a tenbagger (share price could increase by 10X).
- The stock is down 80% from its all-time highs, making this stock extremely cheap.
- Revenues increased significantly over the last year.
- Member accounts increased significantly over the last year.
- Financial services products are losing money. For example, you can get $50 for opening an investment account even if you add $10 to the account. The purpose of the financial services division is to bring consumers into the ecosystem so they buy loan products, which is how SoFi generates the majority of its revenue.
This video from Parkev Tatevosian, a contributor at the Motley Fool and adjunct professor of Finance, highlights the latest SoFi earnings report from November 1st.
- Revenue increased by 56% over the last quarter.
- EPS was expected to be -$.07 but they reported -$.08.
- They added 424,000 new members.
- Total deposits grew by 86% to $5B.
- Personal loans grew by 71% to $1.2B.
- Home loans are down 73%.
- Student loans are down 53%.
This video from CNBC features CEO, Anthony Noto, talking about the strength of the company which includes the SoFi diversified product lines. The emphasizes the importance of creating multiple revenue streams. Noto does highlight the student loan buyback program did slow down revenues but is likely to increase in the future. One big positive with SoFi, is they are taking market share away from big banks because they offer savings accounts with an annual rate of return up to 3%.
This article from seekingalpha.com states that almost 60% of SoFi’s revenue is from student loans. When the US government paused loans in March of 2020, this caused SoFi’s revenues to significantly decrease.
This article from studentaid.gov states the student loan pause period started on March 13th, 2020 and will extend through December 31st, 2022. After the pause period ends, we should expect SoFi’s revenue to increase again.
This article from nbcnews.com states there are 4 million fewer students in college than 10 years ago. The reasons include the following:
- 17 and 18 years can enter the job market and start earning a decent wage right away.
- Students are getting smarter and calculating the payback time on loans is simply too long. In other words, there isn’t an ROI in most cases.
Here are the enrollment rates of students graduating from high school and going to college:
- Tennesse – 53%
- Indiana – 53%
- West Virginia – 46%
- Arizona – 46%
- Alabama – 54%
- Idaho – 39%
As of 2022, 1 in 3 adults say a college degree isn’t worth the cost.
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Step 5: SoFi Competition
➡️ Goal: It’s important to understand who the competitors are and how their financials rank against this company. Try to find 5 other competitors to rank against based on Score. The best way to find competitors is to Google “XYZ competition” and replace XYZ with the company name. You can also go to Tykr and click on the “Similar Stocks” tab on each stock to see similar companies in the same industry.
- Summary: On Sale
- Score: 50/100
- MOS: 85%
- Share Price: $5
- Sticker Price: $19
- Revenue: $984M
- Summary: Watch
- Score: 33/100
- MOS: 81%
- Share Price: $19
- Sticker Price: $61
- Revenue: $841M
- Summary: On Sale
- Score: 56/100
- MOS: 86%
- Share Price: $9
- Sticker Price: $37
- Revenue: $802M
Step 6: SoFi 4Ms
➡️ Goal: All of our homework on this company leads up to the 4M checklist. A lot of investors only look at the numbers. Yes, it’s important to look at the first M (MOS) which is the math part of investing but it’s also important to look past the numbers and also look at the business, the competition, and the management. If all 4Ms pass, we should have high confidence in buying this stock.
✅ MOS: The score of 50/100 shows the financials are good but could be better. When you take a closer look at the financial statements the revenues are increasing but the net income is decreasing. It’s also important to point out that free cash flow is negative. As for the MOS, 85% shows this stock does have some upside potential.
✅ Meaning: FinTech is a hot industry. Especially FinTech products that generate revenues based on fees. It makes sense that close to 80% of the revenue is generated through loans and it’s good to see that SoFi offers a wide range of loan products, not just student loans. I like the fact that they are bringing people into the ecosystem with the financial services products, even if it’s not a highly profitable division of the company.
❌ Moat: The issue with this company is the competition. There are a few other FinTech competitors listed above that offer the same products at very similar rates. It’s also important to point out that big banks offer similar products as well. The differentiator is the 3% annual rate of return on savings accounts. That’s a nice way to bring people into SoFi but can it keep customers in the ecosystem? 3% is not sustainable long-term because the 3% is funded by venture capital dollars and profits. Eventually, venture capital runs out and if they solely rely on profits, that means the EPS growth rate will be limited. That’s a red flag.
✅ Management: Anthony Noto has s served as CEO of SoFi since 2018. Prior to SoFi he worked at Twitter for 3 years in roles including CFO and COO. Prior to SoFi he worked at Goldman Sachs for 3 years. Prior to Goldman Sachs, he worked at the National Football League for 2 years. Prior to the National Football League, he worked at Goldman Sachs for 9 years. The Glassdoor rating is 3.8. Ideally, we like to see 4.0. This is still pretty good, especially for a company that experienced some turnover in the executive suite. Noto’s CEO approval is 88% which is very good. He has a lot of great experience in tech and finance which makes him a great fit as CEO.
If you’re interested, you may complete your own 4M checklist on this stock or other stocks by logging into Tykr.
Step 7: Is SoFi stock a good buy?
For a stock that recently went public in 2021, the financials do look pretty good, especially the balance sheet. This is a highly scalable FinTech company with room to grow over the coming decade. However, there are three issues I have with this stock.
- Moat – There are a lot of competitors and not a unique product that separates SoFi from the competition other than the 3% savings account. If you invest in this company, keep this in mind.
- Penny stock territory – It’s also important to point out the share price is around $5 (USD). As referenced in this article, a penny stock is any stock that is $5 or less. Once stocks drop less than $5, there is a 99.9% chance they will never break out past $5 again. And any stock that falls between $5 and $10 is flirting with penny stock territory. There is a 90% chance it won’t break out past $10. The next step is to let institutions dive in and drive the price above $10. At that point, it may be time to invest.
- Student loans – Personally, I’m not a fan of student loans. If someone wants to get an education, in most cases, they should work full-time while going to school, to pay for education as they go to minimize debt. This is what I did and all it takes is a little time management. However, if you anticipate high loans, make sure you factor in your starting salary after graduation and burndown rate. In some cases, a student loan is worth it but in most cases, it doesn’t make sense. You’re better off going to a 2-year tech school for a career in IT or the trades. You’ll have little to no student loans and start out with a decent salary. You’ll also be able to invest earlier (around age 20) and if you invest wisely, by age 40 you may be able to retire or achieve financial independence. It’s also important to highlight that college is becoming less of an interest for young adults because students don’t see the ROI. This is a major risk for a company like SoFi, which generates revenue from student loans.
I would hold back on investing more until this stock nears or passes, $10. We definitely want to see large institutions diving in first, before we invest our own money.
The Summary, Score, and MOS of this stock may have changed since the posting of this review. Please login to Tykr to see up-to-date information.
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