Members

Alright, so my 1M new member prediction turned out to be way off. We’ll have to wait for Q4 for that one (hopefully). The SensorTower data led us astray this quarter. Previously, when you looked at the comparison of what SensorTower predicted for daily downloads and daily new members added, they tracked pretty well.

Before Q2 of this year, and with the exception of Q2 of 2022, which was very high, 0.9 was the lowest number of new members they got per downloads. Q2 of 2025 was also low, but based on the consistency of the data prior to that one data point, I felt it was likely that was an outlier. It now looks like something in SensorTower’s data has gone amiss, as this marks two quarters in a row that break the former trend. I thought the data was pretty definitive and we would get a 1M member quarter. I was wrong.

Regardless, 905k new members is still pretty incredible growth. They did spend slightly more per new member in sales and marketing than they have in the past, but each new member is also bringing in more revenue than they used to, so I’m ok with the extra customer acquisition cost. New members are the lifeblood of their growth. I’m ok with spending a little more to bring more growth.

The rest of my predictions were incredibly close

This is the part where I am going to gloat a little bit. I have never, ever, been so close in my predictions as I was this quarter. My new members prediction was the exception. For everything else, I was spot on. Here were the actuals compared with my predictions in parentheses:

Personal Loan Originations: $7.48B vs ($7.6B) ✅
Student Loan Originations: $1.49B vs ($1.55B) ✅
Home Loan Originations: $945M vs ($950M) ✅

Lending Revenue: $481M vs ($485M) ✅
Financial Services Revenue: $419M vs ($414M) ✅
Tech Platform Revenue: $115M vs ($116M) ✅
Corporate Revenue: -$66M vs (-$65M) ✅

Adjusted Net Revenue: $950M vs ($950M) ✅

Adjusted EBITDA: $277M vs ($294.2M) ✅

Net Income: $139.4M vs ($135.8M) ✅

EPS: $0.11 vs ($0.11) ✅

Really proud of the accuracy here.

Originations

Personal Loans

SoFi just continues to absolutely own the personal loan market. In the last year, originations have grown by $2.6B. To put that in perspective, LendingClub, one of their competitors, just did $2.6B total in all of Q3. The Loan Platform Business alone did $3.37B in originations. That’s more than either LendingClub or Upstart did in Q3. The business that SoFi just started in Q3 of last year is already doing more quarterly originations than either of their top fintech personal loan competitors. SoFi has become the lending demand aggregator by building an ecosystem that invites high-quality borrowers in and then gives them better services than competitors.

One other interesting thing to consider is that several years ago, when I was having lots of back and forth with bears, one of their key arguments was that personal loans are a commodity. In a commoditized market, they said, there will be no clear winner. My argument at the time was that SoFi would be the winner because their tech allows them to be the low-cost provider and therefore offer better rates. Moreover, the stickiness of their ecosystem drives more repeat business. I would love to know what the breakdown is on SoFi’s repeat customers in personal loans vs new customers. We know that LendingClub’s was about 50/50 this quarter, and we know that SoFi’s member base has been increasing exponentially. SoFi is absolutely destroying the competition in this commoditized market.

SoFi is absolutely dominating this vertical.

Student and Home Loans

Student loans got the Q3 boost we expected. Home loans are being helped by lowering rates. These will continue to be an undervalued source of growth until the moment that they start entering into LPB deals. At that point, everyone will start talking about them.

Revenue

Lending

We already covered originations, which were really good, and so lending revenue was likewise very good. Net interest income made a big jump as expected due to lower cost of capital from the capital raise.

Rates coming down will continue to be a tailwind. The noninterest income will continue to fluctuate from quarter to quarter, but it is an ever-smaller percentage of the total segment revenue, so that volatility matters less each new quarter. Sustained consistent secular growth looks like it will continue unabated as they slowly deploy the extra capital they raised in the quarter over the next year or two.

Financial Services

This segment is just plain nuts. Everything about it is outstanding. Let’s talk overall revenue, then LPB, then credit cards, and then potential future continued growth. I could go on and on here, but I’ll try to make it succinct.

For the first time basically since they got the bank charter, noninterest income in financial services was greater than net interest income. Net interest income growth on its own is already excellent, increasing 32% Y/Y. The noninterest income is finally lapping the first quarter of LPB from last year. The growth rate was nevertheless 157% Y/Y. If anybody would have told me this was feasible in Q2 of last year, I would have had a very difficult time believing them. All that noninterest income is fee-based, high margin, and carries no default risk. That’s a beautiful thing.

Loan Platform Business

As has been the case since the release of the LPB, it’s the star again this quarter. I already showed the graph of how it’s already ahead on origination volume compared to Upstart and LendingClub’s marketplace. The Q/Q increase on LPB originations was $920M. What’s more, we already know it is continuing to accelerate into Q4. How do we know? Management told us during the Q&A:

Kyle Peterson: “Was the strength this quarter broad-based in terms of you guys adding participants on the platform on the funding side, or was it fairly concentrated with existing partners?

Chris Lapointe: “Thanks, Kyle. We saw growth across both new partners as well as existing partners who have partnerships with us. What we actually saw is a bit of a flight to quality where a number of existing partners came to us and asked to upsize their commitments not only in Q3, but Q4. We expect continued momentum to occur in the last quarter of the year. We also saw some growth in new partners as well as expanding credit. Net-net, it was growth across the board.

Just how much growth we will see is anyone’s guess, but the flight to quality appears to be real based on how the LPB is growing faster than Upstart’s business.

LPB fees continue to follow originations. Capital-light risk-free revenue is something Wall Street loves to see. I think there is huge upside long term from expanding this to other loan types, and it’s only a matter of time until that comes to fruition.

I don’t know exactly why the take rate expanded in Q1 only to contract again in Q2. Nevertheless, the trend here with that one outlier quarter is that the take rate is slowly ticking up over time. That means the new partners, the existing partners who are increasing their deal size, or both, are also buying them at higher prices, another indication of excellent demand for this product. This is also a product that SoFi is very uniquely positioned to offer. There is not another fintech on the market that could build this business. They have the member base to drive the volume, the underwriting capabilities, the marketing channels, and a uniquely growing cohort of high-FICO borrowers. This business is extremely difficult for anyone else to replicate.

Credit Cards

I want to discuss three quick points on credit cards. First, the new SoFi Smart Card sounds really unique as well, and should come with some excellent benefits as well as novel funding dynamics. I’ll withhold complete judgement until we see the release, but if they are targeting young high earners, a secured card like this sounds like it will be really differentiated for Gen Z, who hate traditional credit cards. I’m excited to see what it looks like.

Second, they are really starting to ramp their credit card offering. Here are average credit card loans outstanding.

The ramp is really beginning. The new smart card should see this further increase as well. Credit cards are very good business for most banks, so this is an area that should lead to another S-curve of growth in 2026 and beyond.

Third, and best of all, ridiculously high net charge-offs seem to be a thing of the past.

SoFi just had their second lowest net charge-off rate ever at 6.6%. The consistent downward trend is so encouraging after the massive problems they had in 2022 and 2023. If they continue to scale this and bring NCOs down, financial services has yet another growth vector ahead of it.

Tech Platform

The slow improvement continues as accounts continue to grow. A lot of this is certainly driven by intercompany revenue, but there are a lot of green shoots for external deals as well. Wyndham hotels, Southwest Airlines, United Airlines, and T-Mobile have decided on Galileo to run their debit card programs. Contribution margin shrank this quarter, and Y/Y growth sank down to 12%. I’ve said it before and I’ll say it again. I won’t start to get excited until they put up at least two straight quarters of 15% Y/Y revenue growth.

Galileo is still the engine that allows them to iterate and improve SoFi. The pace of new product acceleration is a direct result of SoFi moving over to the Galileo core, which is either complete now or very close to it. That juices the margins in the other two segments and gives them the speed to implement their strategy to iterate, learn, and innovate. Without owning the underlying tech, they wouldn’t be able to accomplish what they do. I want to see this grow as much as anyone, but I’m also comfortable knowing that as long as it is allowing the business as a whole to achieve elevated growth rates, that’s good enough.

Corporate

Corporate revenue continues to be an enigma. I wish they would provide guidance so that I could know what to put into my projections. I was dead on in my estimate, but that estimate was mostly a guess derived from looking at the trend in the data. A little clarity here would help a lot.

Total Adjusted Net Revenue

I projected $950M and SoFi came in at $949.63M. It doesn’t get much closer than that. I should probably just retire and never make projections again because I doubt I’ll ever do better than this quarter. 37.1% Y/Y growth on what was an excellent Q3 last year is stellar. They once again beat even the high estimate on Wall Street, which was $935M.

In July, before SoFi reported Q2 earnings, I said it was time for revenue and profits to go from linear growth to exponential growth. In Q2 and Q3, it’s gone exponential. The easiest way to visualize this is by looking at Y/Y growth . If the quarterly growth numbers are flat, that’s linear growth; if the numbers are increasing, that is exponential growth. Y/Y revenue growth was basically between $100M and $150M every quarter for several years. In the last two quarters, it was above $250M. This looks like exponential growth is beginning.

You can also see it by drawing a straight line through the quarterly revenue trend through 2024. You’ll notice that the recent revenue trend is now significantly above the straight line.

Adjusted EBITDA

I didn’t hit this exactly on the head, but I was still very close. They put up $277M and I projected $294M. They reinvested more into the business than I thought they would, which I am also completely fine with. It still beat the highest estimate again on Wall Street, which was $261.6M. You can also see that this is trending toward exponential growth as well.

The data is noisier, but Y/Y EBITDA averaged around $50-$60M per quarter (the spike in Q4 2023, which was helped by one-time line items, was offset by small growth in Q4 2024). The last two quarters were the first two in a row above $90M in growth. And this Q3 was actually against a very hard comp from last year.

Net Income and EPS

Net income of $139.4M with an EPS of $0.11. This did not quite beat the high estimate on Wall Street of $0.12, but it was still a great beat. Nothing too out of the ordinary to report on here, just continued compounding.

Guidance

I thought they’d raise revenue guidance to a minimum of $3,500M, adjusted EBITDA to $1,020M and EPS to $0.37. Actual updated guidance was $3,540, adjusted EBITDA was raised to $1.035M, and EPS was raised to $0.37. Not only did I get the quarter right, I even got the guidance extremely close as well.

Other Thoughts

Focus shifting to cross sell

I think one of the key shifts in SoFi’s progression that is taking place is the focus on building out the ecosystem to be even more comprehensive. They’ve always said that they want each product to be best in class and also for all the products to be better together. I think that “better together” is the piece that is finally starting to get some attention.

The emphasis on SoFi Plus is the first step. SoFi Plus is meant to give you extra benefits across most of their financial and lending products, which should encourage each member to cross sell into more products. They highlighted the partnership with Josh Allen on the call, and they explicitly stated that they will be increasing their investment into SoFi Plus. They also highlighted the Smart Card as another thing they are going to be adding into SoFi Plus as well.

The next step is their foray into consumer-facing AI integrations in the app. This includes the already-existing Cash Coach and what I think will be a much more upgraded version of it that they are just calling “Coach” that is to be released in 2026. They mentioned it on the earnings call, but he went more in depth in the KBW fintech conference this week. This quote is a bit long, but it’s totally worth the read to catch the vision.

Cash Coach is giving you options to optimize your cash. There is something that we have not launched that we are working on right now called Coach.[…] Coach is really meant to be like the equivalent of a ChatGPT for you at SoFi. For example, my credit card was run up to $6,000. I had just paid it off about eight days ago. I am like, I did not spend $6,000 on anything. I went in and clicked on Coach. I said, please give me a list of every transaction that has happened on my SoFi Credit Card since I paid the bill off X days ago. Ten seconds, it has every transaction. Please aggregate them by merchant. All of a sudden, I’m like, holy cow, my family’s spending a lot of money at DoorDash and on Uber and a lot of money on Apple. We have four Netflix accounts. We’re the only family in the country that’s actually paying for multiple Netflix accounts.

You can ask it other things. How do I improve my credit score? How do I lower my cost of debt? Can I refinance my mortgage? Am I diversified enough? How may I change my risk profile? That is something that will come out later. It will be something that’s unique to SoFi because we have all this data on you, but we also have all this data on other people. We can train models based on that data.

Being a one-stop shop all of a sudden becomes a differentiator on usable data to help you get your money right. In the end, we want that product to proactively answer for you the three questions every day.

If they get this right, it will be an extremely powerful tool for cross sell. It will also be a very differentiated tool that I do not believe exists at any other financial institution or bank, that will speak to their digitally native clientele, and that is very likely to drive amazing word-of-mouth advertising. Cross sell is a huge opportunity for them to increase their average revenue per member. Anthony Noto in the past has said, “My hope is that our products per member at that point are on average at three, which means our most heavy loyal people are at five or six and our least loyal are at one or two.” Right now they are very far away from that goal, and the average number of products per member only just recently bottomed and started to go up. I think Coach is the key to really build this metric.

Products per member went up initially after IPO and then dropped precipitously when crypto rolled off the platform in Q4 2023 and Q1 2024. It’s been basically flat since then but ticked up slightly in Q3. The recent improvements to Invest, crypto launch, SoFi Pay, rollout of Cash Coach and Coach, and especially the perks from SoFi Plus should hopefully help drive this key metric up. This is something I’ll be tracking closely into the future.

Flight to Quality

I’m going to zoom out for a minute. When Anthony Noto came on as CEO in 2018, he told the board that not only would they not meet their student loan origination growth expectations, but that there would be an intentional decrease in originations. He set out, instead, to rebuild the business from the ground up with a relentless focus on building durable revenue and profit streams that would be consistent throughout the economic cycle. The focus shifted from quick profits and high immediate growth to high-earners and borrowers with consistent cash flow. The ecosystem was built out to be able to support those people through their long-term journey to wealth creation and meeting them where they were and helping them to achieve their financial goals.

We’ve all heard the 3-5 minute Noto pitch so often that most long-term investors can quote it. “One-stop shop for all our members’ financial needs,” “be there for every big financial decision and all the days in between,” “help them spend less than they earn and invest the rest,” “get your money right,” etc. At times these just seem like platitudes. I hear them at the beginning of a CNBC interview or investor conference and think “c’mon, we’ve heard this before, let’s get to the other stuff.” But I don’t think those are just words to Noto. They represent the vision that he created when he took over. That is his north star.

The results they are seeing right now are the fruits of those long years of labor. They could have increased originations in 2021 when rates were low, liquidity was high, and money was essentially free like LC and Upstart only for those numbers to crash afterward. They could have circumvented the years-long arduous process of becoming a chartered bank. There were many times they could have sacrificed durability to pull growth forward.

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Instead, Noto and team built a product, team, and business that was focused on creating long-term value, building a trusted relationship with their members, and results that would be durable, consistent, and resilient. The unrelenting demand they are seeing through the LPB from asset managers, hedge funds, banks, sovereign wealth funds, and insurance agencies is a direct result of that long-term focus on quality. The phrase “flight to quality” was used five different times. The origination numbers I put above are significant data to back up that claim. SoFi’s years of building things the right way is now yielding differentiated results.

Conclusion

Another fantastic quarter for SoFi is in the books. The beat-and-raise nature of this business continues to show itself time and time again. There are a lot of catalysts coming. A slow drop of rates is ideal for their business, QT is coming to an end, S&P 500 inclusion appears inevitable and seems very likely to materialize in the next 12 months, and they have the cash flow to reinvest into the business. This is becoming such an easy company to hold for me now. Can’t wait to continue to see what the future holds.

The main reason for that outperformance? Last year at this time is when they debuted the Loan Platform Business. It took everyone off guard and has turned into a huge part of their business. In Q2 of this year, just the fee-based revenue was $105M. When you include referrals and servicing, the LPB is already a business with an annualized run rate over $500M. I don’t think they’ll get above 40% revenue growth again, but they also don’t need to. They need steady, consistent, sustainable growth. Noto and company aren’t interested in building a cyclical business, they want to create a secular compounder.

Members

It’s been an excellent quarter for website traffic. I took this image from Future Investing.

Moreover, Q3 has shown a sequential increase of more than 100k new members in each of the last two years. In 2023, there were 584k new members in Q2 followed by 717k new members in Q3. In 2024, they followed up a 643k new member Q2 with a 756k new member Q3.

The last piece of data we have is the recent SensorTower data that also came from Tannor at Future Investing. This is the total app downloads across both Android and iOS, and it actually maps pretty well to new members. Here is new members per day compared to downloads per day for all the data that Tannor showed in his video. I don’t have access to the raw data, so I just transcribed what he had on screen. The trendline is also shown below. The R-squared value is 0.91, which essentially means that 91% of the change in the value of new members can be predicted by the change in new downloads. That’s an exceptional correlation.

If you use the trendline equation, you come up with a value of 1,054k new members in the quarter. You can also see how Q3 in each of the last two years has outperformed the correlation. As I said, Q3 is actually a seasonally strong quarter usually for new member adds.

Based on that recent data from Tannor, I increased my initial estimate of 940k new members to 1,010k new members. I would not have predicted a 1M member quarter prior to seeing the SensorTower data, but it really seems plausible now. That might be slightly high, but in my opinion, the download data is definitive that new members will almost certainly be above 960k in my opinion. Members are the lifeblood of everything that SoFi does. This is, in my opinion, the most important growth metric to track in the long term. SoFi will find ways to monetize members over time. Getting them in the door gives the company the opportunity to do so. I also expect about 20k churned members, putting the net member increase at 990k.

Originations

Personal Loans

We also had some fun personal loan data during the quarter courtesy of a SoFi bear. Here was a tweet that surfaced at the beginning of October about SoFi’s personal loan data.

Unsurprisingly, this bear cherry-picked the only bearish part of very bullish data. The data do show that August M/M numbers were down 22% from July. However, what they failed to mention is that that was still 41% Y/Y growth and in July and August combined, there was 59% Y/Y growth compared to July and August of 2024. If that 59% Y/Y trend continued for all of Q3, it would imply $7.78B in PL originations and 11.6% Q/Q growth.

The point of highlighting a one-month drop of 22% was to stoke fears of a slowdown in business. The overall data show quite the opposite. The data does not show September so I’m just extrapolating to get the $7.78B number, so take that with a grain of salt. As an aside, YipitData’s historical back test accuracy actually looks quite good. Their data seem very credible. That’s great since it’s so bullish. However, the overall signal is looking very nice. Because August was a bit of a down month for originations, it seems probable that September also may not be as high as July’s numbers. I think SoFi will originate around $7.6B in PL originations.

Student Loans

The third quarter is historically very strong for student loans, and I expect that to be no different this quarter. Many students go back to school, so the in-school loans usually get a boost. I think we see the highest student loan origination numbers that SoFi has had since before the pandemic at $1.55B.

Home Loans

Rates came down meaningfully in Q3 and SoFi is obviously putting an emphasis on home loans. There has been a lot of marketing, they’ve added HELOCS, and just this week they announced the $3M expansion of their Charlotte offices and stated they plan on hiring several hundred new employees. Their Charlotte office is the office they acquired when they purchased Wyndham Capital a few years ago. I’m guessing business is going well, and this is a key growth area they’ve identified for the next few years. I think Home Loans sets a new ATH in Q3 with $950M

Potential LPB Upside?

Last quarter I highlighted that there was potential upside if they expand the credit box or if they add student loans or home loans. They ended up expanding the credit box and we saw a meaningful uplift in originations. I think that credit box expansion will continue to be gradual as they gain trust in the underwriting. But that leaves both student loans and home loans as potential expansions for the LPB. I think it’s likely that it happened in Q3 or will happen in Q4 as management has talked about it several times in the last 3-6 months as a possibility. If that expansion happened, it’s very possible that my student loan or home loan numbers could be low.

Revenue

Lending

Net Interest Income only goes one way for SoFi. Noninterest Income is fairly lumpy, but with a good origination quarter and rates coming down, it should be strong. I have lending revenue increasing to $485M in Q3 on the continued expansion of the balance sheet and strong origination growth. Noninterest income should be bolstered by the strong home loan and student loan quarter as well.

Financial Services

I never get tired of looking at this graph of Financial Services quarterly average revenue per member.

Combine this growth with the exponential member growth and the results have been wild. Last quarter they made $30.86/member in financial services revenue. They are ramping Invest and credit cards, and obviously the LPB continues to expand every quarter. I’m assuming $32.50/member this quarter, which I think is a reasonable ramp. It will definitely be low if the LPB scales into new loans, but I think it’s a good estimate. That leaves us with $414M in FS revenue for this quarter

Tech Platform

We’ve seen some real green shoots here. Last quarter was their first quarter of real growth in a full year. They’ve been rolling out the Wyndham deal, their internal revenue should continue to increase, fintech is coming out of its winter and into its spring, and I’m actually slightly encouraged and think continued growth is a real possibility. I have $116M in revenue projected for this quarter. They’ve invested a lot into this business and I really want it to start paying off.

Corporate

I think if there is a disconnect between myself and others it will probably be here in corporate revenue. Technically, this should come down for the last two months if they used the capital raise to pay off their corporate revolver, because the interest they pay on that is a portion of the corporate revenue line item. The corporate line item is lumpy, but it just keeps getting worse and worse, and it isn’t a rounding error anymore. It’s become a big enough line item to worry about. I’m projecting -$65M in corporate revenue, which more negative than last quarter’s -$61M number despite the interest savings that should be coming in. I would love to be wrong here, but the trend seems pretty consistent.

Total Adjusted Net Revenue

That leads to my total projected ANR of $950M. That is 37% Y/Y growth on an extremely solid Q3 from last year. SoFi did not give specific quarterly revenue guidance for this quarter for the first time as a public company. They did give a 2H revenue projection of $1,746M. Even if you split that evenly between Q3 and Q4, that’s only $873M a quarter, which is wildly low. Analysts, as of the time of writing, have them pegged at $888M for Q3, with a high estimate on Wall Street of $935M. A month ago the estimate was $880M, so several analysts have raised their numbers in the last few weeks.

It’s worth pointing out that every quarter for the last 5 quarters, they haven’t just beaten the mean or median estimates, they’ve beaten the highest estimate on Wall Street every single quarter. They are averaging $30M more revenue than the highest Wall Street estimate over the last 5 quarters.

Adjusted EBITDA

To get the type of member growth I’m projecting, it means that they will have spent significantly on new member acquisition. Additionally, they are expanding their credit card, which comes with new provisions for credit losses. In spite of this reinvestment, I still think they maintain incremental EBITDA margins of around 42%, which puts my adj. EBITDA estimate at $294.2M, an increase of around $55M from last quarter’s all-time high of $249.1M. Again, SoFi only gave 2H guidance and not quarterly guidance, but splitting it into two quarters and dividing by two yields an adjusted EBITDA per quarter for Q3 and Q4 of only $250M. Seems sandbagged to me. Analysts are expecting $249.6M with a high estimate of $261.6M. I think they beat both of those marks

Net Income and EPS

The difference between adj. EBITDA and Net Income will continue to increase moving forward simply because as they make more money, they have to pay more taxes. I think the gap between adj. EBITDA and net income will come in around $158.5M this quarter (it was $151.5M last quarter). In theory, if they did use the cash they raised to pay off the corporate revolver, that number would come down by by around $7M as that is one of the line items in their reconciliations. That means I might be slightly bearish here, which would be great. I end up with net income of $135.8M, which corresponds to an EPS of 11.2 cents for the quarter with my estimated updated share count.

SoFi’s guidance implies only 8 cents of EPS for each of the next two quarters and analyst estimates for Q3 are 9 cents, with a high of 12 cents.

Guidance

Their guidance was so sandbagged last quarter that I expect we see big upward revisions this quarter. Even though they’ll still guide conservatively for Q4, I expect the revenue guide of $3,375 for FY25 will be revised upward to a minimum of $3,500M. Analyst estimates are $3,448M. I think for EBITDA the upward revision will be from $960M to above a billion at $1,020M in EBITDA (analyst estimates are $982M). I estimate that their EPS guidance raise will be from $0.31 to $0.37 (analyst estimates are currently $0.32). I’m very confident we see another triple beat.

Price Action

Last quarter I said that I thought that $25 this year was still possible and I really believed that a new ATH above $28.26 would happen this year. At the time the stock had only recently broken $20 for the first time in years. Crazy to think about that now as only a quarter has gone by and the low-$20s seems bearish. This category is just for fun, but I do think that this quarter will definitely justify the current prices in the high 20s, and a guidance raise that large, relative to analyst projections, could easily shoot it past $30 again. If they deliver the quarter I outlined here, I think low-$30s becomes the new floor assuming good macro.

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Of course, I’m notoriously terrible at predicting the price action, so it could easily sell off on excellent earnings. I think the macro is more accommodative now, and there will likely be a rate cut the day after earnings. I don’t think a sell off will happen this quarter if they post the results I expect.

DDI Predictions in One Place:

New Members: 1,010k (990k net new members with 20k churning off the platform)
Personal Loan Originations: $7.6B
Student Loan Originations: $1.55B
Home Loan Originations: $950M
Lending Revenue: $485M
Financial Services Revenue: $414M
Tech Platform Revenue: $116M
Corporate Revenue: -$65M
Adjusted Net Revenue: $950M
Adjusted EBITDA: $294.2M
Net Income: $135.8M
EPS: $0.112

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The information contained in this article is for informational purposes only. You should not construe any such information as legal, tax, investment, financial, or other advice. None of the information in this article constitutes a solicitation, recommendation, endorsement, or offer by the author, its affiliates or any related third party provider to buy or sell any securities or other financial instruments in any jurisdiction in which such solicitation, recommendation, endorsement, or offer would be unlawful under the securities laws of such jurisdiction.

Growth Assumptions

I outlined the reasoning for my growth assumptions in the main article; here are the numbers.

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1. Lending segment growth needs to be ~15% CAGR from 2023-2026 and it needs to maintain a contribution margin of low-to-mid 60s.

2. Tech platform segment growth needs to be ~25% and contribution margins need to be in the mid 30s.

3. Financial services segment growth needs to be ~50% and contribution margins need to be around 30%.

4. They need to stay disciplined with their other costs, allowing them to only increase by about 10% each year.

So let’s dive into the individual segments and see how things are progressing. The title may have given it away, but they are way ahead of schedule.

Lending

Growth

SoFi originally guided for lending to actually be down slightly in 2024 and then for growth to reaccelerate in 2025. Q1 and Q2 of 2024 were muted quarters, but as the macro picture cleared up in Q3 and Q4, SoFi leaned back earlier than expected into growth. As a result, instead of contracting by 5%-8%, lending revenue grew 10.6% in 2024. So they were already ahead of schedule last year to hit their mid-teens revenue CAGR.

The first half of 2025 has been absolutely stellar for lending growth. Growth was 27% in Q1 and then 32% in Q2. Those were both fairly easy comps from a year ago, but they are now so far ahead of their original guidance that even if lending were flat at Q2 levels in Q3 and Q4, they’d still come out $150M above what their original guidance implied they’d need to get to in 2025.

And we know they aren’t going to just stand still. The recent capital raise lowers their cost of capital, which should juice their net interest margin, resulting in more growth. Moreover, that also gives them extra flexibility to expand their balance sheet faster and push for further growth. My original article used the analogy of SoFi needing to go from 0 to 60. To extend that analogy, the lending segment is already in 5th gear. They can pretty much put it in cruise from here to achieve the original 15% CAGR target. They are far ahead of schedule in lending growth.

Contribution Margin

The contribution margin of that revenue is a bit of a different story. My original requirements called for a contribution margin in the low-to-mid 60. Here is what lending contribution margin has looked like for the last several years.

There is some seasonality here as contribution margin tends to bottom in Q2 and then rise in Q3 and Q4 before decreasing again in Q1 and then again in Q2. You’ll also notice that there is a definitive downward trend that started in the middle of last year and that margins have started to decline relative to where they were in 2022 and 2023. That would be slightly concerning if there were no mitigating circumstances here to explain it.

However, there is a very obvious mitigating circumstance and explanation for the decline. It’s the loan platform business. The LPB started in Q3 of 2024. Prior to that point, all revenues from the originations of loans ended up in the lending segment. So every marketing dollar spent generating leads for new originations was a directly attributable expense to the lending segment and led to revenue in the lending segment. That is no longer the case. Marketing dollars spent getting lending leads now contribute to both lending when they originate and hold the loans on their own balance sheet, AND financial services, since that’s where the LPB revenue gets recognized.

In other words, some of the directly attributable expenses that get assigned to lending are a worthwhile investment because they lead to great high-margin low-risk LPB revenue. However, the expenses get tallied up in the lending segment while the revenue gets attributed to financial services. That weighs on the contribution margin on lending while boosting the contribution margin in financial services. And that’s totally ok. It’s worth the trade off as we’ll see below. Furthermore, the extra growth highlighted above means that they are still getting more profit from the lending segment than their original guidance called for even with the lower contribution margin. Lending revenues and overall profits are still ahead of schedule, even if the contribution margin is lower than what I originally set as a goal.

Tech Platform

(Lack of) Growth

Galileo, SoFi’s Technology Platform, has underperformed their guidance. I spent a whole article doing a deep dive on how it has underperformed, what I’d like to see improved, mitigating circumstances, and what to expect from here. Original expectations were for around 25% CAGR for 2024-2026. Halfway to the finish line and the Tech Platform is underperforming. After putting up 21% growth in Q1 2024 off a very weak Q1 2023 comp, they haven’t even come close to 20% growth again since, much less the 25% growth they guided for. Q2 2025 was their best recent growth quarter, and it was barely 15%.

We found out just this week that Derek White, who had been Galileo CEO since June 2021, is moving on and the role is being filled by Bill Kennedy, who had been Galileo’s CFO since January 2022. Galileo is such a black box that it is hard for me, from the outside looking in, to know how valuable Derek White was, how much he’ll be missed, and how good of a fit Bill Kennedy is in that role. He does have some background as a VP of Salesforce’s Payments Product, but all his other recent past roles were in the CFO capacity. My gut tells me someone with more of a product and tech background would be a better fit for the CEO role, but that’s a complete outsider’s perspective.

Regardless, while there are green shoots about there being 10 new contracts that will be bringing in revenue at the beginning of 2026 that weren’t in place in January 2025, we still need more from Galileo. 20%+ revenue CAGR seems very unlikely right now and better execution will be necessary for this to fulfill the “AWS of Fintech” dream that management and investors had for the Tech Platform.

Contribution Margin

Galileo’s contribution margin has stayed right around 30%, so they are at least hitting their margin targets here. They are hiring quite a bit, and all those salaries will be part of this segment’s directly attributable expenses moving forward, so they need growth to accelerate if they want to maintain these margins. The jury has been out on this business for a while now, and 2026 needs to show some real improvement.

Fortunately, the overperformance of Lending and especially Financial Services actually more than makes up for the underperformance of the Tech Platform. This is the one black eye that SoFi has. If they could get back to a mid-20s CAGR in 2026 and 2027, watch out, because then the business would truly be firing on all cylinders. I do not expect that because their execution has been so lackluster now for several years. The rest of SoFi has been a fine-tuned machine, but Galileo needs improvement.

Financial Services

Growth

The previously discussed LPB caught absolutely everyone off guard. Myself and the other retail analysts had been concerned about how it would be possible for SoFi to achieve their very lofty financial services guidance. Wall Street was similarly blindsided by this business that came from nowhere to become SoFi’s primary growth driver.

When SoFi originally set its guidance, 80% growth for this segment in 2024 and a 50% 3-year CAGR seemed like quite a stretch. Now that guidance seems significantly sandbagged. 2024 Financial Services revenue growth ended up at 88%. In Q1 and Q2 of this year, the segment put up 101% and 106% growth, respectively, compared to 2024. Q3 and Q4 comps are much harder since they include the LPB now, but even with absolutely no growth whatsoever from Q2 levels, they would still put up 69% growth in 2025. The LPB has truly been a gamechanger. They are so far ahead of that 50% CAGR guide that at this point it’s basically a foregone conclusion that they’ll absolutely torch those expectations.

And there is a lot more growth to be had here as well. They just started expanding the credit box for personal loans in the LPB last quarter. The wider that box gets, the more fee-based risk-free revenue they get from this line of business. Furthermore, I fully expect that they’ll begin to fold in both student loans and home loans into the LPB in the near future as well. At this point, I think a 70% 3-yr CAGR is a fairly reasonable assumption for the LPB. To put that in perspective, a 50% CAGR would have resulted in 2026 FS revenue of $1.47B. My own projections for 2026 FS revenue is now $2.10B. That’s $600M and 43% more than they originally guided for. And I think they could realistically do even better than that.

Contribution Margin

If you think that’s impressive, the contribution margin on this exponentially growing segment will knock your socks off. Remember that I originally said they’d be able to hit their EPS guidance if they could manage 30% contribution margin in the FS segment. At the time they provided their midterm guidance, they’d only had two quarters with positive contribution margin, so 30% seemed achievable but possibly difficult.

Again, everything changed with the advent of the LPB in Q3 2024. They put up a contribution margin for the segment of 42% that quarter and haven’t looked back since. In Q2, contribution margin hit 52%. Remember what I said about lending absorbing some of the costs for the LPB? This is where you see that benefit. When you couple the massive growth of financial services with the massive operating leverage they are displaying, you end up with profitability far ahead of what even the biggest SoFi bulls could have possibly foreseen even one year ago.

So where does this margin settle out long term? They are reinvesting into SoFi Invest and their credit card, but we can get an idea of where it might end up by looking at Y/Y incremental contribution margins over the last several years. That chart you can find below.

In 2023, when they were really pushing for profitability, incremental margins got as high as 92.4%. That means for each new dollar of financial services revenue growth, 92.4 cents went towards contribution profit. Financial services probably has the most operating leverage of any of their businesses. There are fairly set fixed costs, but the variable cost of each new dollar of revenue is extremely low.If necessary, and if they were only hyperfocused on profitability, they could probably drive 80%+ contribution margins if they wanted to. I don’t expect them to ever get that high because the higher ROI in the long-term is to reinvest a portion of that money to drive future growth. Even with their greater reinvestment into brokerage and credit cards, incremental margins still have yet to dip below 70%.

In the long term, it seems very reasonable to expect margins to settle above 60%, and possibly as high as 70%, meaning that there is still operating leverage in their fastest growing segment. The combination of the massive growth and contribution margin outperformance means that SoFi is WAY ahead of where their guidance and my models thought they’d be in contribution profit. When I first ran these numbers in June 2024, I had contribution profit for FY2025 and FY2026 at $332M and $471M to hit their guidance. My bearish scenario estimate for what they’ll actually hit now that we are halfway through 2025 is $711M in 2025 and $924M in 2026. My own projections for what I think will happen are actually $797M and $1,179M for this year and next year, respectively. In my June 2024 article, the bullish “if everything goes right” scenario for financial services was $415M and $634M for 2025 and 2026, respectively. They will beat my own most bullish estimates for 2026 already in 2025. This outperformance does not get enough ink.

Corporate

If there is one thing bad about SoFi that rarely gets talked about, it’s the corporate revenue line item. I used to dismiss this mostly as a throwaway line because it was small and fluctuated quite a bit from quarter to quarter. It isn’t small anymore. As deposits have become a larger and larger portion of their funding base, the fluctuations to corporate revenue have increased, and they’ve been mostly to the downside.

Corporate revenue fluctuated around +/- $20M per quarter for three straight years. However, starting in Q3 2024, it dropped to -$40M and it’s only gone down since then. Corporate revenue is made up of the revenue they pay on their corporate debt and reconciling the difference between lending and financial services net income with their Funds Transfer Pricing. For the last year, the reconciliation amount has become increasingly negative each quarter. There is no way to predict this, but the point is that some of the growth that I was so effusive about above with regards to lending and financial services can be attributed to the fact that this number is so negative.

My original projections from June 2024 assumed corporate revenue would be around -$40M per year. A value of -$60M/qtr adds a significant wrench into the projections that was not accounted for properly in the past. The extremely frustrating thing is that I have absolutely no idea how to project this value going forward. What changed from Q3 2023 to Q4 2023 when it went from -$20M to +12M? Why did it fall so far in the last year? Will this revert back to -$40M or by next year at this time will it be at -$80M or -$100M? I know this company about as well as any non-employee, yet I have no answers to those questions. I wish there were more clarity here and I wish that there were some way to predict it.

I hate operating in a vacuum of information. It’s especially frustrating when I’m trying to make multi-year projections. So I’m adding a fifth target to my original list, which is that corporate revenue needs to stay below $75M/qtr. I’m trying to be conservative, so for my bear, bull, and DDI projections outlined below, I’m assuming -$260M in corporate revenue for this year and then -$300M in corporate revenue (which is -$75M/qtr) for every subsequent year. If anybody reading this has more info on how to model the corporate revenue line, please reach out.

Other Expenses

Other expenses have ticked up slightly above the 10% YoY number that I originally set as a target. That’s actually okay though because revenue growth has also accelerated beyond what we expected. They will ramp reinvestment back into the business if they continue to overperform. Anthony Noto talked about this in the last earnings call.

I think it’s really critical that we invest for the future. We want to compound 25% revenue growth for decades, not just for a couple of years. So we don’t want to under invest in the business. In the quarter, if we start to outperform relative to expectations on the revenue line, we’re going to have a hard time spending that money back in the quarter. And so if you see us above the 30% incremental EBITDA margin in the quarter, it’s because we outperformed relative to what we thought and we couldn’t spend the money fast enough. But we are going to make sure that we keep putting $0.70 of every incremental revenue dollar back into the business

So if they are outperforming on growth in the rest of the business, it’s alright for their expenses to increase a bit. They still need to stay disciplined, but as long as the expense growth does not increase too fast relative to the outperformance in revenue, it’s not a problem.

In Q1 and Q2, other expenses grew by 13.7% and 12.7%, respectively. That’s well within the range afforded them. For my bullish scenarios, I actually had 15% Y/Y growth in other expenses and for my own DDI projections, I had 13%. The 10% number was what would be required if they hit their guidance. Since they are above and beyond that guidance, there is flexibility here.

Dilution

Not going to spend a lot of time here, but I do just want to say the updated scenarios account for the dilution from the recent capital raise and assume 4% annual dilution moving forward.

Scenarios

Below you will see the revenue and EPS outcomes for 2024 through 2027 for a bearish case, bullish case, my own projections (labeled DDI). I’ve also included the outcomes from what I originally calculated in June 2024 that they’d achieve based on the guidance they gave at Q4 2023 earnings (the green line), so you can see how ahead of schedule they are, which is also the reason I included 2024. I’m not sharing every growth and margin assumption (I’ll keep that to my paid subscribers), but you can probably get a reasonable approximation from the discussion above.

Revenue

Let’s start by looking at expectations for the top line.

You can see that despite the Tech Platform underperformance relative to their medium-term guidance, the business as a whole outperformed by around $240M last year and is on pace for around a $340M beat in 2025. Even my bearish projections, which assume a major slowdown starting in Q3 2025, are not far from the original guidance. SoFi is significantly ahead of where they need to be to hit their guidance. To get an idea of how far off analysts have been, I’ve also included their estimates from June 2024 and current estimates in the graph below. My estimates (blue) and the guidance curve (green) are the same to so you can compare across the graph above and graph below.

Look at the massive difference between what analysts thought this year’s revenue would be just a little over a year ago and what they think it will be now. Their expectations back then were for $2.78B revenue in 2025. Their estimates now are $3.45B, and I expect $3.53B. Their estimates will end up being wrong by something like 25%. In June 2024, I wrote “I really have a hard time believing SoFi will not completely blow analyst top line expectations out of the water over the next several years given the analysis I just went through.” I was right.

EPS

Same graphs but now for EPS.

My predictions have them coming in at $0.75 in EPS in 2026. I’m assuming a fairly high amount of reinvestment. The main differences between my own projections and the bullish projections are that the bullish predictions assume a return to real growth for the tech platform, whereas they remain pretty much at current levels in my own projections, and the financial services growth is maintained at around 5% greater levels in the bullish case. The bullish scenario also has higher contribution margins across the board, which really helps the bottom line. The contribution margins are probably a little too high for this level of growth, but it’s a bullish scenario. The main takeaway though, is that $0.55-$0.80 in EPS next year seems basically inevitable barring a massive recession. They are way ahead of where they need to be to hit their guidance.

My prediction gives them a 2026 EPS growth rate of 95% compared to 2025. If my predictions are accurate, and the stock is trading around $30 in January when they report Q4 earnings, it would be trading at a FWD PEG of 0.42. A FWD PEG of 1 is considered undervalued. Here are those EPS projections compared to analyst estimates from 2024 and current analyst estimates.

Analysts have finally caught up with the bottom of SoFi’s own 2026 guidance and are now predicting $0.55 EPS in 2026. It only took them 20 months of wrong predictions that were too low to get there. I suspect they will continue to play catch-up on both revenue and EPS.

Reality vs 2024 Bullish scenario

It was interesting to check how SoFi is trending compared to the bearish, base, and bullish predictions I made in 2024. This is instructive to me because it helps me understand where I was right and where I was wrong and how I can improve my own predictions moving forward. It also shows how well SoFi has or has not executed relative to what I thought was possible a year-and-a-half ago. Here are those 2024 revenue scenarios compared with my current DDI prediction.

My current projections are almost EXACTLY aligned with what I thought would be the most bullish possible outcome in June 2024. I only did this comparison after having completed the rest of the article above, so I had no idea these were so close. This reiterates to me once again just how incredible SoFi’s execution has been. They made my revenue growth stretch goals a reality.

There are two reasons my current EPS predictions are lagging the 2024 bull predictions despite the fact that SoFi is hitting the bullish revenue predictions. The first is that I underestimated the amount of other expenses that would be needed to accomplish this growth. At the time I said that other expenses were “by far the most difficult one for me to project,” so I’m not surprised I got it wrong. The second is the recent share offering. I’m now projecting about 10% more shares outstanding than I had previously. Even with those adjustments, it’s still trending way above where anybody on Wall Street thought it would be at this point. Noto and team deserve a lot of credit for what they’ve accomplished.

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SoFi could coast to their guidance, but they won’t

SoFi is way ahead of their own guidance for 2026. They could play it conservative at this point and hit the lower end of the guidance by resting on their laurels. Fortunately for investors, that isn’t how this team is built. SoFi has tailwinds for the first time since becoming a public company. They have balance sheet flexibility, a proven ability to exceed their own lofty expectations, and profits to reinvest into new verticals. Moreover, Crypto is coming back, rates are coming down, and they’re completing the transition to having everything on their own backend software. Things are lining up to be extremely exciting for the next 12-18 months. Rather than coast, I actually expect them to shift into an even higher gear.

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The information contained in this article is for informational purposes only. You should not construe any such information as legal, tax, investment, financial, or other advice. None of the information in this article constitutes a solicitation, recommendation, endorsement, or offer by the author, its affiliates or any related third party provider to buy or sell any securities or other financial instruments in any jurisdiction in which such solicitation, recommendation, endorsement, or offer would be unlawful under the securities laws of such jurisdiction.

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This article will focus on translation. I’ll cover the argument first, followed by why I think it’s flawed, and then we’ll look at the data.

Real-Time Translation as a Bear Case

The argument goes like this. Duolingo is primarily a language learning app. Therefore, its primary use case is to communicate with other people in a foreign language. If there is a suitable alternative to communicating with other people, it will eliminate demand for the product.

Here is Google’s recent demo where Google translates a conversation with Jimmy Fallon.

And here is a recent marketing material from Apple showing off live translation on their new Airpods (link goes to X)

https://x.com/i/status/1965462807253827725

And now Meta has joined in the fun with live translation and live captioning on their new smart glasses. Those are impressive tech, and the latency will only get better with time. Nobody is going to waste their time learning a new language when they can just put in an earpiece and AI will translate what is being said in real time. That sounds reasonable…

Real-time Translation is Actually a Red Herring

…if you’ve never learned or spoken a foreign language. I speak two foreign languages. I learned German and spent two years as a missionary in Germany. I learned Spanish because we visited my wife’s grandparents, who only spoke Spanish, multiple times a week for well over a decade. I’ve also taught others to speak a foreign language. After returning from Germany and while still an undergrad, I spent two-and-a-half years training other prospective missionaries in German-speaking countries.

Here is what people who speak foreign languages understand that those who only speak one do not. Real-time translation is no substitute for learning or knowing a language. There is almost no overlap between the two. I know this sounds backwards to a lot of people, especially in the USA where only about 20% of the population is bilingual. However, the main use case for learning a language is not so that you can have a conversation with people when you go visit a country or you're at a business meeting.

Translation is Transactional Only

Go back and watch those demos again. There is still significant latency. Imagine how labored and difficult having a full conversation would be with those lags. “But Chris, that latency is only going to get better and at some point will be instantaneous”. That’s true, the processing will get so good that the time it will take to translate the words and sentences will be, for all intents and purposes, instantaneous. That will not solve the latency problem. I’ll prove it to you.

All languages are unique. The grammar, sentence structure, intonation, cadence, and wording are always unique. That means that even if the translation process is instantaneous, having an earbud doing the translating for you will still have lag. Here is the above paragraph written in English but with German grammar:

I speak two foreign languages. I have German learned so I two years as a missionary in Germany spend could. I have Spanish learned because we my wife’s grandparents multiple times a week for well over a decade visited have, who only Spanish spoken have. I’ve also others taught, a foreign language to speak. After home from Germany returning and while I still an undergrad was, have I two-and-a-half years spent, in order other prospective missionaries for German-speaking countries to train.

See what I mean? If you are translating from German to English or English to German, you can’t just translate in real time as the words are spoken. You have to wait until the end of every sentence or clause before you can start translating. Even with quantum computing, there is going to be latency in “real-time translation”. The use case for real-time translation is during transactional conversations including asking directions, understanding what that cool building is, or buying flowers at a market like in the Apple commercial. Even a business meeting can be done this way because the parties involved have a vested interest in exchanging information and will remain engaged for that reason. And honestly, Google Translate has been able to solve all those use cases for years already. Yes, the latency is going down, but this tech isn’t new, it’s just slightly faster, and it’s still only useful for transactional conversation.

Real-time translation will forever fail in casual conversation. Nobody is going to stick in an AirPod and have anything remotely resembling a real conversation with a friend. There is too much friction in translation. Even with the intonations, which were really good in the Google demo, there is still too much that is lost in translation. The syncing of gestures and eye movements, the timing of the jokes. The innuendo and subtleties of a normal conversation. Nobody learns a language so they can buy flowers or go to a business meeting. They may use Duolingo for a few days to get a feel for French before visiting the Eiffel Tower, but that individual has no value to Duolingo anyway. They are using the free version for a few days and then churning off anyway. I couldn’t care less about that as an investor.

It’s an Answer Looking for a Question

Why would I use Duolingo if AI can translate in real time is a question built on a flawed assumption.

Consider the following similar questions:

Why would I learn to play chess if a computer has been better than the greatest human grandmaster for over 20 years?

Why would I learn basic arithmetic since the pocket calculator has been around since 1970?

Why practice an instrument if a synthesizer can play the notes perfectly every time?

Even better, why learn anything about music at all if AI can just generate songs?

The assumption that people are making is that the main reason people learn a language is to be able to translate. That is incorrect. Very few people learn a language to be able to translate it. Just like you don’t learn math so that you can calculate the product of 468 and 3,792 in your head and you don’t learn an instrument so you can hear it played by a master. You learn a language to progress, to immerse yourself in another culture, to better yourself, to be able to connect with your own heritage, because you think it's fun or the foreign language is beautiful, to connect with a loved one, to maintain a language you already know, and a hundred other use cases that are rarely translation-related. For non-native English speakers, learning English is often a stepping stone to higher-paying jobs. That will continue to be true even as real-time translation gets better.

Which Opinion is True?

You can make a case for why translation disrupts Duolingo. I can make a case for why it doesn’t. I think my case is based on first principles and is correct, but is there a better way to determine who is right? Maybe we can look at the actual data? Does Duolingo keep track of why people learn a language? Yes, they do. So why do people start learning a new language?

English, Spanish, and French are the three top languages worldwide. It’s English first, by a wide margin, and then the other two. Above you find the chart provided by Duolingo for the main motivation of their new learners last year. If your reason for learning a language is for self-improvement, social purposes, or entertainment, then the ability to translate a language will not affect your demand for the app. The top three categories are absolutely and unequivocally not affected by translation.

Education won’t stop with better translation, we just established that translation does not support connection between people, and translation isn’t going to stop people who are using it just to have fun. “Spend time productively” is also pretty safe. The perception of “productive” may change slightly if people think that learning a language isn’t productive. However, I think it’s pretty clear that what is meant by productive is that they actually feel good about what they are doing. The bigger driver here is that people feel better using Duolingo instead of doom-scrolling TikTok, Instagram, or Facebook. And that will remain true. So the top four reasons for using the app are virtually unaffected by the advent of better real-time translation. Real-time translation also has no effect on people who start using the app to boost their career.

The only category truly affected is people preparing for travel. If you are going on a trip and you don’t have time or desire to become fluent, but you want to be able to function while traveling, or understand some key words and phrases, then these real-time translation items, whether earpieces or glasses, will almost fully fill that use case. As covered above, if these people are only using Duolingo to prepare briefly for travel ahead of a trip, they are almost certainly not high-value customers to lose. And those who are looking to travel to fully immerse themselves in the full cultural experience may still use the app anyway.

If real-time translation were a problem, it would have already eroded their business

I think the strongest argument against real-time translation undermining Duolingo’s growth is actually very simple. This type of translation has been available since long before Duolingo went public. Here is a demo of real-time translation from Google from 10 years ago on YouTube

Again, the latency and accuracy are better today than 10 years ago, but this functionality existed in 2015. That is the same year that Duolingo began to monetize its app. So literally every dollar they have ever made has been made in a market that included real-time translation as an option for their users. Duolingo went public in 2021, when Google Translate already had low latency and high accuracy. For anyone who thinks Duolingo will be disrupted by real-time translation, I have one simple question. Why is this time different? I have yet to see a single good answer to that question. I am convinced that real-time translation does not represent a credible risk to Duolingo’s business.

Subscriber Info

The DDI YouTube Channel is live. Work has been extremely rough this year and demanded a lot more of my time. I’m going to get back to a more regular cadence of articles and YouTube videos as things should be settling down some in the coming months. If you want to support my work, you can subscribe here on substack, or on X, or, now, on YouTube.

Paid subscribers get three perks.

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If you are a paid subscriber and not in the X chat, please email me at datadinvesting@gmail.com and let me know and I’ll get you added. If you have any other ideas for things I can do to bring value to my paid subscribers, don’t hesitate to reach out.

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The information contained in this article is for informational purposes only. You should not construe any such information as legal, tax, investment, financial, or other advice. None of the information in this article constitutes a solicitation, recommendation, endorsement, or offer by the author, its affiliates or any related third party provider to buy or sell any securities or other financial instruments in any jurisdiction in which such solicitation, recommendation, endorsement, or offer would be unlawful under the securities laws of such jurisdiction.

What does it mean to dilute?

A company’s market cap is how much the stock market thinks that company is worth. Take the current stock price, multiply it by the shares outstanding, and voilà, you get market cap. Using today’s SoFi stock price ($25.63) and the latest data for shares outstanding (1.20B), SoFi has a market cap of $30.68B. I own a tiny fraction of that amount. For simplicity’s sake, let’s say I hypothetically own 1,200 shares. That means the percentage of the company I own is my shares divided by the total shares, or 1,200 / 1,200,000,000 = 0.0001% of the company. My hypothetical shares would be worth 0.0001% of the market cap, or $30,680.

Now, let’s say tomorrow that SoFi issues another 100M shares and gives them away and the market cap stays the same. Those shares didn’t create any value, but now I own a smaller amount of the business. All else equal, the stock would immediately rerate from $25.63 to $23.60, still maintain a market cap of $30.68B, and I’d own a slightly smaller piece of the total pie worth $28,320.

That’s dilution. My piece of the pie got smaller because I own the same number of shares, but the total number of shares has increased. Like watering down your kid’s kool-aid because you want them to get less sugar. The new shares are the added water, the total shares are the amount of liquid in the pitcher and the company’s earnings is the sugar, and darn it, I like the taste of sugar. Now it tastes worse because I get less sugar when they pour out the same amount of kool-aid (my shares) into my cup.

When dilution doesn’t dilute

Everything above assumes that the new shares don’t come with any upside. Most people, myself included, tend to think of things on an absolute basis. I usually chart revenue, contribution profit, EBITDA, and net income on an absolute basis. But really, it should all be on a per-share basis. What matters to investors is the revenue and profit generated for each share we own.

Last quarter, SoFi made 8 cents of earnings for every 1 share of public stock. That’s what EPS is. Let’s say that in the example above, those 100M shares were issued and bring in an extra $20M in net income in a quarter. That’s 20 cents of EPS ($20M / 100M shares = $0.20 per share). If the core business continues earnings 8 cents per share, the new, higher-earning shares raise the company’s average EPS to 9 cents per share. In that case, the capital offering isn’t actually dilutive, it’s accretive.

In the kool-aid analogy, this is like taking watered down kool-aid and adding concentrate to it. Am I adding more liquid (shares) to the pitcher? Yes, I am. But that water actually has more sugar (earnings) in it than the existing mixture. So when they pour out the same amount into my cup, I actually get more sugar overall. In this analogy, that sugar is a good thing (don’t tell my kids).

SoFi’s Capital Raise

On earnings day, SoFi announced that they would be raising $1.5B via an equity offering. Later that same day, the pricing for that raise was finalized. SoFi ended up selling 71,942,450 shares at a price of $20.85 to raise $1.5B. As of the end of Q2, there were 1,113,443,000 shares outstanding. So adding ~72M increased the shares outstanding by 6.46%. The stock immediately dropped in after hours trading from its closing price of $22.40 to $20.92, a 6.6% drop, which is logical, as it kept the market cap roughly the same.

Management Suffers from Dilution More than I Do

Anthony Noto, Chris Lapointe, and all their management team own orders of magnitude more stock than I do. These shares aren't going to them, so it isn't like there is a misalignment of interest here. Dilution hurts them more than it does me if it isn't for the long-term benefit of the company. Moreover, their PSUs expire next June, so they have a really large incentive to get the stock above the $25, $35, and $45 hurdles in those PSUs in the short term. So their incentives are for both the short-term and long-term benefit of the company.

Is this offering dilutive?

The core question is this: will the capital raised from these new shares increase earnings by more than 6.46%? What is SoFi going to do with that cash that they raised and how much is that worth? On July 31, SoFi Investor Relation’s X account posted an explanation about the plans for the capital that was being raised. Those plans include:

1. “Pay down expensive debt”

2. “Consider opportunistic acquisitions (though none are currently contemplated)”

3. Gives a “stronger position for potentially greater growth”

4. The pay down of debt would make it “neutral to EPS”

Let’s dive in and see if this share offering is dilutive or accretive. Are they watering down our kool-aid or adding concentrate?

Paying Down Debt in the Short Term

Paying off their highest-cost debt is the low-hanging fruit for this new capital. How much debt does SoFi have and how much does it cost them? We can find the answer in the 10-Q

SoFi has a total of $3.94B in debt. The most expensive debt that they would be using this cash for is the revolving credit facility, of which they have $486M drawn at a rate of 5.92%. The risk retention warehouse facility, of which they have a mere $4.7M drawn at 5.95%, and their loan warehouses, where they have a total of $2,120M drawn at rates between 4.95% and 6.05%. Digging deeper into the 10-Q, the average rate they pay for the warehouse facilities is 5.23%.

Let’s assume they immediately pay off the risk retention warehouse and the corporate revolver. Combined, that’s just under $500M of debt they pay off to save $29.05M in annual interest. That leaves around $1B left to pay off around half of what is left in their warehouse facilities. Let’s assume that they pay off the highest cost debt and that the rate there is 5.3%, which would be $53M. So, all told, if the only thing they did was pay off debt, they are saving $82M annually in interest for the 72M shares they issued. That equates to $1.14 in saved expenses per year, or $0.28/quarter. Last quarter they earned 8 cents per share. So just paying off debt alone makes this capital raise accretive to the bottom line in the short term. Keep in mind that these interest rates move with the SOFR, which basically moves with the Fed Funds rate. So the interest savings will decrease as the Fed cuts rates.

Putting the capital to work in the long term

So, in the short term, it’s accretive. What can they do with this money in the long run? Raising an extra $1.5B in capital means that they can grow their loan book by around $8B-$10B. I detailed the reasoning behind that number in a previous article. Let’s take the midpoint and call it $9B. They make around 6% net interest margin on their loans, so that’s about an extra $540M in interest income per year. Then you have to subtract their defaults and other related expenses to determine the impact on earnings.

SoFi’s management has been very clear that they want to get 20%-30% return on equity. They are not yet fully optimized for profitability, but their ROE last quarter was already 8.6% and it’s growing quickly. I think the 20%-30% target is very achievable. That would mean that in the long term, that $1.5B in equity should turn into $300M-$450M in annual profits. Again, this is for 72M shares, so we’re looking at an extra quarterly EPS of $1.04-$1.56 for those new shares once they have all that capital fully deployed. That’s substantially more than the $0.08 generated last quarter, making the raise highly accretive in the long run.

Acquisition

The other possible use of the capital would be an acquisition. More than likely, we’d be looking at something in the crypto space. I think this is probably a fairly low probability since I’m guessing the valuation of things in the crypto space during this raging crypto bull run are probably fairly extended. I trust management’s capital allocation strategy in this regard as they’ve done a good job folding prior acquisitions into the ecosystem. I don’t want them to overpay, but I also think it’s unlikely that this happens in the near term.

This is not a dilution

So, this capital raise, even if they only pay off debt, is accretive in the short term. If you trust that they will allocate the capital in the long term to get 20%-30% ROE, then it’s extremely accretive in the long term as well. This is not dilution because the earnings that are generated from selling the shares add extra earnings to the bottom line.

That doesn’t mean I have to like all of it

My initial reaction was that I did not particularly like this offering. After a deeper dive into the numbers, I do like it. However, that doesn’t mean there aren’t downsides to this, and I have some dissenting opinions to share. Two of my concerns are about timing, one is about alternatives they could have employed, and then the final one is just about mindset.

Alternatives

Other ways to save on interest

This was absolutely an accretive capital raise, there can be little doubt about given what was presented above. However, there are alternative ways to accomplish the same thing. For example, SoFi has $25.26B in savings deposits. Decreasing the rate they pay on savings APY by 0.3% would give the same savings in their interest paid out as the capital raise. That might hurt their members, and I don’t know what the elasticity of demand is for deposits, so it might not be the right thing or even possible. I’m just trying to illustrate that there are other ways to accomplish the same thing for no increase in the shares outstanding.

I think there are other low-hanging fruit that could accomplish the same thing. The most obvious example to me is business checking accounts. Nerdwallet’s best business checking page has accounts that are paying a measly 1.5% APY as their top pick. I admittedly do not know what it takes for SoFi to launch business checking accounts. I don’t know if there are regulatory hurdles that make it so they can’t roll that out. What I do know is that SoFi would probably rocket to the very top of the list of best business checking accounts by offering like 1.6% and giving businesses reasonably good tools to work with. You know, like the same exact type of tools they already offer through SoFi at Work.

After receiving their bank charter, they easily grew their consumer deposits by over $2B/qtr for years. It’s hard to imagine with the large member base that they have that they couldn’t match that by offering SMB accounts. Even paying 1.6% would allow them to offset the same amount of interest and replace the expensive corporate revolver debt and warehouse facilities with low-cost deposits. It seems feasible they could achieve even more interest savings and have done so with no additional shares sold AND expanded the products they offer and the stickiness of their platform. And business checking does not seem a particularly high-risk product to launch. In fact, business checking deposits have the potential to offset more than $1.5B of high-interest debt. With high adoption, they could feasibly pay off the entire corporate revolver and all warehouse facilities in 2-3 quarters, saving even more than the capital raise.

Organic capital growth is accelerating

There was a time when SoFi’s capital was declining every quarter because they had not yet reached profitability. They are now past that stage and their organic capital growth is sustainable. They are now hitting an inflection point in their profitability. That means quarterly capital increases should already be accelerating from here. While the capital raise is accretive, the company was already on a path of sustainable organic growth.

Furthermore, they have made a big deal about shifting to a model that is based on capital-light fee-based income. A $1.5B capital raise signals a heavier reliance on their balance sheet for growth, not a pivot to more capital-light growth. I don’t care as much about this as others do, but there is a disconnect here between their messaging and their actions. The alternative to the capital raise is to sustainably grow the balance sheet organically as their profitability increases. A capital raise turbocharges the growth for now, but at some point the business has to become self-sustaining. As the graph below shows, they were already on the path to sustainability even without the capital raise.

I highlighted in my last earnings review that SoFi has been building out its student loan portfolio and in Q2 they even bought back student loans that were previously sold to other institutions. There might be something I am not understanding, but I do not see how that helps with their 20%-30% ROE goal. I calculate the returns on those loans to have lower ROE. They’ve grown the student loan portfolio almost the same amount as the personal loan portfolio over the past two years. Those are lower return assets, and buying back those low-yield loans eats up capital. If they had not bought those student loans, they might be able to raise less capital but get the same long-term returns. I trust management, and I readily admit I am not an expert here. They are certainly better allocators of capital than I am and I literally have no banking experience while they are running the fastest growing bank in the United States. I’m far from an expert, but I am going to point out things I see as an investor that leave me with unanswered questions.

Timing

I did not like the timing of this offering for two reasons. First, announcing the offering on earnings day took the shine off of the superb results. There were about eight hours where the exemplary execution, growth, outperformance, and profitability were the story. Then the offering was announced and derailed the entire conversation. I care much more about fundamentals than I do about the narrative, but that is actually the reason this bothered me so much. This capital raise took the focus away from the improving fundamentals and put it squarely back on the narrative. It often takes Wall Street some time to digest really good results. And while in the long run the fundamentals are shining through, I’d prefer for the emphasis to be there.

The second reason I didn’t like the timing is that it was fairly obvious the stock was heading higher, and they could have the same outcomes with fewer shares sold by waiting. If, for example, they had done the raise at $25 rather than $20.85, you get the same benefits, but for only 60M shares instead of 72M. So you get the same benefits, but for 20% less shares issued. I think selling those shares at $20.85 was below the company’s true value even if the outcome is accretive.

Again, I trust management. I know they’ve probably been waiting to pull the trigger on something like this for a while. I know that you have to strike while the iron is hot. I don’t have the information that they have. Maybe Jane Street, who it looks like was a major buyer of the offering, was only willing to go in at that price or there was a time element here that I don’t know about. I don’t have a peek behind the curtain to know anything for certain. I do know that, all else equal, waiting just a couple weeks could have made this offering 20% more accretive for all shareholders, including management.

Mindset

After this offering, I fully expect that there will continue to be capital raises in the future. SoFi has now used equity as a way to fund growth on four separate occasions. The first was the 2026 convertible notes, which were used to capitalize the bank. That was an absolute home run from a business standpoint. The second was the Technisys acquisition. While the jury is still out on that one, I think I’ve seen enough to know that in the long run, the vertical integration alone was almost certainly worth it. The third time was the 2029 convertible note deal, which saved them interest and helped alleviate capital constraints at a time when that was a much bigger concern. That was also a net positive. They are three for three in my book and I’m sure they’ll make it four for four. This has become a trend and it is something that management obviously views as a growth tool.

However, during the time of the 2029 convertible note deal, I wrote, “I don't like that they are diluting at such a low stock price because I think SoFi is very undervalued at these prices.” The stock at that point was trading at $9. As expressed above, I find I have a similar sentiment with this capital raise as well. I can’t shake the nagging feeling that I don’t know if management assigns its equity the same value that I do. I know what I think this company is worth and it is only finally starting to approach the bottom end of what I consider its fair value now. I don’t like raising capital through an equity offering of what I consider an undervalued company.

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Using equity to raise capital is a tool they often utilize. And they do those raises at what I consider to be discounts to what the equity is truly worth. There will now always be the specter after every run up that they are about to drop an offering. If it is always accretive, the truth is that they absolutely SHOULD be doing these offerings. However, their willingness to issue equity at prices I consider undervalued does not sit right with me.

Conclusion

I don’t think there is a legitimate argument to be made that this is anything but bullish for the stock in the short term and the long term because it is accretive to earnings in both the short term and the long term. However, the fact that it is bullish does not mean there aren’t aspects that I consider bearish, which I also covered above. I’ll always give objective criticism when I see fit, but I’d also be a fool not to realize that the good obviously outweighs the bad. This management team has expertly navigated every imaginable headwind and perpetually pulled rabbits out of their hats when the market and the macro left them for dead. As an investor, I savor the prospect of watching this team deploy fresh capital as they finally enter their first period of sustained tailwinds. The future is extremely bright and this capital raise gives them the flexibility to take full advantage of this opportunity. I think we will see them cement their status as one of the preeminent companies and management teams of the decade in the next 12-18 months.

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Yes. And they didn’t just skate by; they delivered a whopping 43.8% YoY revenue growth. They haven’t had that kind of growth since Q4 2022. Back then their YoY absolute growth was $163.5M. This quarter that absolute revenue growth was $261.3M, which is by far their best absolute growth number (their previous best was Q1 at $190.1M). And it isn’t like this is just growth-at-all-costs type of performance either. EBITDA and net income margins hit new highs at 29.0% and 11.4%, respectively, and their incremental EBITDA margin, which they guided to 30% this year as they reinvest into the business, was actually 43%.

SoFi posted record growth and still managed to drop over 40 cents of every new dollar earned to the EBITDA line. I think the 30% long-term EBITDA margins they have guided for are actually a floor, and based on the actual results, long-term EBITDA margins will be much closer to 40%+ once they are fully optimized. That combination of growth and margins puts them in truly elite company, and the Rule of 40 proves it.

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Rule of 40

For those who aren’t familiar, the Rule of 40 was popularized by Brad Feld, a venture capitalist. It’s a fairly simple rule of thumb that was used to evaluate worthwhile investments in the SaaS (software-as-a-service) industry. The concept is that if you add the company’s revenue growth rate to its profit margin, the sum of the two should be 40 or higher. This means that the company can be high growth and low profitability (e.g. 55% growth but -10% margins, for a rule of 40 score of 45), medium growth and medium profitability (30% growth and 15% margins for a rule of 40 score of 45), or low growth and high profitability (10% growth and 30% margins for a rule of 40 score of 40), and be considered a worthwhile investment in all cases.

The choice of profitability metric varies. Some use EBITDA, others operating income (or EBIT), and still others use free cash flow. EBITDA is probably most often used, but it’s certainly not universal. Since SoFi uses EBITDA and GAAP net income as their primary profitability metrics, we’ll use EBITDA. It also helps that virtually every tech company publishes their EBITDA, so it’s a good metric for comparing companies. SoFi’s Rule of 40 has been above 40 every quarter except one since going public. Here is their EBITDA Rule of 40 score for the last three-and-a-half years.

A Rule of 40 score of 45 or higher for the entire time period and of 73 in the recent quarter shows truly exceptional consistency and results. How exceptional? Let’s take a look at some of their best US fintech competition. These are companies that have, for the most part, been growing consistently throughout the last several years and are either profitable or very close to it. Here is SoFi’s rule of 40 (in blue) compared to Robinhood (green), Shift4 (gray), and Affirm (yellow). Affirm hasn't reported their earnings yet for this quarter.

Only Robinhood has managed to post a single quarter better than SoFi’s Q2 print. And Robinhood had an extremely rough 2022 and 2023, where they posted a rule of 40 score of -63 at the low in Q1 2023. It is easier to post growth after a period of contraction, which SoFi has never had. HOOD has had some monster quarters recently, but for sheer consistency, nothing beats SoFi’s performance. FOUR is the next closest, but has been under SoFi every quarter except Q2 2024, where they came in at 45.4 to SoFi’s 45.2. To my knowledge, no other US fintech that has had an IPO in the past 5 years has posted a Rule of 40 score above 40 every quarter since the beginning of 2022 except SoFi. That is incredible consistency and execution in any industry, but especially one that is supposedly rate-sensitive during a rate hike cycle. SoFi’s management still does not get enough credit for what they’ve accomplished.

Originations

I thought that SoFi would have $5.8B in personal loan originations. They absolutely demolished my estimates and came in with a whopping $6.97B. They beat my estimate, which I considered fairly bullish, by almost $1.2B. Let’s look at their originations compared to other fintech lenders LendingClub and Upstart.

That graph is majestic. In four years, they went from less than half of Upstart’s and LendingClub’s origination levels to almost triple their competitors origination levels. SoFi now dominates the personal loan space, and they are expanding their credit box through the LPB. I’ll cover more about the LPB in a minute. They are maintaining about 60% market share between these three companies despite both LC and UPST putting up very good YoY growth numbers. It’s so impressive that SoFi not only became the dominant player as others weakened, but has maintained that dominance even as the macro has turned more favorable.

Revenue

Lending

Net interest income continued to grow and noninterest income reverted to a more typical number. While the $443.5M number was under the $457.5M I projected, it’s still great growth. We could see bigger jumps in future quarters as a result of the capital they just raised offsetting high-interest costs as they said, but I’ll save a deeper dive into that, and my full thoughts about the capital raise, for another article.

Tech Platform

Hey, a positive surprise here as Galileo actually grew this quarter and beat my expectations of $106M (which were more bullish than many others in the SoFi community) by putting up $109.8M in revenue. That’s 15.1% YoY growth, which is the second highest growth they have put up since lapping the Technisys acquisition bump in Q2 2023. It’s a respectable result. After Q2 of last year, I said that, “I will not be fully convinced [that Galileo is back to growth] until I see four straight quarters with 15%+ YoY growth.” They barely beat that threshold this quarter, and Q3 is a tougher comp for Galileo, so we’ll see if they get over that hurdle.

Encouragingly, the contribution margin, which had been under pressure and decreasing for a full year seems to have stabilized this quarter. I'll need to see that confirmed next quarter to know if has truly bottomed. In ancient history in March of 2023, at the KBW Fintech Payments conference, CFO Chris Lapointe said this about contribution margin for Galileo (emphasis added by me):

On the Tech Platform side of things, we've been operating in the low to mid-20s from a contribution margin perspective. Part of that is as a result of the Technisys acquisition. Pre-acquisition, we were operating in the low 30s. We've been investing pretty aggressively in the platform and the people to really build out a combined offering and scale that business. And as we start to get more and more scale in that business, we do expect to get that to a 40%+ long-term margin.

I don’t think they’ve spoken about long-term contribution margins since then, but it would be nice to see them move consistently toward that 40% target from here as growth appears to be returning. I do think they’ve invested heavily in engineering and product development, so that might be a margin headwind for a while, but it’s something to keep an eye on. I want to see the revenue growth outpace the directly attributable expense growth from here.

I also love the detail they provided on the benefits their new client, Banco Nacion of Argentina, is already seeing:

The implementation, which started with corporate banking, has already resulted in a 25% increase in organic client growth and reduced implementation time from months to just 4 business days. They've now positioned themselves to unify mobile and desktop banking systems for over 10 million consumer banking customers as well.

25% in organic client growth is a lot of growth, and reducing implementation times is an efficiency boost for any business.

Also, just something to point out. They started out with corporate banking and are now moving to consumer banking. One piece of low-hanging fruit that I think is ripe for SoFi to pluck is SMB banking accounts. Technisys obviously already has the infrastructure available if they are doing corporate banking on their core for Banco Nacion. Would love to see them roll out those corporate accounts sooner rather than later.

Financial Services

I’m not a fan of all caps, but there are certain times where they are acceptable…

ARE YOU KIDDING ME?!?!?

We all knew that financial services results were going to be good. Nobody thought they’d be this good. I said in my earnings preview that there could be fireworks in financial services if they expanded the credit box on the LPB or they added student loans and home loans to the mix. I didn’t build any of that into my predictions. We saw fireworks and my predictions were way off. I thought there’d be $322.6M in revenue and it came in at $362.5M. I have never been so far off on a revenue projection for any segment as I was for Financial Services this quarter. It blew my numbers completely out of the water. Let’s throw up some graphs. First, revenue by type:

Noninterest income was up 358% YoY. 358%! And check out contribution margin:

It’s almost as high as lending and now comes in at 51.9%. Remember that KBW conference I mentioned above? Here is what Chris Lapointe said about Financial Services contribution margins in that conference:

Then on the Financial Services side of things, as I mentioned, we've been investing really aggressively. We were at a negative 100% contribution margin in that business. We've made progress every single quarter. We're on the precipice of getting to breakeven in that business, and we expect to get to a 20% to 30% contribution margin in the long-term.

From -107.5% contribution margin in Q3 2022 to 52% in Q2 of 2025 and way higher than the very top end of their long-term contribution margin guide from two years ago. Wow. Look at the return to growth in average Financial Services revenue per member. Where are the bears worrying about how SoFi is just pumping their member numbers with people who are checking their FICO scores and isn’t monetizing their members? In hibernation, that’s where.

Lending Platform Business

The driver, of course, is the lending platform business. The expansion of the credit box is super exciting for a number of reasons. Obviously it expands their revenue as they are able to offer their partners more loans. It also gives them data that they never had before in FICO bands that they’ve never lent to. They can also now convert people outside their own credit box (which, remember, has a hard cut off at a FICO of 660) into the SoFi ecosystem. They service all loans that come through the LPB, meaning that for all intents and purposes, it looks to the person who gets the loan like they are getting it from SoFi. They become a member, they login to SoFi to make their payments, and they enter the financial services productivity loop to be cross-sold into other products.

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The QoQ growth in LPB volume is way higher than I anticipated, especially as there were no LPB agreements announced. SoFi had $1.56B in LPB volume in Q1 and then it rocketed to $2.45B in Q2. That is a 57% QoQ growth rate. We knew that this was going to be strong, but nobody expected it to be that strong.

More on originations in a second. The LPB take rate normalized back down to 4.28%, which is very close to where it was in Q3 and Q4 of last year.

Now here is the craziest part of all. One year ago, this business did not exist. Now, just the LPB fees, not including the referrals (which are also growing because now they have more ad spend going towards finding people looking for loans) or servicing, is on an annualized run rate of $420M. If you include referrals and servicing, that number is $522M. They built a half-billion-dollar business from scratch in one year. This isn’t a product launch that could someday be a $100M business. It will be a billion-dollar business sooner rather than later.

One of the mic drop moments in the Q&A that I’m not sure many caught was Chris Lapointe saying, “What I would say is we aren't guiding specifically to LPB originations in the back half of this year, but we do expect continued growth in momentum in both Q3 and Q4.” More growth in Q3 and then more growth on top of that in Q4 is really exciting. And student loans and home loans are going to happen in the LPB. It’s a matter of when, not if.

Let’s put this into context for just a second. The vast majority of Upstart’s entire business does the exact same thing as SoFi’s LPB. Upstart was founded in 2012. They’ve been building this business for over a decade. SoFi has been at it one year. Here is SoFi’s LPB origination volume compared with Upstart’s total personal loan origination volume over the last five quarters (I’ve also included LendingClub’s Marketplace, which is a similar product for them, for reference).

SoFi has built an entire Upstart inside their own company in less than a year. They almost had more originations this quarter than Upstart did. SoFi’s loans have no loss share agreements nor co-funding agreements. Upstart’s have both. Upstart’s take rate also fell in Q2, a big reason for the drop in their stock price (though its take rate is still much higher than SoFi’s LPB). SoFi expanding their credit box is also slowly ratcheting up the competition with Upstart, who cater mostly to lower FICO borrowers. The overlap between their target audiences is still fairly minimal, but with SoFi going down the FICO chain and Upstart going up, the overlap is increasing each quarter. It will be very interesting to see how this develops over the next year. If SoFi’s LPB can overtake Upstart in volume, which looks very plausible from the graphs above, there might not be words to describe how bullish that would be.

Wallet Share and Spend

One of the bigger pieces of data that doesn’t affect revenue as much as some of the other things I’ve discussed, but is still hugely significant, is how much people are spending through SoFi. Debit cards are a huge source of interchange for SoFi and credit cards are a smaller contributor but growing more each quarter (more on this in a minute). In Q2 of last year, SoFi users spent $9B in annualized spend with SoFi debit cards, according to their earnings call. This year, including both debit and credit card, that number is up to $18B on an annualized basis. That is double the amount of spending.

This does lead to some extra revenue, as interchange revenue is up 83% YoY from $14.45M last year to $26.50M this year. The bigger deal to me though is that spend is up 100% while membership is up 34%. People complain about SoFi not publishing their monthly active users. This is as important a metric as you can imagine for how much people are using SoFi and engaging with it as their primary bank. Given that much growth, it’s reasonable to assume that new members are using SoFi as their primary bank more than existing members and SoFi Plus and other network effects are succeeding in getting existing members to also engage at a higher level. This is clear evidence of the flywheel they are building.

Credit Cards

SoFi’s credit card business has been a drag on their earnings as far as I can remember. The main problem is that they got their underwriting wrong and have been digging themselves out of that hole for several years. This has been their biggest operational mistake since I’ve been a shareholder, but they have really turned a corner.

Charge-offs peaked at a whopping 19.3% in Q1 of 2023 but have now come all the way down to 7.7%. Credit cards could easily be another billion dollar business, but they had to deal with these massive losses and get the underwriting correct first. It looks like they’ve done that and I expect that credit cards will be one of the sleeper best-growing portions of SoFi’s business in 2026. If you look at average credit card lending, you can see that it was basically flat for five straight quarters from Q4 2023 through Q4 2024 at around $270M. In Q1, it finally saw a little growth to $297M and then in Q2 it really accelerated to $342M. The ramp in growth is obvious, and the additional capital they just raised should allow them the flexibility they need to accelerate that ramp. I also think we’ll see some creative credit card products tied to secured credit and crypto in the next year or two from SoFi. This is one of their next growth S-curves in the making if they can keep defaults down as they lean back in.

Nitpicking

This was such an outstanding quarter that it was really difficult to find things not to like. However, there are two little things I want to mention to keep an eye on.

Student Loans

SoFi purchased another batch of older student loans at the end of Q1. They had a higher charge-off rate, so the student loan charge-off rate went up. They probably got a good deal on them, so I have no problem with that purchase. However, it has now been five straight quarters with no student loan sales at all. Student loans also have longer terms, so they don't pay down as quickly as personal loans. As a result, they are building up student loans on the balance sheet at almost the same rate as personal loans. Between Q3 2023 and Q2 2025, they added about $5B in student loans to the balance sheet and $5.4B in personal loans.

Student loan average weighted interest is only 5.93% compared to 13.09% for personal loans. My calculation for SoFi’s weighted average cost of capital is 3.49% in Q2. That means the net interest margin (NIM) for student loans is only 2.36%, compared to 9.52% for personal loans. So $1B of student loans on the balance sheet makes SoFi $23.6M in net interest income compared to $95.2M if they were using that space for personal loans instead. While student loan default rates are tiny, a 2.36% spread is quite small.

I don’t fully understand why they are carrying $10B of student loans on the balance sheet and not selling any. Home loans, which are secured by the home as collateral, had a NIM of 4.05% last quarter. SoFi sells all their home loans within 2-3 months of origination at a gain-on-sale margin (GOSM) of 1%-2%. Meanwhile, student loan fair values are 105.8% of principal, meaning they should be able to sell them for 5.8% GOSM. Why keep student loans, which generate lower NIM despite having a high GOSM, while selling home loans that have higher NIM and lower GOSM? I hope somebody asks them about this at some point, because it doesn’t make a lot of sense to me. I’m sure there is a strategy here, but I would like to know what it is.

During times of stress, it will be nice to have a ton of high-performing and very low-risk student loans on the balance sheet. They aren’t going to see the type of potential spikes in defaults that personal loans do. However, wouldn’t home loans accomplish the same goal, but with higher net interest income?

Cyclicality

This deserves a deeper dive but it is worth mentioning here. SoFi’s LPB is incredibly exciting. However, it introduces additional cyclicality into SoFi’s business. Demand for these types of credit products is cyclical and eventually we are going to hit a period where demand for loan assets dries up. At that point, SoFi is no longer completely the captain of its own ship. If Fortress, Blue Owl Capital, and other asset managers and banks all pull back at the same time, LPB volume, revenue, and profits will take a blow. This is what happened to Upstart starting in 2022 and continuing through 2023. They went from over $4.5B in originations to less than $1B in four quarters (you can scroll back up and see the origination graphs again for reference).

SoFi provides higher-quality borrowers to its partners that are more resilient throughout the cycle. That should shield them from the worst of the cyclicality, but make no mistake, when a risk-off period comes, SoFi will not be immune. The LPB is obviously worth it, but the downside is that SoFi becomes reliant on the decisions of companies outside their control. That’s the risk inherent in building the LPB and while it’s a small one for now, it’s worth pointing out during the rosy times so that investors aren't surprised down the road.

Profitability

Okay, enough with the cautionary tales and nitpicking. Let’s celebrate how SoFi blew my own projections and the projections of everyone else from Wall Street to YouTube and everywhere in between completely out of the water with their profitability for this quarter. I already covered how their incremental margins were way above expectations, but Noto explained why in the Q&A on the call and it was very insightful and crazy bullish.

So I think you're starting to recognize we clearly have a lot of operating leverage in the model and our margins could be well in excess of 30% on the EBITDA line. I've been a student of the evolution of direct-to-consumer technology companies starting back in 1999, and I think it's really critical that we invest for the future. We want to compound 25% revenue growth for decades, not just for a couple of years. So we don't want to underinvest in the business.

In the quarter, if we start to outperform relative to expectations on the revenue line, we're going to have a hard time spending that money back in the quarter. And so if you see us above the 30% incremental EBITDA margin in a quarter, it's because we outperformed relative to what we thought and we couldn't spend the money fast enough. But we are going to make sure that we keep putting $0.70 of every incremental revenue dollar back into the business. In terms of where we're spending it, the greatest increase in the spending in the back half of the year is in our engineering product and design areas.

There are a couple of important tidbits to pull from that quote. First, their margins were so high because they made so much money above their own expectations that they just can’t spend it fast enough. And keep in mind that this is a trend because incremental margins are consistently way above their 30% target. Every single quarter, they make more money than they know what to do with. Those are the kind of problems I love to see haunt the companies that I invest in.

Second, he said that they want to compound at 25% for decades. That is the very first time, to my memory, that he has put the number that high. He’s said 20% for decades before in another interview, but never 25% for decades. Just for reference, if you take today’s share price ($23.50), and you compound it at a 25% clip for the next 20 years, the share price would be $2038, a 480-bagger from its ATL of $4.24. I’d be ok with that.

Finally, engineering product and design teams is where they are spending the money. That's a welcome insight to those of us who are concerned that the product launch cadence has become too slow. Hopefully we see them ramp the speed of innovation and products back up to 2019-2021 levels.

EBITDA

The midpoint of SoFi’s adjusted EBITDA guidance was $205M (which matched analyst expectations of 205.7M). I expected to see $223.7M. SoFi posted a whopping $249M. They beat the midpoint of their guidance by $44M, which is their absolute highest beat ever. They have guided for their long-term EBITDA margins to be 30%. They aren’t even fully optimized for profitability, and yet their margins are already 29%.

Net Income and EPS

An EBITDA beat that large naturally led to a significant beat in net income and EPS. I thought they'd get $83.7M in net income, which translates to an EPS of $0.07. Analysts had them pegged at $0.06. They came in at $97.6M with an EPS of $0.084. The higher tax rate that they guided for did not materialize. Their tax rate was up to 13.3% this quarter from 10.9% last quarter, but still a far cry from the 26% they guided for. There was nothing of particular note in the GAAP reconciliations between adjusted EBITDA and GAAP net income.

What is surprising to me is that analyst estimates still seem very behind. They are still only expecting $0.31 for the full year, and we already have $0.14 in the first two quarters. That only leaves $0.17 for the rest of the year, which is very minimal growth. That just seems unrealistic.

Big picture thoughts

This was virtually a perfect quarter. The business is firing on all cylinders, management answered the questions well, the flywheel is really beginning to spin, there are new products and improvements on the horizon, and even the Technology Platform is showing signs of growth and improvement. The LPB has become a showpiece for the unique strengths that SoFi brings to the table, and the stock, which had been on an absolute tear going into earnings, has justified that move and is continuing its upward momentum. Continued growth and outsized returns for investors in the long run seem inevitable. I can't wait to see what they have in store for us next quarter.

DDI Predictions vs Reality

New Members: DDI Prediction - 835k (815k net new members with 20k churning off the platform)
Actual - 846k (830k net new members with 15k churn)
Personal Loan Originations: DDI Prediction - $5.8B
Actual - $7.0B
Student Loan Originations: DDI Prediction - $1.1B
Actual - $993k
Home Loan Originations: DDI Prediction - $550M
Actual - $799k
Lending Revenue: DDI Prediction - $457.5M
Actual - $446.8M
Financial Services Revenue: DDI Prediction - $322.6M
Actual - $362.5M
Tech Platform Revenue: DDI Prediction - $106M
Actual - $110M
Corporate Revenue: DDI Prediction - -$44M
Actual - -$61M
Adjusted Net Revenue: DDI Prediction - $842.1M
Actual - $858M
Adjusted EBITDA: DDI Prediction - $223.7M
Actual - $249.1M
Net Income: DDI Prediction - $83.7M
Actual - $97.6M
EPS: DDI Prediction - $0.072
Actual - $0.084

Subscriber update

The DDI YouTube Channel is live. Work has been extremely rough this year and demanded a lot more of my time. I’m going to get back to a more regular cadence of articles and YouTube videos as things should be settling down some in the coming months. If you want to support my work, you can subscribe here on substack, or on X, or, now, on YouTube.

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The information contained in this article is for informational purposes only. You should not construe any such information as legal, tax, investment, financial, or other advice. None of the information in this article constitutes a solicitation, recommendation, endorsement, or offer by the author, its affiliates or any related third party provider to buy or sell any securities or other financial instruments in any jurisdiction in which such solicitation, recommendation, endorsement, or offer would be unlawful under the securities laws of such jurisdiction.

Members

Members are the most important metric. Why? Because they are the lifeblood of the company. The ecosystem they’ve built is what allows them to monetize an ever-growing member base with existing, improved, and new products. A huge, loyal, and sticky user base is what allows them the agility to go after opportunities as they present themselves. If you build the ecosystem, then you can lean in on whatever opportunity is available to monetize the members. The LPB is the most recent example of this, a product with massive ROI that is only made possible because SoFi has a deep pool of existing borrowers to draw from and because they have become a trusted name.

SoFi will be over 11M members for certain this quarter. There has been strong website traffic numbers, and with the LPB, they have a greater license to reinvest into sales & marketing. Member growth is going to be a big factor of marketing spend, and I think with the ramp up of LPB and the fact that they are leaning into growth will push them to another record quarter for new members of 835k.

Originations

Personal Loans

We unfortunately did not get any information on when exactly the Blue Owl Capital deal started, so this is still a bit harder to predict than I’d like. Loan delinquencies continue to look great and while there was the tariff scare in April, most of the quarter was marked by strength from the consumer, especially high-income consumers. Each and every quarter, SoFi’s profitability grows, which allows them to continue to grow the loan book at the same capital ratio. They’ve been able to sell plenty of loans at record gain-on-sale margins, and the LPB just keeps growing. The virtuous cycle will continue, LPB originations alone should grow by $200M+, and they’ll set another record for personal originations in this quarter. My prediction is for $5.8B personal loan originations in the quarter.

Student Loans

I think this will be slightly down QoQ. The only reason that it wouldn’t be is if they were able to sign up a partner for student loans for the LPB, which would be a big deal. SL Q2 originations have been down each of the last 3 years; I think that trend holds and there will be $1.1B in SL originations.

Home Loans

The housing market is still not great, but Q2 is traditionally the best quarter for mortgage originations. 30-year mortgage rates have stayed mostly flat since November, so there probably won’t be a massive bump, but I think it will be slightly higher than Q1 at $550M.

Revenue

Lending

Lending revenue last quarter was disappointing relative to my own expectations because of non-interest revenue. That portion is always going to be slightly lumpy, but I don’t think we see the drop again that we did last quarter. I see a strong quarter for originations, with a new ATH for personal loan originations and decent student loan and home loan originations.

Net interest income will continue to climb higher as the book of loans continues to grow. APY on deposits has stayed at 3.8% throughout the entire quarter, so that should be relatively close to what they had throughout Q1 (the last drop from 4% to 2.8% was on January 23). Rates have stayed mostly flat, so hedges and fair values won’t have moved much either. as a result, I think there will be a return to growth here and we see $457.5M of lending revenue.

Financial Services

The apple of every SoFi investor’s eye right now is the LPB. Last quarter’s jump in both originations and take rate was amazing. Revenue per member hit a new all-time high as a result. We know there will be at least some modest growth in LPB originations to $1.75B+. If they can start to expand outside their credit box for personal loans, or include student loans or home loans in the LPB, we could see some more fireworks here.

I’m not building any of that into my predictions here. I’m assuming that they continue to monetize members at the same rate as last quarter, but that still results in financial services revenue of $322.6M, which is still an 81% YoY increase. If they managed to expand the LPB, this could be a low estimate.

Tech Platform

Tech Platform has been the drag on the company’s growth for the past year. There are plenty of green shoots here, with the deals that management has been talking about that are coming online in 2025 and early 2026. The Wyndham deal has been live for a while, but it will take time to scale. That’s also true of many of their deals. The drag from Chime leaving should be done, and the other deals should give some modest growth. I’ll continue to be skeptical of Galileo until we see consistent sustainable growth, and I’m only expecting $106M in revenue for the quarter. I don’t really predict Galileo accounts anymore because they are fairly uncorrelated from revenue, so they aren’t really that important to me for projections. One possible tailwind here is actually that there may be a jump in intercompany revenue as SoFi is close to fully transitioning its entire stack to Technisys’ core.

Corporate

Corporate revenue for the last three quarters has been -$40.0M, -$43.0M, and -48.2M, respectively. I am penciling it in at -$44M for the quarter. Not much else to say here.

Total Adjusted Net Revenue

Sum those up and you end up with my prediction of $842.1M in total adjusted net revenue. Q2 2024 was $597.0M, which means my prediction is for revenue growth of 41.1%. Q2 of last year was a fairly weak quarter, but Q2 2024 was still 22% YoY growth from 2023, so that’s still a pretty decent bar they are trying to clear. For comparison, the last time that Palantir had a stronger comparison they were going against was Q2 of 2022. That’s right, it’s been three years since Palantir had a harder comp than what many people are calling this “weak comp” for SoFi.

40% revenue growth for a company that many wrote off as dead for years and have said exists in an industry where sustained 20% growth rates are impossible would be incredible. SoFi’s guidance for the quarter was only $795M at the midpoint and analyst estimates are for $804M at time of writing. If my predictions are accurate, it would represent a very sizeable beat.

Adjusted EBITDA

This one is also a little difficult to predict. SoFi said to only expect 30% incremental EBITDA margins in 2025. Last quarter they came in above that at around 35% YoY incremental margins. I’m expecting a similar value for this quarter.

That means significant reinvestment back into the business, as I’m predicting only $13M of EBITDA growth QoQ to $223.7M. That’s only $13M of EBITDA growth from $70M of QoQ revenue growth in the quarter. I’m completely ok with that as I would much rather they reinvest into growth instead of paying more taxes by dropping more to the bottom line. Get members into the flywheel, grow the LPB, invest in greater marketing now because the long term returns should be huge as they continue to build the ecosystem. I do want to see them continue to prove out their margins by keeping them around 30%+, but I’m a growth investor and I care more about 25%+ growth than I do about whether this quarter has 7 cents or 9 cents of EPS. Analyst expectations here are $205.7M and their own guidance was $205M at the midpoint, so this would not be a massive beat.

Net Income and EPS

Using what I think are reasonable estimates for the line items between adj. EBITDA and GAAP net income, I come in with a net income of $83.7M. Now, one big caveat here is when they gave their Q4 guidance, they said they expected a 2025 tax rate of 26%. In Q1, their tax rate was only 11%. I am assuming that the Q2 tax rate is going to be close to Q1. If their tax rate is in fact 26% in this quarter, net income would drop to $61.6M. I say this as a warning because I don’t think anyone else, including analysts, are building that higher tax rate into their models. If the EBITDA looks good, but the net income and EPS do not look great, go check the tax rate before jumping to conclusions.

My net income number comes out to $0.072 EPS. Analysts are expecting $0.06 and SoFi’s guidance is only $0.055 at the midpoint. SoFi is not trying to grow net income right now, and while many want a blowout EPS number, I don’t think we’ll get it this quarter or this year. And again, I’m not only fine with that, I’d prefer it. If the higher tax rate actually does happen, there is a decent chance they’d miss on EPS. Just something to be aware of.

Guidance

Tariff macro fears, which were still very prevalent when they reported Q1 earnings, have mostly subsided. Inflation hasn’t really reaccelerated, the labor market is still strong, and probabilities still favor around 2 rate cuts this year. The lower uncertainty should mean they are slightly less conservative with guidance. They’ll raise guidance as they always do, but don’t expect a huge raise simply because that isn’t their style.

Product Announcements

SoFi often likes to announce things on their earnings calls that aren’t public knowledge yet. They did it with the Blue Owl deal in Q4 earnings. There have been a lot of app updates recently that point to crypto and level 1 options being very close (like this post on X from today). Moreover, we’ve also seen Cash Coach live in beta form as well. I would not be surprised if we get one or more product announcements on Tuesday.

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Price Action

I don’t need to tell the people reading this article that SoFi’s price action has been fantastic recently. The stock has a tendency to pull back even on strong earnings. Be prepared for that to possibly happen again. I’m fully prepared to revisit the teens again. Nevertheless, I think $25 this year is extremely doable, and I actually still think we hit a new ATH for the history of the SoFi ticker (which is $24.65), and also including IPOE (which was $28.26) this year.

Tuesday morning can’t come soon enough for me.

DDI Predictions in One Place

New Members: 835k (815k net new members with 20k churning off the platform)
Personal Loan Originations: $5.8B
Student Loan Originations: $1.1B
Home Loan Originations: $550M
Lending Revenue: $457.5M
Financial Services Revenue: $322.6M
Tech Platform Revenue: $106M
Corporate Revenue: -44M
Adjusted Net Revenue: $842.1M
Adjusted EBITDA: $223.7M
Net Income: $83.7M
EPS: $0.072

Subscriber update

The DDI YouTube Channel is live. Work has been extremely rough this year and demanded a lot more of my time. I’m going to get back to a more regular cadence of articles and YouTube videos as things should be settling down some in the coming months. If you want to support my work, you can subscribe here on substack, or on X, or, now, on YouTube.

Paid subscribers get three perks.

1) Access to a private X chat.

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3) I send out a portfolio snapshot at the beginning of each month which shows my total allocation to each of my positions.

If you are a paid subscriber and not in the X chat, please email me at datadinvesting@gmail.com and let me know and I’ll get you added. If you have any other ideas for things I can do to bring value to my paid subscribers, don’t hesitate to reach out.

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Disclosures: I have long positions in SoFi and PLTR

The information contained in this article is for informational purposes only. You should not construe any such information as legal, tax, investment, financial, or other advice. None of the information in this article constitutes a solicitation, recommendation, endorsement, or offer by the author, its affiliates or any related third party provider to buy or sell any securities or other financial instruments in any jurisdiction in which such solicitation, recommendation, endorsement, or offer would be unlawful under the securities laws of such jurisdiction.

We interact in a bubble of people who are highly focused on investing. That bias colors our perceptions and opinions. Because of the circles we interact in, there is significant emphasis on the brokerage platform of SoFi compared with its competitors, specifically Robinhood. When you view everything through the lens of investing, it means that the fact that SoFi’s Invest product is not as good for active investors as Robinhood’s gets an exceptional amount of attention.

And it is true that SoFi is not as good of a platform for active investors as Robinhood. That also doesn’t matter as much as you think.

SoFi doesn't care much about adding level 1 options, great charts, or any of the other stuff we care about because we are avid investors. We are not their target market. Their brokerage product is catered to passive investors. That's why they have an award-winning robo-advisor and are prioritizing alternative investment funds like their enhanced-yield ETF THTA, the Ark Venture Fund, Templum partnerships to invest in, SpaceX, Anthropic, Databricks, and xAI. They recently launched additional private market funds. If options were a priority, they'd have focused on that first.

Now, I don't like it because I love selling options, but they aren't catering to you and me. They want people who will turn into wealth management customers. That's their focus. They are not focused on day traders or people actively looking into options strategies. You can say that's the wrong strategy, and you may be right, but you can't fault them for not delivering on something that they aren't trying to deliver. So many people give the company grief for its brokerage offering and say they miss the mark.

The truth is, they aren’t even aiming at that target, so you cannot criticize them for missing something they aren’t aiming for. In our hyper-focus on the target of the best brokerage for us, we completely miss the bullseye they hit on the target they are actually aiming at. It seems to me that very few people consider that the mark isn't being hit because they aren't even shooting at it.

Yes, eventually if they want to be a one stop shop they have to have a brokerage that competes on all fronts, but they have bigger and more important fish to fry. If you are an active investor who uses options strategies, SoFi is a terrible brokerage for you. But that's also not what they're trying to build right now. It's like complaining about Robinhood because they took until 2025 to roll out their robo-advisor (Robinhood Strategies). A roboadvisor was not their focus, they want to cater to active traders first. SoFi will get there eventually, but it just isn't a priority right now. It actually sounds like they are starting to pivot and beginning to put resources into Invest again, but I think it will continue to be catered to passive investors rather than active ones.

It may be the wrong strategy, but it also may be the right strategy. This is data-driven investing, so let's just look at raw numbers. 58% of US households own stocks directly or indirectly. About 20% of them own single stocks. Of that subset, well under 10% actively trade. SoFi is trying to get the TAM of the 90% of passive investors and building a wealth management system for them rather than focusing on the 10% or less of active traders. They are intentionally ceding the active trader market to others for now. This is by design.

None of this is to take anything away from Robinhood, who have been relentless in their execution and have capitalized magnificently on the opportunity they’ve been presented with the equity and crypto bull run. Honestly, my hat is off to them for the rapid product velocity and relentless pursuit of innovation. I turned constructive on them as it became clear the credit card risk I was concerned about would not materialize and I initiated a position earlier this year via LEAPS.

What is SoFi aiming for?

So, if they aren’t focused on brokerage, where is their focus? It’s exactly where it should be, standing up a new business line that is already delivering $300M+ annualized revenue at 50%+ contribution margins. I’m talking about the Loan Platform Business.

SoFi is uniquely placed to build this business. Nobody else has the ecosystem, the underwriting chops, or the excess demand that SoFi has. LendingClub, Upstart, Pagaya, and Affirm don’t have the consumer ecosystem. Robinhood, Chime, Dave, and MoneyLion don’t have the underwriting experience. Nobody can marry the two like SoFi can. And SoFi hasn’t (yet) even included student loan and home loans in the LPB. They will eventually, and if they can simultaneously expand the credit box, this business can easily be a billion dollar business in the next year or two and continue to grow from there.

It also comes at the exact right time. Banking regulations are set to relax, meaning that banks will be able to increase the assets they hold. That gives liquidity to the market and drives demand for the type of loans that the LPB offers. Combine that with the fact that rates will be falling in the next year or two, and there is very fertile soil for the LPB to rapidly grow.

LPB is Crushing Competitors

The LPB shares a lot of similarities with LendingClub’s marketplace business, and Upstart’s entire business. All those businesses do the marketing and underwriting and transfer the loans and risk almost immediately to a third party. Upstart has significant loss share agreements with their partners. SoFi has none at all. And look at how quickly SoFi’s LPB is growing relative to their competitors.

SoFi’s LPB didn’t exist until Q3 of 2024. In it’s debut quarter, it already had over 3x the originations as LC’s marketplace. By Q1 2025, in only its third quarter of existence, it already crossed $1.5B in originations. SoFi’s LPB is only originating loans in its existing credit box, but is looking to expand to other FICO ranges and to other loan types (student and home loans). SoFi built an entire Upstart inside its own business in less than a year.

This highlights something important to consider. When I initially was looking at SoFi and LC and Upstart, I thought a key differentiator was going to be the underwriting. It turns out that all three of these companies do a great job underwriting loans and get above-average returns for their credit boxes. However, it also turns out that underwriting is not the most important factor. The way it has played out is that building a sticky and trusted ecosystem, where you can cross-sell customers on other products and you get customers coming back for repeat business, is a much more important factor than underwriting. The hardest part about underwriting loans for these companies isn't the underwriting, it's finding potential customers at a reasonable cost. Lower customer acquisition cost (CAC) juices returns and volume much more than underwriting.

Think of it this way. On the margins, better underwriting in a normal environment can probably yield defaults that are lower than competitors by maybe 1%-2% in the prime plus category. Let’s look at the unit economics on each loan and see if lower defaults or lower CAC results in better returns. Here is what Anthony Noto said in Q1 2023 earnings about their profit per loan:

Let’s just say, over the course of the time, our average variable profit on a personal loan, and so that would be the revenue of that personal loan less the life‑of‑loan losses—the funding costs and variable operating costs and the customer acquisition cost—results in $800 of variable profit. That could have a customer acquisition cost of anywhere between $600 to $1,000.
If someone comes in through Relay, and they do credit score monitoring or they connect accounts or they're in checking or savings, and we see that they have a bunch of credit card debt and can benefit from consolidation, we would make a term‑loan offer to them or personal‑loan offer. If that person adopts that personal loan, the variable profit goes from $800 up by the savings on customer acquisition costs, so anywhere to $1,400 to $1,800.

SoFi’s average life of loan losses is 7%-8%. Lowering this down by 1%-2% would mean decreasing defaults to 5%-7%. That would increase total returns by around 10%-20%, from a variable profit of $800 to around $900-$960 per loan. Meanwhile, having a lower CAC increases the variable profit per loan to $1,400-$1,800. These aren’t mutually exclusive, and obviously the best option is to have both low CAC and better underwriting, but if you had to choose just one, you’d choose lower CAC every time.

This is why SoFi’s LPB will continue to win. It benefits from the financial services productivity loop, an advantage unique to SoFi among their competitors. They can drive volumes that the others cannot because they have an entire ecosystem of borrowers that they are constantly turning down for loans. They are beginning to monetize that group and their ability to monetize them will only increase as time goes on.

SoFi is Hitting the Bullseye on their Target

Let’s put this in perspective. SoFi has been a publicly traded company since Q2 2021. In that entire time, 15 full quarters, their cumulative brokerage revenue stands at $83.2M. The LPB has been in existence for a grand total of three quarters. The cumulative LPB revenue in those three quarters, not including servicing revenue, is $162.4M. Here is a graph of cumulative brokerage revenue compared with cumulative LPB revenue since SoFi has been a public company.

This isn’t a comparison. Level 1 options, fancy charts, and even crypto may add up to an extra $10M-$20M of revenue combined per quarter in the near future. Moreover, it would be competing head to head in a product category where SoFi has no leverageable competitive advantage. By way of contrast, there is no other company that is positioned to build and scale a lending platform business like SoFi. They have a unique and defensible competitive advantage here that they are using to build a billion-dollar business. There is no doubt; the return for investors from building the LPB is significantly higher than anything they could have achieved with SoFi Invest. SoFi is disrupting where THEY choose, not where we think they should, and the results speak for themselves. Judge them where they are focused and you’ll end up with a more accurate picture of the business than trying to prescribe to them what they should be doing.

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Subscriber update

The DDI YouTube Channel is live. A sincere and heart-felt thank you to those who support my work. If you do want to support my work, there are several ways to do so. You can subscribe here on substack, or on X, or, now, on YouTube.

Paid subscribers get three perks.

1) Access to a private X chat.

2) I buy stocks every week, and I send out my weekly DCA weighting list to subscribers

3) I send out a portfolio snapshot at the beginning of each month which shows my total allocation to each of my positions.

If you are a paid subscriber and not in the X chat, please email me at datadinvesting@gmail.com and let me know and I’ll get you added. If you have any other ideas for things I can do to bring value to my paid subscribers, don’t hesitate to reach out.

You can also use my referral links for SoFi if you want free money when you sign up for SoFi, or discounts on Tesla or finchat.io:

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Disclosures: I have long positions in SoFi and Robinhood.

The information contained in this article is for informational purposes only. You should not construe any such information as legal, tax, investment, financial, or other advice. None of the information in this article constitutes a solicitation, recommendation, endorsement, or offer by the author, its affiliates or any related third party provider to buy or sell any securities or other financial instruments in any jurisdiction in which such solicitation, recommendation, endorsement, or offer would be unlawful under the securities laws of such jurisdiction.

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Members

The 11M members turned out to be a red herring. They are certainly above that number now, but that made my prediction inaccurate. Even so, this was the highest number of new members in the history of the company with 802k new members. There were also 13k churned members during the quarter, which led to a net quarterly member increase of 789k members up to 10,916k total members.

They also achieved this without significant increases in customer acquisition costs, even as the TGL deal went live. CAC has remained very consistent at just under $300 per new member for quite a while now. I think SoFi is probably comfortable with that number. It is very encouraging that they've managed to quickly scale member additions per quarter while maintaining the same CAC. SoFi’s marketing team is doing an excellent job.

Originations

Personal Loans

I guessed $5.7B for personal loans, with a range of $5.4B-$6.0B. They came in at $5.53B, inclusive of $1.56B in the LPB. Unfortunately we did not get commentary on when they began originating loans for the Blue Owl Capital deal, so it’s difficult to really know how much is from announced LPB deals versus unannounced deals. Even so, SoFi grew originations by 5.4% QoQ and have proven they can and will continue to gobble up market share in the personal loans business. Just look at their personal loan origination numbers compared to competitors LendingClub and Upstart. This is what winning looks like.

I wrote a SoFi earnings preview for Seeking Alpha prior to Q2 2022. In that article, which is now almost 3 years old, I said there would be three things that differentiated SOFI from LC and UPST. In order of importance:

1. Member Growth: SoFi's ecosystem ensures that member growth would fuel origination growth, but also that those members stick around and become repeat customers. SoFi now has 11M members compared to less than 4M members when I wrote that article.

2. Quality of Borrowers: SoFi primarily lends to prime, prime plus, and super prime borrowers. Loans to higher-quality borrowers perform better across the cycle and asset managers trust SoFi's loans more than competitors’. They also have access to the vast pool of members referenced in point 1 above. In Q1 2025, SoFi sold over $2.5B in personal loans, that's more loans sold than LC or UPST even originated in the quarter.

3. Access to Funding: SoFi’s continually growing capital allows them to hold more loans on their books each quarter. The combination of durable member growth and high-quality borrowers has led to greater commitments from asset managers than their competitors. Receiving the bank charter also means that in future times where asset managers and banks might be backing off, they have a resilient source of capital in the form of their own balance sheet to continue to drive revenue.

In 2022, none of those things were certain, but this has played out exactly as I said it would. When I wrote about these three strategic advantages that would lead to outperformance of SoFi over their competitors, SoFi's market share of originations between these three companies was 21%. It's now 58%. SoFi went from being the new kid on the block to the dominant player in the fintech personal loan space, and their advantage should continue to compound for years to come.

Neither LC nor UPST has the ecosystem that SoFi does, and that gives SoFi a competitive advantage. The ecosystem means that SoFi pays to acquire a customer once and is able to keep them as a sticky customer. SoFi members are much more likely to return at no incremental cost the next time they need a lending product or any other product. This also means that asset managers are confident that SoFi can hit higher origination amounts because they have a deep pool of high-quality members to originate from.

Consider this stat. SoFi's total origination growth from Q1 2024 to Q1 2025 was $2.26B. That is greater than the total originations of either LC ($1.99B) or UPST ($2.03B) in Q1. Their yearly growth is higher than LC or UPST’s entire business. That’s nuts. They have differentiated products and a differentiated business model, and that is leading to differentiated results.

Student and Home Loans

I predicted $1.3B in student loans and $450M in home loans. SoFi originated $1.19B and $518M, respectively. Those are very respectable numbers. It’s nice that SoFi is replacing previously low APR student loans with higher ones in the current environment. Rate cuts and a decrease in treasury yields are what is really needed for this business to accelerate. The question now is when those rate cuts happen, not if. I do wish they were selling some of their student loans rather than holding all of them, but it does give them a very large base of her interest income with extremely low default rates.

Deposits

I’m not sure how much I’m going to cover deposits in the future because they’ve reached their target long-term ratio. SoFi wants to cover about 90% of their loans with deposit funding. They are at that mark. This will probably hold steady going forward. As expected, time deposits came down and demand and savings deposits went up. I expected around $1.8B in added demand and savings deposits, and it came it at $1.88B. There are only $502M time deposits left total, so that portion of their funding is getting extremely low, which is good because they are higher coupon than demand or savings.

The important takeaway is probably that they aren’t going to push too hard on deposits now that they’ve reached their funding goal. Also, the people who thought that deposits would drop precipitously because they’ve lowered their APY were mistaken. The ecosystem benefits are strong enough that they don’t need to have the highest tier APY to grow their deposits. That’s very good news. That’s a sign of a developing moat.

Revenue

Lending

Lending actually came in well under my own estimate of $440M at a mere $412M. Am I worried about that underperformance? No, and here is why:

Net interest income continues to grow and that is cash flow into the company. Noninterest income decreased quite a bit this quarter, but a lot of the noninterest income is non-cash revenue, meaning things like movements in the fair values of their loans, the gains or losses on their hedges, and how much they gained or lost selling their loans. Things like fair values and hedges can be lumpy from quarter to quarter and will always be noisy. There are two things that are important that can come through that noninterest line. They are:

1. Is there a deterioration in credit quality that is negatively affecting fair values?

2. Is the gain-on-sale margin on their loans decreasing, meaning there is less demand for their loans from asset managers and banks?

Those would be trends to watch and maybe be concerned about. Neither of those things are happening. Here are their defaults and delinquency rates (this is excluding the effects of the late-stage delinquent loans they sell):

They are going down. Moreover, total defaults against their maximum life of loan losses target of 8% looks increasingly constructive. The gap between their current losses and the 7.85% losses they saw in 2017 keeps expanding.

Last quarter the gap between the lines was 1.28%. The gap is now 1.44%. It looks to me like they are on track to have net cumulative losses around 6% on these vintages. This is a far cry from the doom and gloom scenarios painted by Wall Street analysts as recently as Q2 2024, when KBW said you should short the stock ahead of earnings because they expected losses to skyrocket.

How about loan sales? Are they still profitable, or are the gains they get from selling loans decreasing over time?

Gain on sale margin is up and to the right. Lending revenue may have missed my estimates and may be down quarter over quarter, but there is absolutely nothing here to worry about. All the signals are extremely positive.

Financial Services

I thought they’d have more members, but even still they crushed my estimates. I thought they’d get $277.2M and they came in with $303.1M. Average revenue per member hit a new all-time high of $27.77. Financial services is absolutely killing it.

And here is a new chart to demonstrate their operating leverage in this business. Here are financial services directly attributable costs per member over that same time period.

I’m not completely sure what the floor is here as it seems to be flat recently, but the combination of decreasing costs per member and increasing revenue per member is leading to very significant operating leverage for the overall business. That is why the contribution margin in this business is skyrocketing.

Technology Platform

I projected $105M in revenue, and it came in at $103.4M. They also lost Chime, their largest client in absolute account numbers, as Chime switched to doing their own processing in house. The Tech Platform remains a disappointment. We have had some good commentary at fireside chats since the quarterly report, but the Tech Platform remains in the penalty box for me until revenue growth meaningfully reaccelerates for several consecutive quarters. It seems like that is possible in 2026, but I’ll wait and see. We know that there are plenty of new contracts that will be generating revenue, but we still don’t know how many might end up like Chime and move off Galileo and we don’t know how fast those new contracts will be ramping revenue. I really like the story here, but we need some steak along with the sizzle.

It also isn’t good that contribution profit has been flat for almost two years and contribution margin is on a downtrend. There should be some seasonality here with payroll taxes, but last year we didn’t get a margin boost in the second half so I'm not sure if that’ll happen this year either. They are adding headcount, and therefore expenses, at about the same rate as they are adding revenue right now, and that's not good. Revenue absolutely needs to accelerate in 2026 in the tech platform. I’ll be excited when I see multiple quarters of growth here, not before.

Corporate

I said -$40M, we got -$48M. I might in the future start thinking differently about how to split up revenue to remove the effects of corporate revenue weirdness, but for now it is what it is.

Total Adjusted Net Revenue

I predicted ANR at $782M and SoFi came in at $771M. SoFi’s guidance was for $735M at the midpoint and analyst estimates are at $739M so this was still a beat. The difference in lending revenue was the bulk of the difference between my estimate and the actual result. As covered above, I do not find what happened in lending to be concerning in the least.

Adjusted EBITDA

SoFi said that they outright expected to lower incremental EBITDA margins to the 30% range in their Q4 earnings call. I thought they’d get better operating leverage than expected and end up with 34% YoY incremental adj. EBITDA at $213M. Actual adjusted EBITDA was $210M. Analyst expectations are $173M and their guidance was for $180M, so this was a very big beat. Incremental margins came in at 35% YoY and 39% QoQ, so even with heavier reinvestment, they are still driving significant incremental margin growth.

Net Income and EPS

I estimated GAAP net income at $54.6M and $0.047 EPS. They came in at $71M and $0.06. Their own guidance and analyst estimates were for $0.03. The tax rate was lower than I expected, leading to outperformance. A great double beat here on the bottom line.

Other Stuff

I’ll cover two other things here briefly before I close. Credit Cards and LPB.

Credit Cards

SoFi is fixing their biggest operational mistake of the past few years. Credit cards were supposed to be a growth driver in 2023. They scaled the product in 2022, doubling it from just under $100M in credit card balances at the end of 2021 to just over $200M borrowed at the end of 2022.

However, SoFi got the underwriting wrong. Defaults spiked all the way up to 19.3% in Q1 2023 and the credit card business has cost them hundreds of millions of dollars of cumulative losses over the past several years. 2024 was a year where credit card balances stayed basically flat and charge-offs began to trend downward. Q1 2025 was the first quarter in over a year where credit card balances saw a meaningful increase, and it was accompanied by even lower defaults.

Credit cards can be a very lucrative business if you get it right. It looks like SoFi has turned a corner here, and if they can continue to decrease the losses while increasing balances, this looks to be an underappreciated growth driver for 2025 and 2026. Here is how CEO Anthony Noto talked about it recently at the JP Morgan Conference: "We've restructured our [credit card] business and relaunched products and our new product and go to market is performing very well. Our back book is still a hindrance and, you know, we're living with that back book and we'll optimize it over time." Hopefully this is part of a new S-curve for growth. I'll be keeping an eye on this moving forward.

LPB

The crown jewel of SoFi’s recent past and it just keeps getting better. The old-school loan referral business exploded this quarter. It had been chugging along at $12M-$13M per quarter for a year, but had a 58% QoQ increase to $19.7M. The new LPB also saw a really big QoQ increase across the board. We still don’t know exactly when the Blue Owl Capital deal started, but originations jumped from $1.0B in Q3 and $1.1B in Q4 to $1.56B in Q1. That led to a jump in LPB revenue from $47.0M in Q4 to $73.1M, a 55% QoQ increase.

But none of that is the most exciting part to me. The most exciting part is that their take rate is expanding. Take rate is the percentage they make from each dollar they originate. It was right around 4.25% for the first two quarters. It expanded to 4.69% in Q1. That’s a big jump and raises the ceiling on this business by quite a bit.

Take rate may still fluctuate from here, especially as they expand the credit box and possibly add student loans and home loans to the mix. Those will have a lot take rate. I truly hope that in the future they will give us originations and take rate by loan type, because otherwise this will be much more difficult to track and understand. Nevertheless, this is a business that did not exist last year and is already above a $300M annualized run rate, with huge contribution margins (probably around 60%+), and is still in its infancy. It cannot be stressed enough how game changing this is for the business as a whole. The LPB changed everything.

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Conclusion

I said there was smooth sailing ahead and we’re seeing it. SoFi continues to be a compounding machine. There are some criticisms, but they are mostly around perception and narrative…not the business itself. This is the best macro that SoFi has seen in its history since Noto joined as CEO, crypto is coming back, they will finish the transition onto their own core this year, and *crosses fingers* the product release cadence should rapidly accelerate once that transition is complete. This is such an easy company for me to hold right now, and its still only really getting started.

Subscriber update

The DDI YouTube Channel is live. A sincere and heart-felt thank you to those who support my work. If you do want to support my work, there are several ways to do so. You can subscribe here on substack, or on X, or, now, on YouTube.

Paid subscribers get three perks.

1) Access to a private X chat.

2) I buy stocks every week, and every week I send out my weekly DCA weighting list to subscribers

3) I send out a portfolio snapshot at the beginning of each month which shows my total allocation to each of my positions.

If you are a paid subscriber and not in the X chat, please email me at datadinvesting@gmail.com and let me know and I’ll get you added. If you have any other ideas for things I can do to bring value to my paid subscribers, don’t hesitate to reach out.

You can also use my referral links for SoFi if you want free money when you sign up for SoFi, or discounts on Tesla or finchat.io:

SoFi Money Link - Get an extra $25 when opening an account
SoFi Invest Link - Get an extra $25 when opening an account
Tesla Referral Link - Get up to $2500 off a new Tesla
finchat.io Link - Get 15% off

Disclosures: I have long positions in SoFi

The information contained in this article is for informational purposes only. You should not construe any such information as legal, tax, investment, financial, or other advice. None of the information in this article constitutes a solicitation, recommendation, endorsement, or offer by the author, its affiliates or any related third party provider to buy or sell any securities or other financial instruments in any jurisdiction in which such solicitation, recommendation, endorsement, or offer would be unlawful under the securities laws of such jurisdiction.

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Members

Maybe the single most interesting data we got this quarter is website data. Between NBA, TGL, and their other marketing channels, it appears from the data that SoFi’s marketing is crushing it.

January traffic passed the previous all-time high by almost 3M visits (19.53M vs 16.72M). February, even in a short month, had almost 18M visits, and then March blew it out of the water even further with 21.19M visits. That looks like some bullish numbers for new members. SoFi said they were going to reinvest for growth in 2025, and this looks like an example of that happening. Member growth has been fantastic and looks to be continuing that trend. Between that and the potential leak of 11M members that popped up on their recent new job listings I’m expecting the first 900k+ member quarter with 903k new members.

Originations

Personal Loans

This is really hard to figure out because of the Blue Owl Capital deal. On January 27 on the Q4 earnings call, SoFi said they “agreed to initial terms with Blue Owl Capital Funds for up to $5 billion of personal loans over two years”. We didn’t get actual confirmation of the deal until March 13. But the Fortress deal from last year wasn’t actually announced until October 14, 2024 but we found out they’d been originating loans from them starting at the beginning of Q3 four months earlier. The Blue Owl Capital deal is $625M per quarter in originations. Even if this deal only started on March 13, that’s around $130M of originations in the quarter. If they started originating in January or February, the number is much higher.

Either way, SoFi now has the capital and growth in tangible book value to support modest growth in their balance sheet while simultaneously growing originations through the LPB. I think originations set another new high at $5.7B, but that could be anywhere from $5.4B to $6.0B depending on when that deal went into effect. This will fuel growth in Lending revenue from rising net interest income from loans on the balance sheet, noninterest income through recognized fair values. It will also fuel Financial Services growth through the Loan Platform Business.

Student and Home Loans

Last quarter surprised me with $1.35B in student loans and $577M in home loans. Rates have been fairly steady since then, and the real estate market has been pretty poor in Q1. Student loans might get a bigger bump in Q2 now that the new administration is starting to refer defaulted payers to collections, but I have a hard time getting a feel for Q1. I think both these numbers will come down slightly with $1.3B in student loans and around $450M in home loans.

Deposits

SoFi has pretty much reached their deposit goals, with over 90% of their loans backed by deposits, so they aren’t going to really push here. The lower APY they’ve been offering (from a peak of 4.6% to its current level at 3.8%) has been mostly in line with competitors, and the ecosystem benefits are high enough for them to still retain users. They can monetize deposits even after 100% of loans are backed by deposits, but not at as high of a net interest margin.

I expect them to let more time deposits run off without replacing them and that demand and savings deposits (demand deposits are the same thing as checking deposits) will continue to grow at a modest pace, probably at around $1.8B. I may not be covering these as closely in the future unless we see a big change in the trend here. SoFi will continue to grow deposits along with members, so member growth is a more important metric to track.

Revenue

Lending

I still think SoFi will grow lending beyond the 15% CAGR they outlined for 2023-2026. Last year lending grew 11%, but remember that they really throttled originations in both Q4 2023 and Q1 2024, leading to a couple of very low growth quarters at the beginning of 2024. Also, their net interest income (the blue bars), now make up the vast majority of lending revenue, while noninterest income (green bars) is no longer a large contributor. I think it’s instructive to focus on what is going on with net interest income to figure out how lending revenue is going to move.

SoFi now has enough retained earnings to be able to continue to grow their loan book without changing their capital ratios. That means they can sustainably add hundreds of millions of loans to their balance sheet without having to worry as much as they did before they were profitable. More loans held means more interest income recognized.

Moreover, they’ve been slowly reducing the APY they are offering.

• August 26, 2024: APY reduced from 4.60% to 4.50% (a decrease of 0.10%).

• October 7, 2024: APY reduced from 4.50% to 4.30% (a decrease of 0.20%).

• October 30, 2024 : APY reduced from 4.30% to 4.20% (a decrease of 0.10%).

• December 2, 2024: APY reduced from 4.20% to 4.00% (a decrease of 0.20%).

• January 23, 2025: APY reduced from 4.00% to 3.80% (a decrease of 0.20%).

The average APY in Q4 was around 4.15%. In Q1, it’ll be around 3.85%. Average savings deposits well be around $22.5B. That 0.3% difference in the rate they are paying out for deposits translates to around $17M more in revenue, all else equal. That’ll get split between Lending and Financial Services, but it means that net interest margin (NIM) for each type of loan will be expanding this quarter. I think lending revenue expands from $423M last quarter to $440M this quarter.

Financial Services

Expanding LPB business, lower APY on savings accounts, continued cross sell, and a huge quarter of member adds will all be tailwinds this quarter. Here is the average financial services revenue per member for SoFi.

Assuming it drops just a tiny bit from last quarter again, which is probably a conservative assumption, to $25.20/member, and with the huge member adds I’m predicting, this quarter ends up with FS revenue of $277.2M. That’s about a $20M increase from last quarter’s $256.5M. There is room for upside here if the Blue Owl Capital deal was implemented earlier in the quarter than March.

Technology Platform

I’ll believe in the growth here when I see it. We haven’t seen it yet, and Q1 is historically slightly weaker for the Tech Platform. I still am projecting very modest QoQ growth as we are hopefully moving from fintech winter into fintech spring. Last quarter was $102.8M, and I’m projecting $105M for Q1. I’d love for them to highlight any new deals signed like they did in Q4, that was really interesting and useful info.

Corporate

Continues to be impossible to predict, so I’m keeping it close to flat QoQ at -$40M. Be aware that if this number is lower, like if it comes in at only -$20M, that may mean my projections for Lending or Financial Services are slightly too high, since all this balances in the Funds Transfer Pricing framework. It’s complicated, but at the end of the day doesn’t matter too much.

Total Adjusted Net Revenue

That puts my prediction for ANR at $782M. SoFi’s guidance was for $735M at the midpoint and analyst estimates are at $739M at the time of writing. I think there is no possible way they miss their guidance or analyst estimates. If my estimate is correct, this also represents 34.7% YoY revenue growth, which would be a truly impressive number.

Adjusted EBITDA

To get those big revenue numbers and add that many people into the ecosystem means that there will be some extra reinvestment into the business required. They outright said to expect lower incremental EBITDA margins in the 30% range in their last earnings call. I’m assuming slightly better than that at 34% YoY and 35% QoQ, which puts my estimate at $213M. Analyst expectations are $173M and their guidance was for $180M, so this would, again, be a sizeable beat.

Net Income and EPS

Using what I think are suitable estimates for the differences between EBITDA and net income and using a tax rate of 30%, I get a GAAP net income of $54.6M. They said their assumed tax rate for the year would be 26%, but they have a higher tax burden in the first few quarters because of payroll taxes for social security, so I bumped it up to 30% for this quarter. Their own guidance and analyst estimates are for $0.03. My estimate puts them at $0.047, which rounds up to $0.05.

Guidance

If there is somewhere that SoFi might fall short, it will be guidance. They’ll raise the full year guidance, but the Q2 guide might look a little weak compared to analyst expectations. In three of the last four quarters, SoFi has had a sizeable beat, but their guidance for the next quarter was actually lower relative to what they just delivered. That may happen again here because they are so conservative on guidance and because there is so much uncertainty regarding the macro right now. SoFi has proven they’d rather guide low even if the stock suffers. This is the one part of the earnings that could miss and might end up with the stock being punished. Analyst expectations for Q2 are $791M, which is higher than I’m seeing for this quarter’s results, meaning if they do have a slightly downward guide like they are prone to do, they’ll miss. The stock may get unfairly punished for this again.

Bonus Prediction

We’ve seen hints in the app code for Cash Coach, Crypto, and additional options work in the last few weeks. I think there will, once again, be a new product announcement on the earnings call. People have been criticizing them for a lack of innovation, and this would be a good opportunity to show that isn’t the case.

Conclusion

This will be another steady and extremely strong quarter from SoFi. Most companies would kill to see 30% growth. SoFi will almost certainly eclipse that number, show strong results, reinforce the growth in the LPB, and generally show that its fundamentals just keep improving. They will almost certainly have record new member growth as well. SoFi has become a stock that I can sleep easy at night holding. Quarter after quarter they put up excellent, consistent, durable, sustainable growth. This quarter will be no different. I don’t know how the stock will react and I don’t particularly care. The company is just continuing to execute and this quarter will be no different.

Subscriber update

The DDI YouTube Channel is live. I’m still figuring out how to do everything there, but expect to see more as we go. A sincere and heart-felt thank you to those who support my work. If you do want to support my work, there are several ways to do so. You can subscribe here on substack, or on X, or, now, on YouTube.

Paid subscribers get three perks.

1) Access to a private X chat.

2) I buy stocks every week, and every week I send out my weekly DCA weighting list to subscribers

3) I send out a portfolio snapshot at the beginning of each month which shows my total allocation to each of my positions.

If you are a paid subscriber and not in the X chat, please email me at datadinvesting@gmail.com and let me know and I’ll get you added. If you have any other ideas for things I can do to bring value to my paid subscribers, don’t hesitate to reach out.

You can also use my referral links for SoFi if you want free money when you sign up for SoFi, or discounts on Tesla or finchat.io:

SoFi Money Link - Get an extra $25 when opening an account
SoFi Invest Link - Get an extra $25 when opening an account
Tesla Referral Link - Get up to $2500 off a new Tesla
finchat.io Link - Get 15% off

Disclosures: I have long positions in SoFi

The information contained in this article is for informational purposes only. You should not construe any such information as legal, tax, investment, financial, or other advice. None of the information in this article constitutes a solicitation, recommendation, endorsement, or offer by the author, its affiliates or any related third party provider to buy or sell any securities or other financial instruments in any jurisdiction in which such solicitation, recommendation, endorsement, or offer would be unlawful under the securities laws of such jurisdiction.

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Here were the arguments I saw pop up again and again that I’ll discuss:

1. The tech platform is horribly underperforming.

2. There is no clarity on what is going on behind the scenes.

3. SoFi will never get a hybrid multiple until we see some growth in the tech platform.

Underperformance

SoFi’s tech platform is primarily composed of two large acquisitions. The first was the purchase of Galileo in 2020, followed by Technisys in 2022. These have been folded into a single entity under the Galileo moniker, a wholly owned subsidiary of SoFi. SoFi often touts their vision for Galileo to become the “AWS of fintech.” In fact, the very first article I ever published here was about that vision. If you want a refresher on what the tech platform does, I’d suggest revisiting that article and reading the section titled “Three Pillars of SoFi's Technology Segment”. Even back then, two years ago in April of 2023, this is what I had to say about Galileo’s execution.

However, the last year has raised questions about the long-term viability of the business across the entire business cycle and exposed their reliance on neobanks. SoFi's other segments have flexed their muscles and shown strength in a tough environment, but the same cannot yet be said for their "AWS of Fintech" offering.

Plenty of data shows the tech platform hasn’t met the expected standards.

Technisys Guidance

When Technisys was acquired in 2022, they claimed it would add $500M-$800M of revenue through year-end 2025.

While it’s impossible to pinpoint exactly how much Technisys has contributed, we can make a decent approximation. Let’s assume Galileo’s existing payment issuing and processing grew by about 8% annually since the acquisition (which is probably a low estimate), with all additional tech platform growth coming from Technisys. If so, through the end of 2024, Technisys has added roughly $334M in revenue. To hit the midpoint of their 2022 acquisition guidance ($650M), they’d need about $315M in 2025 growth alone.

It’s safe to say that won’t happen, and at this point, even reaching the low end ($500M) seems a huge stretch. We’ll never know for sure, though, because SoFi doesn’t break out revenue from legacy Galileo products (like payment processing and card issuing) versus legacy Technisys offerings (like the banking core). Investors gave up over $1B worth of dilution to make the Technisys acquisition happen. We should at least be able to tell what we’re getting for it and we can’t.

Goodwill impairment

When a company makes an acquisition, goodwill is the amount paid above the fair market value of the acquired company’s net assets. For example, if you buy Company ABC for $100M but its net assets are worth only $70M, you assign $30M to goodwill, representing intangible assets like brand, expertise, or intellectual property, and carry it on your balance sheet.

Periodically, you must reassess that goodwill’s accuracy. If the acquired company underperforms, you write down its value. In Q3 2023, SoFi took a $247M goodwill impairment tied to both the Galileo and Technisys acquisitions. The 10-Q for that quarter explains why, and I’ve pasted it here with key portions highlighted:

This came just a year and a half after the Technisys acquisition. Already at that point, the tech platform had underperformed SoFi’s own projections and expectations. The growth rates were low enough that they had to take away $247M worth of value off the goodwill they’d initially assigned to those acquisitions (a $124.5M impairment of the Galileo acquisition’s goodwill and a $122.7M impairment to the Technisys acquisition’s goodwill). There’s also a small risk of further impairments if underperformance continues. If that were to happen, it would be a direct one-time hit to the GAAP net income during the quarter where the impairment occurs, causing an earnings miss.

2024 Guidance Miss

SoFi has never missed their overall guidance for any quarter in their history as a public company. Last year, they provided segment-specific guidance for their lending, financial services, and tech platform segments. While they crushed financial services and lending targets, they missed tech platform guidance by a wide margin. In their Q1 presentation, even after one quarter of the year, they said they expected 20% growth from 2023 levels.

In Q2 earnings, that guidance changed to “mid to high teens”

In Q3, it dropped again to “low to high teens”

2024 tech platform revenue ended up at $292.3M, a 14.45% increase from the 2023 levels of $255.4M, firmly in the mid-teens range. It isn’t just that the tech platform growth is low relative to investor expectations, it’s that it was low relative to their own expectations. Something shifted significantly between April’s 20% projection and year-end reality, and investors deserve a clearer explanation of what changed. Unlike the rest of the business, SoFi seems unable to accurately project the revenue they will receive from Galileo. This seems particularly concerning given that many of these contracts should have been negotiated prior to issuing guidance. Ostensibly this should make the tech platform one of the easier segments to guide for.

Communication

I like management teams that take radical accountability for both their successes and failures. SoFi didn’t hit their guidance, and actually, that isn’t really too big of a problem because they had other parts of the business that outperformed. Stuff underperforms sometimes. You can’t have everything hitting on all cylinders all the time. However, when something does underperform, I think you owe your investors a better explanation than “extended sales cycles”, which is essentially the only explanation that we’ve received. I realize that it is considered a faux pas in business to highlight your failures, but it’s something that I, personally, think is a differentiating factor that makes management teams truly exemplary.

Earlier in this article I said it was impossible to tell exactly how much Technisys has added in revenue since the acquisition. That fact highlights my biggest complaint and my biggest criticism of the tech platform. There is a dearth of information and lack of transparency in this underperforming segment. I even asked a question about this in the 2023 investor Q&A. It was one of the top voted questions, but was not answered. I realize that there are things that cannot be disclosed with regards to the contracts that are signed by Galileo. But to blame the lack of information investors receive on non-disclosure agreements is a cop out. There are plenty of easy ways to share more data while still honoring their NDAs.

A big portion of my frustration with Galileo stems from not knowing what’s going wrong—I can’t tease it out from the data because that data is nonexistent. This is a business that has a $400M+ annual run rate and yet the only numbers investors get to see are total Galileo accounts (which doesn’t include Technisys at all), total revenue, contributions profit, and intracompany revenue. That’s basically it.

I cannot tell why it is underperforming. Is it that existing Galileo partners are struggling to sign up new members? Is there a lack of new fintech partners signing up? Is total payment volume from their existing partners down? Are the number of banks using Cyberbank Core increasing or decreasing? How many platforms (like Toast) are using them? Do they have additional retail partners out there like the Wyndham hotels deal that we don’t know about? How many credit unions, regional banks, national banks are using Cyberbank Core? How many of those are domestic vs. international? I have opinions about the answers to these questions, and we have vague commentary about some of the answers, but I have no data to back any of it up. It’s all just opinions, and opinions are noise.

There is a significant amount of data they could share without violating non-disclosure agreements but they choose not to, and at this point it is a deliberate choice. As a shareholder, Galileo is a total black box, and that’s really frustrating. Communication is something that is totally within their control, and I’d appreciate a lot more clarity. The Loan Platform Business, nonexistent before Q3 2024, already offers more data and transparency than the tech platform, which predates SoFi’s 2021 public debut. I’m not ok with that.

This should not have caught anyone off guard

Just a quick observation. I saw a ton of consternation about the tech platform after Q4 as if this took people off guard. Q4 Galileo results were poor, with a smaller YoY growth rate than any of the previous three quarters of the year. However, this has been a problem for much longer than that. After Q2 of this year, I put the tech platform in the penalty box and said “I will not be fully convinced until I see four straight quarters with 15%+ YoY growth.” If Q4 was the first time you noticed a problem, you haven’t been paying attention.

Mitigating Circumstances

Ok, all that being said, there is some broader context that I’d like to add to the discussion that I don’t think has been covered anywhere else. If you look at Galileo’s results in a vacuum, especially compared to the rest of SoFi’s business, they are underwhelming. However, businesses don’t operate in a vacuum. Galileo powers SoFi’s own offerings as well as generates revenue from other third parties like Robinhood, Chime, Dave, etc. To get an idea of whether Galileo really is struggling, we need to zoom out and consider how they are doing relative to their competitors. Galileo primarily provides banking-as-a-service (BaaS) offerings, card issuing, and payment processing. Let’s see how their growth compares to others who offer similar products.

A comparison with their competition

There is no one-for-one competitor with Galileo, but several companies overlap significantly. Marqeta (MQ) is an issuer processor, nCino (NCNO) is a BaaS and banking core provider, Fiserv (FI), Fidelity National Information Systems (FIS), and Jack Henry (JKHY) all offer some combination of core banking systems, payment processing, digital banking platforms, and merchant services, Q2 Software (QTWO) provides cloud-based platforms for online and mobile banking, and Temenos (TEMN on the Swiss stock exchange) is a digital banking core provider. Again, none of these are perfect comps, but they provide a pretty wide range of publicly traded companies to compare against.

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We only really have revenue from Galileo, so that’s the only metric we can use to compare Galileo’s growth with its competitors. A couple quick points of clarification so that this data has the proper context. First, Marqeta changed the way they count revenue in the last couple years, so I’m going to use gross profit growth for them as a proxy for revenue growth because gross profit remained consistent through the change. Second, FIS sold off their merchant solutions business, so I’ve subtracted that out from some prior quarters where it would have been applicable. Third, some of these businesses experience seasonality, so we’ll use trailing-twelve-month (TTM) revenue to smooth that out. Last, it would give an unfair advantage to Galileo if we started before the Technisys acquisition, which was completed in Q1 2022. Therefore we’ll compare TTM revenue growth of each company starting in Q1 2023.

Galileo’s 25.2% cumulative TTM growth ranks second, behind nCino’s 27.3%. Of these seven companies, TEMN, NCNO, MQ, and Galileo have approximately the same magnitude of revenue/gross profit, JKHY is slightly larger, and FI and FIS are significantly larger. You would expect the smaller companies to be able to scale more quickly, but this still highlights that relative to their competition, SoFi’s tech platform has actually done quite well.

One reason for the fairly anemic growth across the board is that the rate hike cycle in 2022 had a huge cooling effect on the fintech industry at large. Galileo’s bread and butter prior to that was to sign up new fintechs and neobanks and help them scale quickly. However, funding for those companies dried up in 2022. As a result the growth strategy pivoted to target larger existing fintechs, banks, platforms, etc. This means longer sales and implementation cycles. A recent Bloomberg article with Plaid’s CEO Zach Perret contrasted the last few years in fintech with what they expect in 2025, putting it this way:

[It] was a lean time for most fintechs, particularly those that serve consumers. As interest rates increased after the Covid-19 pandemic, fintech funding dried up and borrowing suddenly became drastically more expensive. […]

“There’s just this truly renewed sense of optimism going into 2025,” Chief Executive Officer Zach Perret said in an interview. “It’s way more fun to operate in fintech spring than it was to operate in fintech winter.”

Galileo and their competitors slow growth the last several years is confirmation that they were also hit by the fintech winter. Hopefully they begin to see the same green shoots of a fintech spring moving forward, although the recent uncertainty brought about by Trump’s tariff announcements could have a similar chilling effect as the rate hike cycle. Galileo is a US-based company and only sells digital products, so tariffs don’t affect them directly. However, the uncertainty and resulting chaos has left many companies hitting pause on their plans until the macroeconomic picture has more clarity.

Just a bank rears its head again

Those who are familiar with my work know that it frustrates me to no end when SoFi gets referred to as just a bank. The reason it bugs me so much is that it’s just lazy analysis. It’s a soundbite, not a cogent argument. SoFi investors constantly hear about how it’s just a bank, and therefore deserves a bank multiple (meaning it should trade on a low multiple of its price/book value ratio or in the single digits on a price/earnings ratio). Moreover, you’ll often hear about how a fintech multiple hinges on tech platform growth.

Those are all stupid arguments for a number of reasons. I won’t go into detail about all of them, but I do I want to highlight that that last argument is particularly idiotic. Saying a “fintech multiple” is totally dependent on Galileo growth is a completely arbitrary standard that for some reason people apply to SoFi but do not apply to anyone else. Think about Robinhood, Affirm, Upstart, Pagaya, Nubank, Shift4, Toast, or even Paypal or Block. How many of these companies would you refer to as a fintech? I would call all of them fintechs, as would most people. Yet how many of these companies sell the backend software they use for their own products to other companies as a SaaS offering? I am not aware of any of these other companies selling their software as a service.

Think about how illogical this is. If you build a technology that allows you to sell your own digital financial services, you can be anointed fintech and receive a high valuation multiple. But if you build a technology that allows you to sell your own digital financial services, and in addition to that, you sell that technology to third parties, you can be a fintech if and only if your third party offering is growing quick enough. Can you see the logical disconnect there?

Think about this scenario. Say that tomorrow, Robinhood chooses to license its software and clearing house to allow other brokerages to run on Robinhood’s backend. Let’s call that service Da Vinci and say that it’s immediately a ~$300M/yr revenue business in 2025. Let’s say that in 2026, their core business that exists right now were to grow at, I don’t know, 28.6%, but Da Vinci only were to grow by 12% to $340M/yr. Would they lose their status as a fintech because this extra revenue source isn’t growing fast enough? Would that make it so that they ought to be valued as “just a brokerage” and the only way they could get a multiple higher than Schwab is if their Da Vinci software arm grew fast enough? Do you see how ridiculous this whole concept is? Was that 28.6% an oddly specific number? Yes, because excluding Galileo, SoFi grew at 28.6% last year. Galileo may have only grown at 12%, but it also enables the 28.6% growth in the rest of the business. Remember this quote from Noto (emphasis added by me):

A lot of people will ask me do you want to be an enterprise company or do you want to be a consumer company? I do want to be 100% perfectly clear. Our mission is consumer focused, is to help our members achieve financial independence to realize their ambition and everything we do is to serve them. The tech platform needs to serve us well so we can serve them well. It just so happens the tech we are building is world-class and other people need it and so we can make money off it, which improves our returns, but it will always be to serve our end mission of a company.

I want to see the tech platform compound at a mid-20s CAGR. However, if it only grows at 10% indefinitely, but allows SoFi to have better margins, faster innovation, and better serve their customers so that the business as a whole has a mid-20s CAGR, that’s still fantastic.

Perspective

Two last things to highlight how people need to have some perspective and then I’ll close.

Margins

People seem to think that growth in the tech platform would lead to huge margin expansion because software margins are really high. That isn’t true. The tech platform is now the lowest margin business that SoFi operates. In other words, one dollar of revenue growth for the tech platform is worth less in profits than a dollar of growth in either lending or financial services. Here is the contribution margin of each of the business segments over time:

At the end of the day, the thing that most investors should care most about is a company’s earnings growth and the cash going into a that company’s coffers. If that describes you as an investor, and if you had to choose one segment to underperform, you would choose the tech platform. Having the lowest margin segment of your business underperform really isn’t the worst thing in the world.

Another argument bears use to justify a lower multiple is SoFi’s capital-intensive nature. Galileo is capital-light fee-based revenue that comes with lower risk. Logic argues that if that part of the business isn’t growing, then the multiple SoFi receives should be lower. However, the Loan Platform Business (LPB) is also capital light, fee based, and low risk, and its margins are significantly higher. LPB revenue is not as sexy as a “Technology Platform”, but if I had to choose between high-growth LPB and Galileo, I’d choose LPB every time. Here is why:

After SoFi’s recent confirmation of the Blue Owl Capital agreement, and assuming no other deals or growth from Q4 levels, the annualized origination rate for the Loan Platform Business is now $6.9B. In both Q3 and Q4, take rate was around 4.25% excluding servicing. If that holds true for the Blue Owl deal as well, it means that the LPB is now on an annualized revenue run rate of $293M. This business went from $0 to $300M in about 9 months (again, excluding servicing, which is at least another ~$5M/qtr so far). Not only that, but this is high-margin revenue, with a contribution margin north of 50%, an EBITDA margin of probably 40%+, and a net income margin of probably 30%+.

Why do I bring this up in an article about the tech platform? In order for Galileo to bring in the same amount of increase in contribution profit since Q2 2024 as the LPB is bringing in, the tech platform would have needed to grow its quarterly revenue by around $110M in the last three quarters. Remember, it’s total quarterly revenue is only like $103M/qtr total. That’s right, the LPB, by itself, is now worth more in terms of profits to SoFi after 9 months than the entire tech platform. The tech platform would need to grow at more than 100% in the next year to replicate the profits the LPB is already generating in just 3 quarters.

A comparison that people will hate.

People hate when I compare SoFi to Palantir. Hopefully they’ll be more ok with this one because I’m just comparing perspectives about the companies, not the companies themselves. They’ll probably still hate it, but I think it’s a worthwhile thought experiment.

SoFi’s tech platform is 14% of revenue and grew 12% in 2024. People’s response was to lose their minds like it’s the end of the world for the company. Palantir’s international revenue makes up 14% of their revenue and grew 4% in 2024. Karp pointed this out multiple times during their earnings call. Nobody even cares.

Does the fact that Europeans and other allies aren't adopting Palantir’s products make their technology any worse? No, that is ridiculous. Palantir's business operates on the bleeding edge of the most innovative sector of technology. They are executing at an exceedingly high level and their products and value proposition are clear. Nobody is freaking out that Palantir is "just an American company" and can't grow internationally.

Sofi's tech platform is still not completely proven commercially. However, they are powering the back end of SoFi's operations, and SoFi is taking market share in every single vertical where they operate. The business has executed at a high level for years. Yet everyone is freaking out that they are "just a bank" and can't sustain their growth. It's just plain silly.

Conclusion

I want to see better growth, more transparency, and greater accountability when the tech platform misses expectations. I want to see better communication and significantly more metrics so we can track its progress and understand what is going on behind the curtains. I am legitimately disappointed that Galileo is not performing as well as I expected and as well as SoFi expected. I know some of SoFi’s management will read this and I hope they reconsider their communication strategy surrounding Galileo’s results. But the fever that gripped the SoFi community was an overreaction. Zoom out. Have some perspective. SoFi grew total revenue by 26% overall in 2024 during their “transitional year”. Growth is accelerating in 2025. Galileo is powering SoFi’s growth even if the revenue growth from third parties could be better. Take a deep breath everyone, it's going to be ok.

Subscriber update

The DDI YouTube Channel is live. I’m still figuring out how to do everything there, but expect to see more as we go. A sincere and heart-felt thank you to those who support my work. If you do want to support my work, there are several ways to do so. You can subscribe here on substack, or on X, or, now, on YouTube.

Paid subscribers get three perks.

1) Access to a private X chat.

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3) I send out a portfolio snapshot at the beginning of each month which shows my total allocation to each of my positions.

If you are a paid subscriber and not in the X chat, please email me at datadinvesting@gmail.com and let me know and I’ll get you added. If you have any other ideas for things I can do to bring value to my paid subscribers, don’t hesitate to reach out.

You can also use my referral links for SoFi if you want free money when you sign up, or Tesla, or finchat.io for a discount on those products:

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Disclosures: I have long positions in HOOD, NU, PLTR, PYPL, and SOFI.

The information contained in this article is for informational purposes only. You should not construe any such information as legal, tax, investment, financial, or other advice. None of the information in this article constitutes a solicitation, recommendation, endorsement, or offer by the author, its affiliates or any related third party provider to buy or sell any securities or other financial instruments in any jurisdiction in which such solicitation, recommendation, endorsement, or offer would be unlawful under the securities laws of such jurisdiction.

Members

While we didn't quite get the 800k new members I'd hoped for, Q4 still set a new all-time high with 785k new members added to the platform. There were also 31k members who were churned off the platform, leaving 754k net new members for the quarter.

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I'm very pleased with that number. Member growth is the key to achieving consistent, sustainable, and durable growth. Their marketing strategies are paying off by bringing more people unto the ecosystem. Moreover, they continue to do so at relatively low customer acquisition costs below $300.

Many are calling for SoFi to have a quarter with 1 million new members in 2025. I do think there is an outside chance they get it in Q3 or Q4 of 2025. As we’ll cover a bit more in depth below, it looks like 2025 is supposed to be a year of reinvestment in growth initiatives in the business, with a lot of that going into brand awareness. If Noto is right, and brand awareness is what stands between SoFi and their ultimate goals, then reinvesting heavily into that brand awareness ought to result in outsized member gains this year.

Originations

SoFi absolutely crushed my origination predictions across all three loan types. They set a new all-time high in personal loans, and this quarter saw their highest student loan originations and home loan originations since Q4 2021, when the Fed Funds rate was 0%.

I predicted $4.55B in personal loans, $790M in student loans, and $400M in home loans. They originated $5.25B, 1.35B, and $577M, respectively. The normal Q4 headwinds to student loans were overcome by, it seems, the resumption of student loan payments. Similarly, the home loan numbers came in strong in spite of Q4 usually being a weaker quarter as well. It might have been helped by some refinancing or closing of loans that were locked in during September when rates were lower, but not closed until October or November. Even so, these origination numbers were simply spectacular. This is far and away the strongest Q4 we’ve ever seen for personal loans and bodes very well for the coming year.

Deposits

I predicted $2.1B in demand and savings deposit growth and a decrease in time deposits. That’s almost exactly what happened with $2.09B in demand and savings deposit growth and a decrease of $662M in time deposits. In Q4, APY decreased from 4.6% to 4.0% and yet they still had record member growth and consistent deposit growth.

I think it is worthwhile to point out that many people say that deposit growth is simply a function of the APY that is offered. The data have definitively proven this is not true. In November, after SoFi’s APY had already been cut several times, LendingClub was still offering 5.15% APY, which is higher than SoFi ever offered. Right now they offer 4.5% when SoFi offers 3.8%. LendingClub has had a higher APY for several years at this point. Yet here are their quarterly deposit growth numbers (this includes demand, savings, and time deposits).

Deposits are not just a function of APY. The fact that SoFi has added more deposits every quarter than LC while having a lower APY is proof. The rest of the value proposition and the ecosystem benefits are just as important. Noto spoke to this on the earnings call:

What we've seen is that the value prop of SoFi Money is much more than the APY. Having Zelle is really critical. People want a safe, secure way to be able to send money person-to- person. We also provide person-to-person payments via just a phone number email in addition to bill pay, free overdraft, the two-day early paycheck. And we'll continue to add other features and functionalities, to make that really valuable.

The data back it up. SoFi’s full value proposition is much more than just their APY.

Revenue

Lending

Originations outperformed my expectations so it is absolutely no surprise that lending did too. I thought they’d end up with $365M in revenue, but they blew that out of the water with $423M, driven by an ever-increasing net interest income line and robust continued noninterest income. As a reminder, net interest income is cash and not tied to fair values. The fair values fall in the noninterest income bucket that each and every quarter becomes less and less important.

SoFi initially guided to lending revenues in 2024 declining to between 92%-95% of 2023 levels. They ended up growing the segment by 11% instead. Their original guidance was for a GDP decline in 2024 and 5% unemployment. Neither of those happened, so they outperformed. We’ll revisit this thought later…

Financial Services

The first ever quarterly decline in revenue per member since the bank charter finally happened in Q4, going from $25.42/member to $25.33/member. That combined with the slightly lower member adds than I predicted meant that Financial Services revenue missed my own prediction of $259M and came in at $256.5M. It’s still showing incredible growth, and with the Blue Owl Capital deal that was announced and almost finalized for the loan platform business, the growth will continue in 2025. Financial Services has really become the star of the show for SoFi, and that trend looks set to continue for the next couple years with their increase in the three-year growth guidance.

While we are on the subject of the LPB, I’ll have a more thorough analysis after they release the 10-K and I’ll probably do a quick article just on that. However, it’s great to note that they grew originations from $1.0B to $1.1B this quarter (I do wish we had one more significant digit on that number). 10% QoQ growth is impressive, but more importantly, that Blue Owl Capital deal would end up being an additional $625M of originations per quarter. That would put LPB volume at around $1.7B-1.8B per quarter as soon as the deal goes live. As a reminder, LendingClub did $1.84B in total originations in Q4 and Upstart did $1.33B in Q3 (they haven’t released Q4 numbers yet). SoFi’s LPB business on its own in less than a year will be matching or beating the entire origination volume of their two biggest US fintech lending competitors. That’s a very big deal.

Tech Platform

Not good enough. The tech platform growth stalled further this year when it was supposed to be accelerating. This has become a big point of contention in the SoFi community and deserves a full discussion of its own, which will come in part two. I will briefly say here that this should not be too big of a surprise to those who have been paying attention. Earlier this year, after Q2 earnings, I said, “the execution at Galileo has not matched the excellent execution everywhere else in the business. The Tech Platform is in the penalty box for me after this quarter.” At the time, I said that it will remain in the penalty box until I see four straight quarters with 15%+ YoY revenue growth. Based on guidance, I predicted $112.5M in revenue, but they only posted $102.8M.

I also said in the earnings preview that “Any Galileo contract announcements would be more important than the actual results here.” We got three of those. The government deal with Direct Express we already knew about, but the hotel deal and the other financial services provider deal were new to investors. However, the fact that none of these deals will really make a mark until 2026 bring up more questions than answers for me. I want more clarity and I think investors deserve it. Why does it take so long for these deals to become monetized? What does that ramp look like? What type of bespoke integration and investment are needed to get these things online? As I said, full article forthcoming here.

Corporate

Corporate revenue continues to be a riddle wrapped in a mystery inside an enigma (such a good Winston Churchill turn of phrase). I know why it happens (FTP), but it’s virtually impossible to predict, so it is what it is. This quarter it came in at -$43.0M.

Total Adjusted Net Revenue

All told, SoFi managed to handily beat my expectations of $697.5M in ANR with a whopping $739.1M. They beat their own guidance by $67M, their highest ever quarterly beat, and beat analyst estimates by $63.5M. It was honestly a massive quarter. It’s pretty crazy that at this point that seems almost expected, but here we are.

Adjusted EBITDA

SoFi also recorded a new record adjusted EBITDA of $198.0M, which was $8.1M above my estimate. EBITDA was slightly lower margin than I expected it to be, but they still managed to beat analyst expectations by $26M. Again, this seems to have been swept under the rug a bit because it’s so expected at this point, but that is a 15% beat on EBITDA, which is actually a very impressive feat.

While we are on EBITDA, I want to speak to something that management said. This will come up again in the guidance section below, but I do want to discuss something that Noto said during the call about incremental margins. If that’s a new concept for anyone out there, an incremental margin is how much you drop to the bottom line for each new dollar of revenue you get. So if you have a 30% incremental EBITDA margin and you go from $600M to $700M in revenue, a $100M increase, it would mean your EBITDA would increase by $30M. Here is what Noto said:

In 2023, we had set guidance with a 30% incremental EBITDA margin. We said our margins long-term would be 30%. So in that time period, we wanted to show evidence of that, and manage the balance of growth and profitability, by delivering a 30% incremental margin. […]

In 2024, we took a very conservative stance at the same point last year, relative to others based on interest rates, the economy, inflation, geopolitical, et cetera. And because we took that very conservative stance, we drove margin expansion at the expense of revenue growth, and we delivered well more than 30% incremental EBITDA margins, which is evidence that we can do that and maintain growth, having just grown 25%, which is well above the revenue expectations that, we established last year in January. So we couldn't be more confident that our long-term margins, are 30% for EBITDA and 20% for net income.

And in 2025, we're just tilting the balance back, to where we were in 2023, which is a 30% incremental EBITDA margin. Because that allows us to ensure we're investing today, to drive durable growth beyond today into the future in revenue, in products and in members. The thing that's most important about our guidance, which we just provided, is our revenue expectations are higher in '25, than the street had and what we had previously had. And our revenue expectations for growth into '26, are now higher as well.

Noto’s point was that they had 30% incremental margins in 2023, boosted them in 2024 to drive profitability, and will be adjusting them back down by reinvesting more this year. Noto repeated this line on his earnings-day appearances on Bloomberg and CNBC. It’s a lie…but it’s a good lie. Incremental EBITDA margins in 2023 were never close to 30%. They were much higher, with the lowest quarter coming in at 43%. So it remains to be seen whether this time they are sandbagging (which would surprise absolutely nobody), or if they really will drive only 30% incremental margins.

The just completed quarter’s incremental margins were very low at only 12%, but that’s because it was coming off such a difficult comp from Q4 2023. One year ago, they were driving hard for profitability and really limited expenses and had 74% incremental margins. I think 30% will be the minimum for incremental margins and would certainly not be surprised if they once again come in higher.

Net Income and EPS

Despite the fact that adjusted EBITDA came in almost $12M higher than in Q3, net income only increased by about $300k from $60.7M to $61.0M (excluding the benefit of the tax credit). The main culprits for the differences between Q3 and Q4 reconciliations were:

1. An increase in SBC of $2.7M

2. An increase in depreciation and amortization of $1.8M

3. A $9.4M change in the fair values of servicing rights from a $4.4M credit last quarter to about a $5M loss this quarter.

None of these are particularly troublesome to me. SBC is going to increase as they continue to hire more staff and D&A will increase as they invest more into capital expenditures for the business. The fair values of the servicing rights only matter in the event that they eventually choose to sell those servicing rights. It’s a noncash accounting treatment based on fluctuations in loan prepayment, interest rates, default rates, and everything else we understand so well from the last two years of fighting fair value battles. However, to my knowledge, SoFi has never sold servicing rights to any of their loans, which makes this purely academic, and it’s why they adjust it out for both their total adjusted net revenue and adjusted EBITDA.

That swing in fair values of servicing rights moved this from a 6 cent EPS quarter to a 5 cent EPS quarter. It still beat analyst expectations of $0.04. Q4 results were excellent across the board with the exception of the tech platform.

Guidance

I thought that SoFi would guide for $3.15B-$3.25B in revenue for 2025. They actually guided higher than that at $3.2B-$3.275B, which absolutely crushed analyst estimates of $3.02B. I projected an EPS guidance of $0.30-$0.35. They guided for $0.25-$0.27, which actually missed analyst expectations of $0.28. There are three mitigating factors here that should be discussed. They are taxes, reinvestment, and bearish macro assumptions. I’ll cover each independently.

Taxes

My own projections for their taxes for 2025 were only for around 8% because they still had plenty of losses that they could write off. Only they took all of them this quarter and from here moving forward, they are assuming a 26% tax rate. So, taking the higher tax rate into account, a $0.27 guide actually translates to $0.33 if the tax rate were only 8%. In other words, SoFi is actually guiding to almost exactly where I thought they’d end up if they would not have taken the entire tax write-off this quarter.

I also assumed the same tax rate for 2026 (I honestly just hadn’t thought that far ahead), which means that they are going to have to drive even more profitability to the bottom line to hit their 2026 guidance than I had built into my models. I will adjust accordingly.

There is one massive benefit to taking the taxes now that I haven’t seen extensively covered anywhere else. That ~$270M credit goes straight to their total capital for the business. That is the equivalent of around $1.8B more assets they can hold on their balance sheet in 2025 without increasing their capital ratios. At their current net interest margin of 5.9%, that is enough room to grow net interest income by around $26M/qtr. That tax credit is essentially a new $100M business that just dropped into their lap. That’s easy growth to capture over the next several quarters in the lending segment and financial services segment.

Reinvestment

I mentioned this above, but Noto talked in the earnings call about reinvesting back into the business at a higher rate this year than in 2024 to supplement growth. I’m a growth investor. I love this move. Starting this year, for every $100 the company drops to the bottom line, they have to pay $26 in taxes. When there are still so many ways to grow the business, the long term ROI in reinvesting that money into growth is so much greater than giving it away to Uncle Sam.

I’d much rather see 30%+ revenue growth in 2025 with $0.30 in EPS than 25% revenue growth and $0.35 in EPS. In fact, even if we only get $0.40 of EPS in 2026 but you told me it would lead to 40% revenue growth in 2025 and 2026, I’d take it. The greater revenue growth would be the result of more members being monetized at a higher rate.

When you have a sticky relationship with your members like a bank does, marketing dollars and new product initiatives are an investment that will repay itself in spades in the years to come. Market share gains are way more important to the goals of the company than a few cents of EPS in the short or medium term. I’m glad they are using the money to build better tech, push brand awareness, and hopefully launch some new products that will result in extra expenses in the short term. I’m all for it if it means that they are fulfilling the vision of becoming the one-stop shop for all your financial needs.

Macro Assumptions

True to form, SoFi has a lot of room for outperformance built into their macro assumptions. Here is what they said on the call about the assumptions behind their guidance:

In line with market expectations, our assumptions are as follows: an interest rate outlook consistent with the forward curve and just north of 1.5 rate cuts; GDP expansion of 1% to 2%; normalization of unemployment in the 5% range; and continuation of normalized credit spread across capital markets and stabilization of consumer credit.

I love the “in line with market expectations” bit, because only one of those numbers is actually in line. The market is only pricing in about 1.5 rate cuts. However, the other two numbers are increasingly bearish. The GDP numbers are only slightly bearish, as the Fed Reserve Board expects a range of 1.6%-2.5% (see graphic below). However, the very most important number from SoFi’s perspective is the unemployment number. People who are employed pay back their loans. 5% unemployment by the end of this year is incredibly bearish. In fact, if there were close to 5% unemployment by the end of the year, there would certainly be more than 1.5 rate cuts. Here is the unemployment data from the past three years.

Unemployment peaked at 4.2% last summer, touched that number again in November, and is at 4.0% as of the January reading. Unemployment to 5% by the end of this year would mean that something breaks in the economy this year. To put it in perspective, in December, the Federal Reserve Board updated their projections. The range of anticipated unemployment exiting 2025 from all Fed Board members is 4.2%-4.5%. The most bearish member of the Fed only sees 4.5% unemployment by the end of the year and SoFi is guiding for 5%.

SoFi, as usual, has left themselves room to outperform based on extremely conservative macro assumptions, especially in unemployment. This is one of the key reasons they continually beat their guidance and that I expect them to continue to do so this year. Last year they did the same thing, guiding to 5% unemployment. The real number ended up being 4.1%, and SoFi outperformed their initial revenue guide by $221M, their EBITDA guide by $81M, their net income guide by $127M, and doubled their EPS by getting $0.15 when they guided for $0.075 (see below). I don’t know what the magnitude of the beats will be in 2025, but unless the economy breaks, I feel safe saying the beats will come and they will be substantial.

Management does not care about their PSUs

One thing that I took away from this earnings is that this management team has the utmost integrity. Anthony Noto, Chris Lapointe, and team are consummate professionals whom I already trusted, but with whom I'm now even more impressed.

In my earnings preview, I wrote about their PSUs and how it might lead them to push extra hard or perhaps be slightly more aggressive this year. To their credit, they stuck 100% by their standard guidance methodology. They do not seem to care about the stock or how they can personally benefit nearly as much as they care about building a durable, long-lasting business that will grow and compound for more than a decade regardless of the near-term consequences. If I, as an investor, were to get mad or be frustrated at the type of long-term mindset, integrity, and devotion to core values that I claim to espouse myself, I'd be a hypocrite. That doesn’t make them infallible or absolve them from criticism, some of which will come in my next article. However, it does make them, in my opinion, very trustworthy. I'm proud to be a shareholder of this company and look forward to many years of compounding returns.

Conclusion

Q4 was in most ways an excellent quarter. For anyone who was watching live as we reacted to the earnings release on YouTube, I had some initial concerns with the guidance, but it is actually better than I originally thought when I saw it at first glance and was reacting in real time. The Tech Platform is legitimately disappointing… a black mark on otherwise great results. The long term trajectory of the company is still stellar. They are still not being fully rewarded for their consistent and secular growth. They are winning and look primed to continue winning over the coming years.

Subscriber update

The DDI YouTube Channel is live. I’m still figuring out how to do everything there, but expect to see more as we go. A sincere and heart-felt thank you to those who support my work. If you do want to support my work, there are several ways to do so. You can subscribe here on substack, or on X, or, now, on YouTube.

Paid subscribers get three perks.

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If you are a paid subscriber and not in the X chat, please email me at datadinvesting@gmail.com and let me know and I’ll get you added. If you have any other ideas for things I can do to bring value to my paid subscribers, don’t hesitate to reach out.

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Disclosures: I have long positions in SoFi. I recently sold my long position on LC and no longer hold any position.

The information contained in this article is for informational purposes only. You should not construe any such information as legal, tax, investment, financial, or other advice. None of the information in this article constitutes a solicitation, recommendation, endorsement, or offer by the author, its affiliates or any related third party provider to buy or sell any securities or other financial instruments in any jurisdiction in which such solicitation, recommendation, endorsement, or offer would be unlawful under the securities laws of such jurisdiction.

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Members

We actually got an excellent piece of data in December when SoFi published that they’d crossed the 10 million member mark. In the press release, SoFi actually disclosed that the number was accurate as of December 12. That means that in the 63 days between the end of Q3 on September 30, and December 12, SoFi added 627k members, which is an average of 8,600 new members each day. If you extrapolate that to the entire quarter, you’d end up with 790k new members for the quarter. That would be a new record number of new members.

It’s worth noting, however, that this assumes that there were no churned members in the quarter. Churned members only really started being recorded this year. In Q1, there were 32,000 churned members. In Q2, it was only 2,000. In Q3 it jumped to 157,000. I asked Investor Relations about this and they said that most of the account removals are due to their development of better fraud detection capabilities. Fraudulent members are being removed from the platform for breaking the terms of service.

That makes me think that the number of accounts removed in Q4 will be non-zero, and I’m guessing it’ll be in the range of 30k (this really is just a guess as the data are so noisy on churned members so far). I also believe they would have included churned members in their 10M member number. However, I also think signups most likely slow down over the holidays, but only by a little. I am therefore going to predict that total member adds will be north of 800,000 for the first time ever at 810,000 new members.

Originations

Personal Loans

Lending is still SoFi’s biggest segment, and originations fuel lending growth. Q4 is historically a weaker quarter for originations, and was their lowest origination per member in each of the last three years.

SoFi did really slam on the brakes with originations this time last year, whereas they are now in the beginnings of reaccelerating the lending business. I don’t expect Q4 originations per member to be quite as low as they were in Q1, so this won’t be the lowest per member quarter of the year, but I do think they’ll come in slightly lower than Q2 at around $450/member. However, since this quarter promised to be a record for new member additions, we can still expect a lot of originations. I’m estimating $4.55B in personal loan originations for the quarter.

Student Loans

I also expect fewer student loans this quarter than we saw in Q3. Students are returning to school in Q3, so it usually gets an origination bump from in-school loans. Even though the Fed cut rates, treasuries have stayed high and I do not think the rate cuts will materialize into higher student loan refis for now. While it is true that starting on October 1, the federal government again began to report delinquent loans to credit agencies, I don’t know if that will really create a sizeable bump in refi originations. I’m guessing we see $790M in SL originations for the quarter

Home Loans

Q4 is historically the worst quarter for mortgages because people hate moving after school starts and before the holidays. Additionally, mortgage rates rose for most of Q4, so there is a dual headwind compared to Q3, which had $490M in originations. I think they will come much closer to $400M in originations in Q4.

Deposits

SoFi’s overall deposit numbers have not been as strong recently. Part of that is because they’ve been letting time deposits run to term without issuing new ones, and part of it might be that they are not pushing as hard now that most of their loans are backed by deposits instead of high-cost warehouse lines of credit. Additionally, their APY, while still excellent, has been cut from a peak of 4.6% APY to 4.0% APY. While most other neobanks have done the same, there is now a slightly lower impetus for people to move from traditional accounts like Chase, Citi, and Wells Fargo to SoFi. Balancing this, however, is the fact that this is going to be a strong quarter of member additions and SoFi Money (their checking and savings), is the fastest growing product they have. I think they’ll add around the same amount of demand & savings deposits as last quarter, with the member adds balancing the dropping rates (demand deposits are checking account deposits). I’m predicting $2.1B in demand and savings deposit growth and another decrease in time deposits.

Revenue

Lending

I anticipate origination contraction across all three loan types that they offer. However, the bump they get by fair values is less important each quarter as their portfolio grows. The personal loan portfolio was around $17B at the end of last quarter. The interest income they generate from that portfolio is growing each quarter, making the contribution of revenue they get from fair values of new loans originated a smaller and smaller percentage over time.

This is shown quite clearly in the chart above. The blue bars are net interest income and the green bars are noninterest income. The trend here is obvious. Even in the quarters where they tapped the brakes in Q4 2023 and especially Q1 2024, interest income was flat or slightly increasing. Moreover, in Q4, they dropped the APY on their deposits, but the existing loan book still has the same rates. This should increase the spread they recognize.

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We know they completed a $525M securitization in Q4, so loan sales look like they were also probably robust. So even if it's a slightly weaker quarter from an originations standpoint, that doesn’t translate one-to-one with revenue. I am predicting $365M in lending revenue in Q4. Based on the chart above, that actually seems fairly conservative.

Financial Services

Financial services was a huge winner in Q3. Led by the expanded Loan Platform Business, it saw massive growth above and beyond what everyone was expecting. The growth trajectory here is incredible and well beyond what I expected to see. Again, we’ll split this between net interest income and non-interest income.

That massive spike in noninterest income last quarter was the Lending Platform Business. You can read all about it in this article if you are curious. Or if you prefer, I did a YouTube video on it here. Either way, it was a complete gamechanger. Last quarter they did $1.0B in LPB originations. One of the biggest things I’m looking for this quarter is whether they were able to add to that number. The continued demand and savings deposit growth should continue to fuel net interest income growth as well. I’m optimistic about them increasing their LPB volume as the product certainly should have gotten more publicity after they reported their Q3 earnings.

Moreover, since becoming a chartered bank, SoFi’s FS revenue per member has never decreased QoQ. Last quarter it was $25.42. Even if I assume it remains flat, I end up with $259M in FS revenue, an increase of about $21M compared to Q3. Again, that seems slightly conservative, but very reasonable.

Technology Platform

Galileo also has seasonality, but whereas Q4 is a historically weak quarter for lending, the opposite is true of the tech platform. One of Galileo’s core products is debit card issuing and processing. Every time somebody pays using a Galileo-issued debit card, they get a tiny fraction of the revenue from that sale. Q4 is the highest spending quarter because of Christmas, so Q4 is seasonally strong. SoFi also guided for “low to high teens growth” overall for Galileo vs 2024. Revenue of $112.5M would put them right at 15% YoY growth. Q3 was $102.5M, so this would be fairly significant QoQ growth, but neobanks are seeing strength again, and Galileo powers a lot of those. Hopefully they also start recognizing some revenue from their smaller Technisys deals they’ve been signing over the past few quarters.

Any Galileo contract announcements would be more important than the actual results here. If they announce that they signed a whale this quarter, that would mean so much more than a big quarterly beat. We’ve been hearing about a robust pipeline for over a year at this point without too much to show for it in terms of revenue. The Fed cooperated by cutting 50 bps in September, 25 bps in November, and 25 bps in December. Hopefully that encouraged other companies, especially banks, to feel more free to devote budget to things like upgrading their core technology. I’m not holding my breath for any announcements, but they would certainly be welcome.

Corporate

This is going to get technical. If you don’t care about the details, feel free to skip this section and go straight to the part labeled “Prediction” below. Corporate revenue is extremely volatile and hard to predict. It will continue to be volatile and hard to predict. There is one contributing component that is straightforward. That is the interest on corporate debt. This is the interest they pay on their corporate revolving credit facility and their senior convertible notes. The amount charged on the corporate revolver is tied to the SOFR, which is tied to the Fed Funds rate.

SOFR has been coming down this quarter, so although corporate interest has been increasing over time, it actually should come down this quarter for the first time in a while, which is good. However, that is not what leads to the volatility, as you can see the contribution of the corporate interest compared to the quarterly corporate revenue.

So, why is corporate revenue so volatile? The answer is the Funds Transfer Pricing, or FTP. FTP is the way that SoFi (and all banks) divvy up the net interest income between their different segments. There is a lot of accounting mumbo jumbo that goes into the calculations, but it's easiest to understand with an example. These numbers are made up and are indicative, not representative of reality, and I’ll try to use round numbers to make the math easy.

Let’s say lending has $100M of loans bringing in 12% in interest. They make $12M annually in interest. Financial services is paying 4% in APY on $100M of deposits, so they pay out $4M annually in interest. The net interest income for the company as a whole is $12M - $4M = $8M.

However, the company needs to decide how to split that $8M between the lending segment and the financial services segment. It’d be awesome if that were simple, but because it’s accounting, they have to make it convoluted for no reason. They use the FTP. In the FTP, the lending segment does its fancy accounting using some assumptions and comes up with a number of 5% that it is paying to financial services. The financial services uses a separate set of assumptions, because accounting is confusing, and instead comes up with a rate of 6% that they charge lending, and they are paying out 4% to their depositors. So the lending segment says it made $100M * (12%-5%) = $7M, and the financial services segment made $100M * (6%-4%) = $2M. So combined, the lending segment and financial services segment made $7M + $2M = $9M.

If you look at the numbers at the end of the last two paragraphs, they are not the same. Somehow, the company as a whole is reporting $8M in net interest income, but if you combine the net interest income of the lending segment and the financial services segment, you end up with $9M. Those are not the same number, and never will be because the financial services and lending segments use different accounting methodologies to come up with their interest rates. However, you can’t make up revenue out of thin air when you reconcile the books for the entire company. So how do banks do that reconciliation? They assign that difference to “Corporate” revenue. So corporate revenue for the quarter has to be -$1M so that the books balance. So now, for the entire company, you have +$7M for lending, +$2M for financial services, and -$1M for corporate and the total net interest income is $8M as it should be.

However, the next year maybe instead of a shortfall for corporate revenue, there is a surplus. This leads to the volatility from quarter to quarter that you saw above. It also makes corporate revenue essentially impossible to predict, because there is no way to recreate all the assumptions required to do the calculations.

Prediction

All of this is to say that apart from the corporate interest portion, I can’t predict this so I’m not going to try. Moving forward, therefore, my assumption is that the FTP portion of corporate revenue is going to be flat from quarter to quarter. It will therefore always be wrong, but because I’m basing all my other predictions on change from the previous quarter, it means my total adjusted net revenue number should be fairly accurate. So, my prediction for Corporate revenue is -$39M.

Total Adjusted Net Revenue

That means I am predicting for total ANR of $697.5M in revenue, a slight increase QoQ. Analysts are predicting $678.5M and SoFi’s guidance is for $675M at the midpoint. A $22.5M beat compared to their guidance is about where you’d expect them to come out. This seems very reasonable to me.

Adjusted EBITDA

I’m assuming a QoQ incremental EBITDA margin of 45%, which is slightly below where they’ve been over the past year. That means adjusted EBITDA ends up at $189.9M. Analysts are expecting $171.9M and SoFi’s guidance is $174.0M. My prediction is a $15.9M beat compared to their guidance, which again, seems about right.

Net Income and EPS

That adjusted EBITDA corresponds to a net income of $63.9M. Fortunately we no longer have to adjust for preferred shares dividend payments, so we divide that by diluted weighted average shares outstanding, which I assume will be 1,115M, and you end up with $0.057 of EPS, which rounds up to $0.06. Analysts are expecting $0.04 (technically $0.038, but it also rounds up). This would be a pretty sizeable beat.

Guidance

Alright, this is the really fun part. Anybody who follows me knows I’ve been highly critical of analyst expectations for 2025. They are only predicting $3.02B in revenue for next year, which is only a growth rate of 17.8% for next year. This year, which was a “transitional year” for the first half of the year, will end up with a growth rate around 23.7%. As I covered recently, my own projections and SoFi’s long-term guidance call for a reacceleration in growth rate in 2025, not a decline. My own predictions call for 38% growth in 2025, while SoFi’s guidance would result in around 33% growth.

On the EPS side, SoFi’s 2026 guidance is for $0.55-$0.80. If you assume linear EPS growth from 13 cents this year to the midpoint of 67.5 cents in 2026, that would imply they need around 40 cents of EPS next year, which matches my projections of their guidance, which come in just above that at 41 cents. My own prediction is for 47 cents next year. Analyst expectations, meanwhile, are for 27.8 cents of EPS, which is obviously much lower than what management has forecasted.

SoFi management knows that Wall Street expectations are low and they can easily beat them. They also like to guide conservatively so that they can raise that guidance every quarter. I expect that they’ll come out with a guidance that is based on very conservative assumptions, probably no rate cuts throughout all of 2025 and only marginal growth in GDP for the next year.

However, even with those conservative assumptions, analyst expectations are so bearish that they can do exactly what they like to do. They’ll come in with numbers that beat expectations but leave lots of upside to be realized throughout the year. Although I think that internally they are looking for $3.4B+ in revenue next year, their guide will only be for around $3.15B-$3.25B. That’s still about a $200M beat to expectations. Similarly, while I think they’ll be targeting that $0.40 EPS mark internally, their guidance will be for something like $0.30-$0.35. They’ll set the bar above where analysts have it, but at a height they know they’ll easily clear.

This also gives them the opportunity to revise their 2026 guidance. As I covered before, they are ahead of schedule already on that guidance. I don’t know if they will be bold enough to raise the top end of that guidance, but I do think there is a decent chance they raise the floor and say they are now planning on $0.60-$0.80 in 2026.

There is a chance that they decide to throw caution to the wind and not be as conservative. In that case, I think they could easily guide for $100M more revenue and about 5 cents more EPS than I outlined above. I don’t expect that to happen, but it is in the realm of possibility. Even with conservatism built in, however, I expect them to easily beat 2025 analyst estimates across the board.

A big year for management

SoFi’s management has a LOT riding on 2025. Yes, it’s the transitional year to see how they get to their 2026 guidance, but it’s also the last full year they have to get push the stock higher before their Performance Stock Units (PSUs) expire. For those who aren’t aware, senior management like CEO Anthony Noto, CFO Chris Lapointe, and Galileo CEO Derek White have stock that only vests if they hit certain stock price thresholds in the next year and a half. The PSUs are broken up into three equal buckets that are only awarded if the stock price exceeds a volume-weighted 90 day trading average of $25, $35, and $45 on or before Jun 1, 2026. So to realistically have a chance at receiving all their PSUs, they need the stock to already be over $35/share by this time next year.

How much is it worth to them? Noto could get a total of 6.43M shares. Lapointe can receive up to 831k shares, and White would earn 750k shares. Here is how much their net worth increases with each individual award, and the growth in their total cumulative net worth if the stock trades at an average price of $45/share before the 2026 target date.

(these numbers are before taxes and the cumulative column assumes they keep all their shares until they are worth $45. After-tax earnings are basically these numbers divided by 2):

So there are approximately 360 million reasons why they are going to push as hard as possible to deliver the goods in 2025. For those who think this is out of reach, remember that at this time last year, Robinhood was trading in the $10-$11 range and today is at $46. Management has always been in the shareholder’s corner, but their interests are especially aligned over the next 16 months.

Noto is a fighter and a winner. I think he is absolutely ready to take the gloves off. In the Q2 earnings call, there were several times he spoke boldly and directly to analysts and investors. I think we’ll see more of that again this quarter as they communicate the vision of where they are going. I also think there is a decent chance we get a product announcement this quarter. Something like Cash Coach or the paid SoFi Plus subscription or full rollout of the new credit cards. I think we get some fireworks or surprises in the earnings call. I can’t wait.

Subscriber update

The DDI YouTube Channel is live. I’m still figuring out how to do everything there, but expect to see more as we go. A sincere and heart-felt thank you to those who support my work.

Paid subscribers get three perks.

1) Access to a private X chat.

2) I buy stocks every week, and every week I send out my weekly DCA weighting list to subscribers

3) I send out a portfolio snapshot at the beginning of each month which shows my total allocation to each of my positions.

If you are a paid subscriber and not in the X chat, please email me at datadinvesting@gmail.com and let me know and I’ll get you added. If you have any other ideas for things I can do to bring value to my paid subscribers, don’t hesitate to reach out.

Disclosures: I have long positions in SoFi.

The information contained in this article is for informational purposes only. You should not construe any such information as legal, tax, investment, financial, or other advice. None of the information in this article constitutes a solicitation, recommendation, endorsement, or offer by the author, its affiliates or any related third party provider to buy or sell any securities or other financial instruments in any jurisdiction in which such solicitation, recommendation, endorsement, or offer would be unlawful under the securities laws of such jurisdiction.

KBW and SoFi: A Brief History

KBW is an investment banking firm that specializes exclusively in the financial services sector. I bear no ill will toward anyone there or toward Timothy Switzer. I am certain they are doing their best to get their investors good returns and to provide good analysis. If they didn’t succeed in doing so, they wouldn’t have clientele and a business, so they are doing something right. However, I do take issue with bad analysis, and their analysis on SoFi has been nothing but hot garbage. This is a professional institution who published this research, makes money on those reports, and obviously those reports affect the companies they report on. Personally, I have nothing against them, but I will not pull my punches when I critique their professional analysis, and will include a healthy amount of sarcasm. My articles may not move markets, but I hope it helps to establish some accountability for these analysts where none seems to exist.

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January 2024 Downgrade

On January 3, 2024, almost one year to the day from today, KBW downgraded SoFi to a sell. The best thing about that report is that I still have it and can call them out for how farcically wrong they turned out to be. The stock sold off 14% on that downgrade, which at the time was the second worst day the stock had EVER had. Today, it has sold off 10% as of the time of writing. So their analysis must be insightful and accurate for them to hold that much sway, right?

No. Virtually everything they said last year has proven to be dead wrong. I’ll go through their analysis, use only their numbers and direct quotes from their key points and we'll see how accurate these predictions ended up a year later. Let’s start with the numerical values and then proceed to the written analysis. The question I’m trying to answer here is “should I put any weight onto their analysis based on their track record?”

By The Numbers

Price Target

This one is easy, KBW’s price target was $6.50. Price targets are one year out. Even after today’s stupid sell off, SoFi is still at $14/share. Their price target was off by 115%. They were dead wrong. This means either their valuation framework or their predictions or both were wrong.

Revenue

KBW's revenue forecasts for 2024 by quarter were as follows:

$550.5M, $567.9M, $586.6M, and $593.8M

That equates to a grand total of just under $2.3B in revenue for the year. We haven't gotten Q4 numbers yet obviously, but so far, this is the revenue reported by SoFi by quarter and their guidance for Q4:

$580.6M, $597.0M, $689.4M, $675M*

KBW underestimated SoFi's revenue by $30M in Q1, another $30M in Q2, and $95M in Q3. If SoFi's guide for Q4 (which they will beat) is accurate, KBW will end up being wrong on their revenue estimates by around $250M, which is more than 10% of total revenue. They projected around 11% revenue growth for the year. SoFi will come in at over double that growth rate around 23%. So KBW got revenue and growth dead wrong. (Asterisks indicate estimate based on SoFi’s guidance).

Adjusted EBITDA

If KBW got revenue estimates wrong, they were even more wrong about profitability. Here were KBW's estimates for adjusted EBITDA by quarter:

$113.2M, $121.5M, $130.3M, $125.2M

That gives a a full year total of $468M. Here are the actuals and SoFi’s guidance for Q4:

$144.4M, $137.9M, $186.2M, $171.5M*

That's a full year total of $640M. So KBW's estimates were low by around 37%. Incremental EBITDA margins have been above where KBW expected them to be even with higher growth the whole time. KBW expected adjusted EBITDA to grow by a paltry 8.5% in 2024. It will grow by at least 48% in 2024. Their growth estimates here were off by a mere 566%. So KBW got EBITDA dead wrong, projecting lower profitability on lower growth than actually happened.

EPS

Same story. KBW estimates:

-0.02, -0.01, 0.00, 0.00

Actuals:

0.01, 0.01, 0.05, 0.04*

Their total full year profitability estimate was -$0.03. SoFi is expected to come out with +$0.13. KBW expected them to be unprofitable for the year after SoFi literally said they’d be profitable every single quarter moving forward in their investor Q&A in December 2023. Dead wrong. Again.

Analysis

Ok, so they got the numbers wrong, but maybe their root analysis was still accurate? Nope. Here were their key points in their own words compared to what actually has come to pass in the last year.

“Why Slower Origination Growth in 2024 Is Most Likely Outcome”

That was literally their heading. Here were their main arguments for why origination growth would stall, again in their own words:

“Likely near the peak of market share gains”

They argued that SoFi is likely near the peak of their market share gains and that other companies (they call out LendingClub by name) will grow at the same rate or faster than SoFi in 2024. What actually happened?

In Q3 2024, LendingClub put up their very first increase in YoY originations since Q3 of 2022. SoFi, meanwhile, has never had a single quarter of negative YoY originations. SoFi has continued to gobble up market share at the expense of their competitors like LC and Upstart. KBW’s analysis was, you guessed it, wrong.

“Bank will hit capital restraints if loan sales do not resume”

Like most banking analysts, KBW did not account for the fact that management can, you know, actively manage their company. They only see what the archaic legacy banks have done and cannot fathom that an agile dynamic fintech can do things that alter their path. You know, things like restructuring their debt structure to add $500M in total capital and completely alleviate all capital restraints for the company. Which is exactly what they did in March of 2024. They are now raking in retained earnings each and every quarter since they are profitable. That allows them to sustainably grow the balance sheet. They now have a very healthy buffer between their current capital ratios and the 14%-15% level where I expect them to operate longer term.

“We believe there is risk for lower coupon rates to work against fair value marks in 2024 should rate cuts materialize”

Ah yes, the fair value argument surfaces again. Rising rates would hurt fair values in 2022 and 2023 is what everyone told me. Then KBW comes out and says that falling rates will also hurt fair values in 2024. They also, ostensibly, walk uphill both ways when they go to work. There are two incredibly salient points that made it so that their arguments turned out to be, you guessed it, dead wrong.

First, SoFi hedges their fair values against rate movements. No hedge is perfect, but SoFi’s hedges have proven to be incredibly close. Fair values were not significantly affected by rising rates. They have not been significantly affected by falling rates this year. Hedges weren’t even mentioned in their January 2024 note.

Second, and this is something that every bearish analyst seems to ignore, loans are worth more held to maturity than what is embedded in the fair value marks. The math isn’t this simple, but directionally, this is accurate. Today SoFi writes a personal loan with a 14% interest rate. The fair value on that loan when originated is about 106%. When you take into account their cost of capital and loss rates, SoFi makes around 108% annually by holding the loan. Average life of loans is around 1.5 years, or six quarters.

In this case, SoFi has $100M of loans that have a fair value of $106M. If they hold the loans to maturity, they make $112M. Over the next year and a half, the loans get paid down and the fair value amortizes over those six quarters, that’s around $1M in fair value amortization each quarter. That is a $1M drag on revenue per quarter ($6M amortized over 6 quarters). But they make $2M in net interest income each quarter. They make more by holding the loans than selling them even accounting for depreciation of fair values. As a SoFi investor you WANT them to hold the loans as long as possible and you WANT them to take that fair value markdown because the extra money they earn from interest they get is more than the defaults and the fair values markdowns put together.

Yes, there is default risk, which could make everything worse. However, defaults already peaked, much to KBW’s chagrin (more on this in the bonus wrong prediction below). So fair values are less a risk today than they ever have been before.

In much shorter terms, KBW’s concerns about the fair value marks in 2024 were wrong.

Bonus wrong prediction

KBW also had another note a couple weeks before Q2 earnings where they told investors to short SoFi before the earnings call. Why short it? Their analysis showed that SoFi's net charge-off rate would be between 6.3%-7.1%. The actual result? 5.4%, inclusive of the losses on the late-stage delinquent loans they sold. On a portfolio of about $20B in loans, that’s $260M less defaults than was predicted. The analysis was dead wrong there too. Default rates have improved ever since.

Should I put any weight onto their analysis based on their track record?

You can answer for yourself, and I think KBW is probably excellent at analyzing regional banks as they claim to be. That doesn’t change the fact that they were comically bad at analyzing SoFi last year. I am highly skeptical of KBW’s SoFi analysis given that they were so farcically incorrect about everything when they made this same call at this same time last year.

January 2025 Downgrade

Let’s get to this year’s downgrade. We’ll grow through their 2026 estimates, then cover the analysis including their valuation model.

2026 estimates

Revenue

Their first point is that the “Path to Long-Term Guidance Appears Long & Difficult”. I agree with that statement, but trust that SoFi management has things well in hand. As Anthony Noto said in the Q2 earnings call, “Hard is not for everyone, but for me and those who stay at SoFi, it fits just fine”. Compared to what they did to grow massively during the headwinds in 2022 and 2023, this long and difficult path is actually fairly straightforward. KBW gives a breakdown of their own 2026 annual revenue CAGR guidance compared to management’s 2026 guidance:

I just went through a very detailed analysis about why SoFi is way ahead of schedule on their 2026 guidance in Lending and Financial Services. They are slightly behind on the Tech Platform, but the outperformance on Lending and FS has more than compensated for that underperformance.

KBW just came off a year where they are got severely burned on their estimates by not taking SoFi management at face value. KBW are doubling down on that call, and saying that despite the previous outperformance, SoFi will still be unable to grow as guided. SoFi management has never missed a quarterly or annual guidance as a public company. That’s three straight years of exceeding what they’ve said they’d do. By contrast, KBW were egregiously wrong every single quarter last year. I think the balance of evidence favors SoFi management.

Adjusted EBITDA

SoFi has shown incredible operating leverage for the past two years. Their incremental EBITDA margins have been 40% or greater for eight straight quarters, with an average at 53%. That means of for every $1 of extra revenue they make, they drop 53 cents of it to the EBITDA line. The data are pretty definitive that the 30% long-term adj. EBITDA margins are almost certainly sandbagged. KBW cites that 30% number heavily in its analysis.

Apart from the fact that KBW thinks that growth will be significantly less than SoFi is guiding for, they also have incremental margins for the next two years at 36%. That seems like an extremely low number to me given that they haven’t had a single quarter that low for two full years. So when you combine foolishly low growth with lower-than average incremental margins, you risk compounding your errors to the downside. I think that is a mistake in this analysis.

EPS

KBW was off on 2024 EPS by a full $0.15. SoFi management is guiding for $0.55 - $0.80 of EPS. Management’s guidance assumed no new product lines (they already have more product lines), a slight recession in 2024, higher unemployment in 2024 than we’ve seen, and a overall pessimistic macro view. KBW’s 2026 EPS estimate is 0.36, which is less than half of the midpoint of SoFi’s guidance. That implies an incremental net income margin of 32%. Here is that incremental margin since 2022. SoFi came in above 32% in every quarter except one. KBW is combining low growth with lower-than average incremental margins here as well.

Analysis

Apart from the difficulty in achieving long-term guidance, which I covered above, their main arguments might sound familiar. They are fair values, capital restraints, and valuation. You’ll notice that those are the exact same concerns they had last year that all proved to be wrong. We’ll cover these briefly one at a time.

“Fair Value Accounting Methodology and Imperfect Hedging Program Still Present Some Risk”

This is such an easy go-to argument for bears at this point because it’s complicated and relies on fear of the unknown. The same fear of the unknown that plagued the company in 2022…and also 2023…and also 2024…and never came to fruition. Yes, hedges are never perfect. Yes, there are assumptions built into the fair value calculations that are not possible for an outsider to fully verify. Yes, there will be fluctuations from quarter to quarter.

No, it’s not going to result in some monstrously crippling $400M write-down in a single quarter that brings the entire company to its knees. If that were going to happen, it would have happened in 2022 when we got historic rate hikes or 2023 and 2024 when defaults were spiking and nobody knew exactly where they would level off. This is a less volatile rate environment than 2022 and defaults already peaked and are coming down. There is no monster hiding in SoFi’s fair value closet. The actual reality of the situation is that their hedging strategy has been more than sufficient and the fair value marks have been proven again and again by market-clearing loan sales. This is a tired argument at best.

Furthermore, remember what I said before. Worst case scenario is that they hold the loans and recognize, *gasp*, more revenue from net interest income than is currently embedded in the fair value marks. Until something material changes here (like a deep recession), I see no reason to think that fair values are something we’ll ever have to worry about as SoFi investors.

“Adjusted Capital Thinner Than Reported Levels”

KBW’s argument here is that if you were to exclude the extra revenue from the fair value marks, then SoFi’s capital ratios would be lower. That’s a true statement. It’s also a completely and totally irrelevant statement. It is doing analysis in a parallel dimension that has absolutely nothing to do with reality.

KBW knows this. You know how I know they know this? Because SoFi clarified it at the KBW Fintech Conference in February of 2023. That’s right, they got a chance to ask this question to CFO Chris Lapointe publicly at their own conference. He gave them a straightforward answer and yet they still trot out this tired argument as a stick to beat SoFi with. Here is the exchange:

Analyst: I believe the accounting rules -- you mentioned a phrase, the intent to sell. I think they're fairly liberal around that intent from a timing perspective. But are there any limitations? Can you hold these loans 8, 9 months in the capital and funding? Like is there any kind of restrictions we should think about in that regard as you guys continue to grow?

Chris Lapointe: Yes. So as long as you have an intent to sell, you would end up -- yes, you would end up marking them as held for sale. Even in an environment where you were to account for these in a fair market value way, you can switch from held for sale to held for investment and hold them to maturity with no implications on CECL or anything. You would always be marking them to market.

There is no scenario where SoFi is magically forced to switch accounting methodologies. Arguing that their capital ratios would be different if they did have to change accounting methodologies is a fruitless endeavor. It’s a hypothetical scenario meant to foment fear in investors just like the fair value argument. The fact that we were talking about this two years ago and it still never actually came up in spite of everything that has happened in those two years tells you everything you need to know. I asked SoFi Investor Relations directly if they are planning on moving any new personal loan originations to a held-to-maturity portfolio. They said no. This argument is another red herring.

Also, as stated above, SoFi’s increasing profitability now gives them extra capital each new quarter in the form of retained earnings. That means they will keep growing their capital. The profitability that KBW did not predict already came in 2024. SoFi’s earnings now provide them the capital they need to grow the loan book. The debt restructure last year freed up their capital restraints then, and earnings gives them all the buffer they need going forward. The increased demand from asset managers for unsecured consumer debt has been a consistent theme across SoFi, LendingClub, Upstart, and Affirm for the last six months. Capital constraints are less a problem today than they have been for years.

“Valuation Overstretched Even if Most Ambitious Targets Are Hit”

This, to me, is an irresponsible and absurd claim. The claim is that even if they hit their EPS target of $0.55 - $0.80, they’d still be overvalued at current prices. Their argument is that even for companies who return 20%-30% on their tangible common equity (ROTCE), the average P/E is around 10. In KBW’s own words “two banks that already generate the return profile SOFI is trying to hit (TBBK and CASH) both trade at only 10x 2025E EPS, demonstrating that the market still assigns bank-like multiples to differentiated, digital, high-return, high-growth bank models.” The analysis completely ignores two very important factors. The first is that they are analyzing SoFi as if it were already optimized for profitability. The second is that completely ignore the one thing that all investors should truly understand — the power of compounding.

The power of compounding

The two examples they pull out are Pathward Financial (CASH) and the Bancorp (TBBK). They call them “digital, high-return, high-growth bank models”. Let’s check that assumption of high growth compared to SoFi. In 2018, Anthony Noto took over as CEO at SoFi. Fortunately, in 2018, all three companies had nearly identical annual revenue at $269M for SoFi, $271M for TBBK, and $286M for CASH. Let’s look at their revenue charts since then (data courtesy of finchat.io), including 2025 estimates for each company. Despite starting out at the same point (actually, SoFi was the narrowly the smallest of the three), SoFi now has 3.5x the revenue of CASH and 5.3x the revenue of TBBK.

This gap will only widen over time as SoFi is still growing at a faster CAGR than either CASH or TBBK. Calling all of these “high growth” and leaving it there is irresponsible. Furthermore, focusing only on one single profitability metric (in this case return on tangible common equity) makes you lose the forest for the trees. SoFi’s revenue growth alone in this year is projected to be $500M. TBBK’s total revenue for the last entire year is only $472M. That’s right, SoFi’s revenue growth is higher than all of TBBK’s revenue even though they started at the same place 6 years ago.

Proper valuation metrics

Imagine you hired someone to hang up Christmas lights on your home. They pull up in their truck and you don’t see a ladder. You ask them if they have one or need to use yours and their response is “It’s alright, we brought our sledgehammer.” Would you be concerned? Of course you would be concerned. A sledgehammer has no use in hanging up Christmas lights, whereas a ladder seems pretty critical. A sledgehammer is the wrong tool for the job.

TBBK and CASH are in their maturity stage. It makes sense to use PE for them. However, using a static trailing PE with a company with SoFi’s growth profile is about as useful as bringing a sledgehammer to set up Christmas lights. Trailing PE is meant for mature companies who don’t grow quickly. As we just established, SoFi is very much still growing compared to these other companies. The chart below gives a good framework for what valuation metric is applicable at what stage for the company.

Let’s go back to KBW’s analysis. They say that, “given management’s own outlook [meaning ROTCE of 20%-30%] and our own more conservative projections, our base case scenario for the purposes of this valuation exercise assumes SoFi reached a sustainable 20% ROTCE in 2028 — this implies a price target about $8 and 46% downside given a 10x multiple on earnings power of $1.10 discounted back two years at 14%.” They are using almost too many assumptions to count in there. Discounting an already ridiculously low PE ratio back at a discount rate of 14% is an interesting strategy. We also already established how accurate their “own more conservative projections” have been in the past. Regardless, let’s take that earnings number of $1.10 in 2028 at face value.

At that point, SoFi will still be somewhere in between the “high growth” and “mature growth” stages. Given what we talked about concerning growth earlier, I think using a PEG ratio is a superior valuation method than the PE ratio. Assuming SoFi hits the midpoint of their 2026 guidance, they’ll get $0.67 of earnings in 2026.

To get to $1.10 in earnings in 2028, they’d need to continue to compound earnings at 28% in both 2027 and 2028. A PEG under 1 is considered undervalued and the average PEG ratio for S&P 500 companies is 1.5. If SoFi were to trade at $8 in 2028 on $1.10 of earnings that were growing at 28%, they’d be trading at a trailing PEG of 0.29. I consider NU an exceptional deal right now. It’s a bank and it’s trading at a FWD PEG of 0.47. The only reason it’s trading so low is that it has sold off 33% recently because of massive geographic risk with what is going on in Brazil and the Brazilian currency.

Let’s use CASH and TBBK as examples. CASH is trading at a PEG of 1.09 and TBBK is trading at a PEG of 0.66. Neither of those are remotely close to the ridiculous 0.29 PEG implied by their $8 price target. Even using a PEG of 0.66 on their 2028 hypothetical framework would give a SoFi stock price of $20.32. That’s a 10% annualized return after today’s nasty sell off. That would likely beat the market over the next four years.

Even at the undervalued PEG of 1, the stock would be at $30.80, a double from here, which would be an excellent return of 22% annually. At the average PEG of 1.5, the stock price would be $46.20, or around triple its current stock price and a four-year return of 35% annually. And remember that all of these assume that KBW can accurately predict revenue growth with greater accuracy than SoFi’s management, which has thus far been very untrue. If SoFi management’s guidance is accurate, the returns would be much higher.

Valuations are always going to be subjective. There are always going to be varying opinions and I don’t claim that PEG is the best or only metric you should use. There is no one-size-fits-all approach. In fact, I spent two full articles covering the valuation recently across a massive host of metrics including PS, PS/G, P/GP, P/GP/G, PEG, a reverse DCF, a forward DCF, and price to cash flow. I don’t know what the exact right answer is here. However, I do know that the market should and does reward companies who prove to be consistent growers. I also know that you shouldn’t use a sledgehammer to hang up Christmas lights.

Conclusion

KBW’s prior analysis for 2024 was absurdly incorrect. Let’s recap just exactly how wrong they were:

Revenue growth was predicted to be 11%. Actual growth is around 23%. That’s a 109% miss.
EBITDA growth was predicted to be 8.5%. Actual growth is around 48%. That’s a 550% miss
EPS was predicted to by -$0.03. Actual EPS is around $0.13. The percentage miss doesn’t even make sense because they got it so wrong.
Stock price (based on their valuation framework) was predicted to be $6.50. Before this ridiculous downgrade, it was $15.40. That’s a 137% miss.

They missed every numerical prediction by over 100%. Their bogeyman bear cases of capped market share on originations, fair value fears, and capital constraints were all proven demonstrably false. This year, they are recycling the exact same monster-under-the-bed arguments about fair values and capital constraints while doubling down on their valuation framework that ignores growth completely.

The data show that they misunderstand the core business, resulting in predictions that were far off the mark. SoFi management’s guidance is far more trustworthy, as they have beaten every single quarterly and annual guide for 14 straight quarters. You can form your own take on what you think about KBW’s analysis. I think it’s garbage.

Subscriber update

The DDI YouTube Channel has started! My first video was a live Q&A on the day of earnings. I’m still figuring out how to do everything there, but expect to see more in the new year. A sincere and heart-felt thank you to those who support my work.

Paid subscribers get three perks.

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Disclosures: I have long positions in SoFi, LC, and NU.

The information contained in this article is for informational purposes only. You should not construe any such information as legal, tax, investment, financial, or other advice. None of the information in this article constitutes a solicitation, recommendation, endorsement, or offer by the author, its affiliates or any related third party provider to buy or sell any securities or other financial instruments in any jurisdiction in which such solicitation, recommendation, endorsement, or offer would be unlawful under the securities laws of such jurisdiction.

1. Lending segment growth needs to be ~15% CAGR from 2023-2026 and it needs to maintain a contribution margin of low-to-mid 60s.

2. Tech platform segment growth needs to be ~25% and contribution margins need to be in the mid 30s.

3. Financial services segment growth needs to be ~50% and contribution margins need to be around 30%.

4. They need to stay disciplined with their other costs, allowing them to only increase by about 10% each year.

Since we’re talking about going from 0 to 60, let’s continue the car analogy. Every six months or so, they'll need to shift into higher gear, so let's see if they have enough speed to shift from first gear into second gear. We’ll check in on each of the segments individually and then look at expenses.

Lending

At the time I wrote the article, SoFi was guiding for 2024 lending revenue to be only 92-95% of 2023 levels. We are now three quarters of the way through 2024, and SoFi is significantly ahead of where they planned to be. Rather than shrinking YoY, lending has been growing. In fact, through the first three quarters of the year, 2024 lending revenue is 6.7% higher than it was in 2023, driven by the massive outperformance in Q3.

SoFi has also changed their guidance to be “at least 100% of 2023 levels”, which is probably the understatement of the year. To get to those levels, they only need $280M in lending revenue in Q4. That would be down over $100M QoQ and the last time lending revenue was that low was Q2 of 2022. It’s safe to say they are comfortably ahead of their growth guide. As for contribution margin, it’s holding steady exactly where it needs to be. Q1 was slightly lower in 2024 than it was in 2023, but both Q2 and Q3 were higher this year.

Lending has outperformed thus far. Lending is still their biggest and most profitable business, so when it outperforms, that means SoFi as a whole will probably outperform. Just as importantly, it takes the heat off of this segment in both 2025 and 2026. If lending revenue really were to have contracted by around 7% in 2024, it’d need to see 26% growth in 2025 and 2026 to get to the 15% CAGR specified above. If they end the year at 6% YoY growth total, they only need 20% each of the next two years to meet that goal. Lending is ahead of schedule relative to where I’d thought it would be and with easing rates, loan buyers returning, and delinquencies and defaults peaking and coming down, the prospects for the lending business look excellent moving forward.

Tech Platform

Galileo is the opposite story for 2024. Their original guidance for the year was a 20% growth rate. Here is the data so far

There is growth here, but it is not 20% growth. Overall through the first three quarters of the year, 2024 shows 14.4% growth relative to 2023. Moreover, SoFi adjusted their guidance to only “low to high teens”. In their Q2 earnings call, when they lowered the yearly guidance for the tech platform, they said “While this is lower than our original 20% guidance for tech platform, we view this as transitory and still feel confident in our multi-year growth guidance for this business.”

However, underperforming today means overperformance is required in the future to make up for it. That puts pressure on this business to really start delivering in 2025. Previously, they would have needed to accelerate the business from 20% growth this year to around 27.7% growth in the next two years. Now, to hit their longer term guidance for this segment, that number has increased to 30.2% required in each of the next two years. Achievable, but it will require better execution than what we have seen in this segment up until now.

As for contribution margin, they are doing quite well. Contribution margin here has been rock steady around 32%-33%. You would think that further growth should help these creep up as fixed costs remain steady as they scale the business, but contribution margins in this range are sufficient to get them where they need to go.

There are several green shoots for tech platform that show they are starting to get some wins. Three in particular have cropped up in the last month or so. Rapid Finance started a pilot earlier this year. That pilot was obviously successful as they chose to expand the partnership with Galileo. Second, Galileo was chosen as the debit card issuer and processor for Direct Express®, the US Treasury’s largest prepaid debit card program. That is a five year contract that begins on January 3, 2025, so that should help next year’s growth. Finally, just recently, SoFi announced a partnership with Mesh Payments.

The Mesh Payments partnership is of particular note because they are using using Galileo as the payment processor, SoFi as the sponsor bank, and Cyberbank Core for the core banking. That is the very first time that any client is using all three services as far as I’m aware. It’s an excellent proof of concept and evidence that they have a unique product offering that nobody else can offer and that there is demand for all these services.

Financial Services

Honestly, when SoFi guided for 75% YoY growth in financial services, I was pretty skeptical to start. A lot of the growth in Financial Services over the past few years has been from deposit growth offsetting higher cost of funding. I wasn’t sure where they were going to supplement that growth as their deposits would no longer be offsetting as much as they used to. My skepticism was remedied in Q3 when they debuted the new loan platform business and blew all previously reasonable-sounding estimates completely out of the water. The data are honestly incredible.

That Q3 number was stupendous. Through the first three quarters of the year, financial services is up 90% compared to the first three quarters of last year. They need $221M in Q4 to hit their new 80%+ growth guidance. They are absolutely killing it with financial services.

Not only is growth ahead of schedule, but the new loan platform business is highly incremental to margins. The contribution margins of the LPB are closer to lending margins at 50%+, meaning that contribution margin for the overall segment is exploding along with growth. And massive growth coupled with margin expansion is a recipe for huge outperformance relative to where I thought they’d be at this point.

As a reminder, contribution margin here needed to be around 30% by 2026 to hit their EPS guidance. It is already north of 40%. And remember that both credit card and brokerage right now have negative contribution margin. If they can get those positive, there is a decent chance that the segment could get to a margin north of 50%. Long term margins are going to depend heavily on the mix of where the revenue is coming from, but it seems very safe to assume that 30% margins were a severe underestimate after the debut of the new business.

Expenses

In that original article, I said that the most difficult part to project was other expenses. Contribution margin takes care of the expenses that are directly attributable to each segment. All other expenses, like brand marketing, management compensation, stock-based compensation, etc. are harder to project. However, the hope was that long term, those expenses would grow at a rate around 10% per year.

It’s almost as if they had this modeled out and came to the exact same conclusion themselves. Almost as if they know exactly what they are doing. Q2 and Q3 YoY other expenses growth came in at 9.1% and 10.8% YoY growth, respectively. So while overall they are outperforming on their growth objectives, their other expenses have fallen to exactly where they need to be.

They already shifted into second gear

In two of their three segments, they are already far ahead of where they need to be in terms of the growth trajectory they laid out. It also happens to be the case that those are their two biggest segments with the two largest contribution margins. The extra growth in lending and financial services has more than made up for the underperformance of the tech platform. Not that that is an excuse, but if the goal is $0.55-$0.80 EPS in 2026, they are well on their way.

SoFi wasn’t supposed to reaccelerate lending until next year. They started in Q3. They weren’t supposed to be able to grow financial services this fast when deposit growth made less of a difference moving forward as it did in the past. They debuted a new business that moved it forward even faster. And they did that while masterfully controlling costs.

Updated Bearish, Base, and Bullish Predictions

In that previous article, I gave bearish, base, and bullish predictions for where I thought revenue and EPS could end up through 2028. With an additional six months of data, I have amended those scenarios. I won’t step through all the assumptions here, but will provide the outputs. Basically, the outperformance this year raises the 2024 revenue and EPS enough that it becomes much easier to achieve and outperform their goals. My updated bear, base and bullish predictions for revenue and EPS are below. Bolded values are updated December 2024 predictions, the gray are the values from my previous article for comparison.

SoFi’s outperformance has been so great that my base case revenue and EPS scenario is now up to the top of SoFi’s 2026 guidance at $0.78 of EPS in 2026.

Analysts are still Woefully Behind

Because I’ve built up a bit of a network, I can now get ahold of most analyst reports on SoFi. At this point I am completely convinced that most of these analysts have very little idea what they are talking about. They cover a ton of names and haven’t taken time to understand the intricacies of SoFi’s different businesses and business strategy. Their estimates are evidence that they often miss important parts of the picture. Six months ago, analyst estimates were for $0.08 EPS in all of 2024. They’ve already hit that in the first three quarters. They'll probably beat that projection by 50%-75%.

Yet somehow, this outperformance hasn’t affected analysts’ long term projections much at all. You would think that if SoFi can beat 2024 estimates by 4-6 cents, that would mean they can probably beat 2026 estimates by at least that much. Yet 2026 estimates have only moved from $0.44 to $0.47. My bear case revenue estimates are above the mean analyst estimate for revenue. There will be continued upgrades as analysts catch up to reality. Here are the bear, base and bull revenue and EPS compared to analyst expectations in chart form:

My projections aren’t meant to be completely accurate, but they should give a decent range of what to expect. Unless the macro turns extremely sour (unlikely), or SoFi stops executing (even less likely), I think there will be significant upward revisions each and every quarter as they continue to prove analysts wrong. Moreover, I think the biggest upward revision will probably happen in about one month when they release 2025 guidance and analysts are caught off-guard, again, with how low their estimates are relative to what SoFi believes is possible. I’ll probably revisit this briefly again after Q4 earnings so I can update everything with their new guidance and see how close I am to what they project. The biggest takeaway is SoFi is ahead of schedule on their guidance, and that Wall Street is nevertheless still underestimating them.

Subscriber update

The DDI YouTube Channel has started! My first video was a live Q&A on the day of earnings. I’m still figuring out how to do everything there, but expect to see more in the new year. A sincere and heart-felt thank you to those who support my work.

Paid subscribers get three perks.

1) Access to a private X chat.

2) I buy stocks every week, and every week I send out my weekly DCA weighting list to subscribers

3) I send out a portfolio snapshot at the beginning of each month which shows my total allocation to each of my positions.

If you are a paid subscriber and not in the X chat, please email me at datadinvesting@gmail.com and let me know and I’ll get you added. If you have any other ideas for things I can do to bring value to my paid subscribers, don’t hesitate to reach out.

Disclosures: I have long positions in SoFi.

The information contained in this article is for informational purposes only. You should not construe any such information as legal, tax, investment, financial, or other advice. None of the information in this article constitutes a solicitation, recommendation, endorsement, or offer by the author, its affiliates or any related third party provider to buy or sell any securities or other financial instruments in any jurisdiction in which such solicitation, recommendation, endorsement, or offer would be unlawful under the securities laws of such jurisdiction.

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The advent of the loan platform business is not just a shot across the bow of the bear thesis, it’s a direct hit to the hull. Bears have maintained their position that SoFi’s growth will meaningfully slow as they become capital constrained. My contention has always been that the numbers don’t really support that argument.

I have argued, and continue to maintain the opinion, that member growth is the crux of their long-term growth. If you can grow the number of members entering the ecosystem by about 40% every year, then your revenue will continue to grow at very healthy rate above 20% each year. If you get people into the ecosystem at reasonable customer acquisition cost (CAC) for whatever product they are adopting, they will generate a healthy return. Not only that, some of them will cross sell into other products. This leads to greater lifetime vale (LTV) of each member at very low additional cost. Ergo, grow the member base and as long as the product is sticky enough to keep them around, SoFi will find ways to monetize them.

Has this played out? Yes. The average revenue per user (ARPU) has stayed relatively flat. The overall trend is slightly downward, which is to be expected as they pivot from a lending focus to financial services focus and as users go dormant on the platform. However, in three years, their ARPU moved from its peak of $77.66 in 3Q21 to $67.24 last quarter. That’s a decrease of 13.4% over 3 years, which is only 4.3% per year. Meanwhile, their total number of members grew by 219% in that same time period, an annualized growth rate of 47%.

The counterargument is that that is all well and good, but the only reason that SoFi has been able to pull it off is because they’ve had room on their balance sheet to grow their loan originations. Once that balance sheet space fills up, monetization would go down. I thought that was a poor argument because they’d pivot from using the balance sheet to monetize in different ways.

Enter the Loan Platform Business

What are other ways they could monetize those members? Maybe by, I don’t know, debuting a brand new capital-light business model to extract fee-based revenue with absolutely no balance sheet risk that is massively scalable? They did exactly that, and it is called the loan platform business (LPB).

At the Mizuho Conference on June 12, 2024, Dan Dolev asked a question and CFO Chris Lapointe’s response left me frustrated. I wasn’t frustrated by the response, but rather the fact that Mr. Dolev didn’t ask what I considered an obvious follow-up question. Here was that exchange:

Dolev: And maybe kind of talking about the other side of it, like maybe a little bit of an update on the capital market activity, like how do you feel vis-a-vis the loan buyers?

Lapointe: Yes. Demand is as strong as it's been since I've been in this seat. We ended up doing $1,900,000,000 of sales in Q1 of this year. That was the most sales that we've done over the course of the last 2 years. We have more demand than we are willing to fulfill right now at execution levels that are really favorable to us.

The obvious question to me was this: if you have more demand from loan buyers than you are willing to fulfill right now, why not originate more to fill that demand? Why not create a marketplace for loans that matches your borrowers with those investors? This isn’t a novel concept, LendingClub does something very similar with their own marketplace. However, it seemed at the time that SoFi’s business model did not incorporate this type of offering. SoFi would only fund loans that they felt comfortable holding on their own balance sheet, and perhaps they would sell them later.

I’d thought about them maybe doing something like the LPB, but to be honest, I did not see this coming and neither did anyone else. The LPB blindsided me, other investors, and analysts alike, and as a result, Q3 numbers blew away everyone’s expectations. SoFi usually likes to do a slow rollout to test new products before leaning into them. They often debuts new products like their new recent credit cards, Pay in Four (their BNPL), custom ETFs, etc., but they’ve never had a new product that immediately hit the top and bottom line as fast or as significantly as the LPB.

What kind of results are we talking about here?

To be completely fair, this wasn’t an entirely new line of business. SoFi has long touted that they turn down about 80% of the people who ask them for a loan. They refer those people to other companies through their Lantern business and partnerships with companies like Pagaya, taking a small referral fee for lead generation to other lenders. This showed up in their financial services segment as referral revenue, and its growth can be tracked below. This is total referral revenue, which also includes fees they get for other referrals like insurance, estate planning, business accounts, etc. The data we do have indicates that lending referrals make up the vast majority of this revenue, about 85% of the total.

So what changed in Q3? The new wrinkle is that rather than farming out these leads to others for a small fee, SoFi took a portion of the people they would have otherwise rejected and used their own underwriting expertise to originate the loans on behalf of others, such as Fortress. They originate the loan and immediately transfer it within days or weeks to the balance sheet of their partners. Those partners pay them handsomely for providing the marketing, underwriting, and other services associated with originating the loans. SoFi also gets to sign up any new customers acquired this way as new members and keeps a small ongoing revenue stream from servicing the loans. The result was an explosion of a brand new business line, with the LPB bringing in a total of $61.2M in revenue in Q3.

SoFi, conveniently, did us the favor of separating the revenue from this new business from the previous referral revenue in the 10-Q. Total revenue from the loan platform business in Q3 was $55.6M in fees, with an additional $5.5M in servicing revenue. Of that $55.6M in fee revenue, $13.3M was from the same type of lead generation referrals I explained above. However, a whopping $42.4M was fees from the new product they started in Q3. That’s right, they scaled the product from $0 to $42M in a single quarter.

On the servicing side, there was $5.5M in Q3 and a total of $12.2M recognized cumulatively in the year to date. So the jump in servicing revenue was probably somewhere around $2M from Q2 to Q3. That means all told, the new product they added to the LPB resulted in around $44M of extra revenue in its very first quarter of operation. For context, all other noninterest revenue from the financial services segment, which includes interchange revenue, brokerage revenue, and the referral business I described above was only $40.2M combined. In its very first quarter, the new LPB contributed more to the top line than all other noninterest income put together from all their other financial services products. That’s nuts.

Capital light revenue

But wait, there’s more! This revenue is truly and completely capital light. It is a fee that they collect in cash immediately. There are absolutely no loss share agreements or financing agreements. They are taking absolutely no risk on that $44M of revenue they just brought in.

With this product, SoFi may throw a bit of a kink in the works of Upstart and LendingClub’s marketplace business. While the credit boxes don't overlap completely, they are now directly competing for those borrowers. SoFi, however, has the built-in advantage of their sticky ecosystem that leads to greater customer retention, cross sell, and repeat sales. The one-stop shop they’ve built means that market share will probably continue to shift to SoFi. In 2021, SoFi was the laggard of these lenders in personal loan originations, with their market share between these three companies hovering around 20%. They have dominated since then, with their market share coming in at an all-time high of 60% in Q3. The vast majority of LendingClub and Upstart’s clientele is there just for a loan. Most of SoFi’s members are not there for a loan, but will go to SoFi as one of their first options if they are looking for a loan. Leveraging the existing user base is a powerful advantage of SoFi’s model.

Furthermore, it gives them a more diverse portfolio of assets to offer to asset managers and banks. Some investors may prefer seasoned loans, others might want the benefits of buying structured certificates, and others, like Fortress, want newly originated loans. SoFi now has a plethora of options that allow them to serve all those different needs.

Expand the TAM without expanding risk

One of the questions I’ve had in the past is where does SoFi draw the line on member growth. Their target demographic is HENRYs (High Earners, Not Rich Yet). These are people between the ages of 20 and 45 who make $100k+, but still haven’t become high net worth individuals. But how many of those are there out there? SoFi will end the year with around 10M members. The image below, from Visual Capitalist, shows that the 90th percentile income for individuals doesn’t cross $100k until sometime between the ages 30 and 35. Around 36% of the US population is between 18 and 45, and let’s generously say that 15% of these people make more than $100k. That means only about 18M people in the US possibly qualify as HENRYs.

SoFi, at some point, needs to broaden their offerings to more than just HENRYs in order to continue to grow. The reason that they target these individuals is because they have the highest LTV. It is also because the higher the income, typically the less likely a borrower is to default on a loan. SoFi is entering a stage where they are going to have to start expanding their target demographic to continue to grow the member base. However, they do not necessarily want to take the risk of holding loans from lower quality borrowers.

The LPB solves this issue. SoFi can expand their credit box and originate those loans, but immediately transfer the risk to someone else. They still make money off those people by getting the fee. But they also service the loan, which means borrowers become members and are introduced into the SoFi ecosystem. As far as the borrower is aware, SoFi looks like their lender. They still use SoFi’s interface to pay their loans and they can still be cross sold on other products, but the risk of default is on someone else’s balance sheet. The LPB gives SoFi the flexibility to expand their credit box, and expand the customer base, without the risk that typically accompanies doing so.

This may be cannibalistic to loan sales

There is one potential downside to the LPB. This was a question that was brought up on the earnings call, and one that needs to be looked at closely going forward. It is possible that loan buyers who purchase their loans through the the LPB will decrease the amount of loans SoFi otherwise sells. For example, if the LPB didn’t exist, would Fortress perhaps have signed a $2B forward flow agreement for whole loan sales that are already on SoFi's balance sheet instead of new originations? Nobody knows, but it seems reasonable to think that might be the case.

However, that didn’t really manifest in the quarter. Yes, whole loan sales were only $375M, which is the lowest they’ve been in a while, but they sold an additional $312M in structured certificates, and $594M were prepaid and refinanced, also getting them off the balance sheet. All told, that’s $1.28B in loans that were moved off the balance sheet in the quarter, which is right in line with the prior two quarters, and is not inclusive of the $1.0B in “sold loans” from the LPB. Furthermore, we know they already closed a securitization in Q4 and management said that “quarter-to-date in Q4, we've already done close to $1 billion in sales across our products as well.” That is probably inclusive of the securitization I mentioned, but still it is a sizable number. This is something to keep an eye on moving forward, but also something that has not manifested as a problem yet.

Way too early LPB projections

Take all of this with a grain of salt. Also, I’ll try to explain my assumptions here and why they might be dead wrong. To make a projection about how much money this new business will make, we need to decide what to expect for LPB originations and for SoFi’s take rate, or gain on sale margin (GOSM). Here is the info we have from the call in those two areas.

For LPB originations, they did $1.0B in Q3. During the Q3 earnings, Jeff Adelson from Morgan Stanley asked about what to expect for LPB origination volumes and gave a range between $4B and $6B. CFO Chris Lapointe said, “We have that $2 billion agreement with Fortress, as well as commitments for Q4 and 2025 with several other partners.” Anthony Noto added, “The outlook is pretty significant as we go into 2025, in excess of what you articulated.”

Those $1.0B in originations resulted in $42.4M (let’s ignore the servicing revenue to make it easy), which means about a 4.2% GOSM. This is going to fluctuate. Here is what Chris Lapointe said about that on the call:

In terms of the take rate, what I would say is: we're looking at apples-and-oranges when you're trying to compare this take rate to what you see in the general originate to sell business. These are loans that are originated on behalf of others, and they would not have been originated unless contracted to given the credit - and overall asset characteristics of the loans, as well as our own risk appetite and capital allocation strategy. What we're receiving is a platform fee for our underwriting capabilities, our marketing capabilities, and our overall operational capabilities. And that platform fee will vary depending on the partner.

Let’s give a range then of what we could expect from this business in the next 12 months. Let’s assume the bottom of the range for 2025 LPB originations is $6B, since Noto said “in excess of what you articulated,” and what was articulated was $4B-$6B. It doesn’t seem crazy to think that they could get to $8B of LPB originations in 2025 when they did $1B in their first quarter. So let’s give it a range of $6B-$8B of originations. On GOSM, let’s say there is a range of 3.5%-4.5%.

That gives us a range of $210M-$360M of incremental 2025 revenue from the LPB. Analyst estimates for 2025 did go up after SoFi reported earnings, but they went from $2,862M to $2,994M. That’s a decent jump, but that’s only an increase of $132M. Remember, this is a business that DID NOT EXIST prior to Q3, that nobody saw coming, and that generated $42.4M in incremental income in its very first quarter. At a bare minimum, analyst estimates should have jumped by $169.6M even if the LPB stays absolutely flat from Q3 levels for an entire year.

Analysts are assuming that it stays flat AND it cannibalizes around $40M in revenue from other businesses, and it is not incremental to servicing revenue (we already know it is). If you needed any indication on how clueless most analysts are about SoFi’s future, this is an excellent example. Analyst estimates should probably have jumped around double what they did just with this one piece of data alone. I don’t know how they missed it since more than half the questions on the call were about the LPB, but the math just doesn’t make sense to me.

Lack of innovation argument takes a blow

One last point. I often hear complaining about SoFi’s lack of innovation. Some of it is absolutely warranted, and I wish we saw more products rolled out faster. However, to go from a product that didn’t exist to one that’s around $200M annualized in a single quarter is pretty incredible. It shows agility, it shows innovation, it shows that they can roll things out in the background with no fanfare, and it hints that there are probably additional of innovative products that we don’t see that are in the works.

Conclusion

The Loan Platform Business is a game changer. It proves innovation at SoFi is not dead. It’s a brand new business that already has around a $200M annualized revenue run rate. It allows them to expand their credit box and target demographic without increasing their risk profile. It gives them another completely capital light revenue source with high incremental margins. Analysts didn’t even price the business in properly even though they asked a ton of questions about it. It’s a paradigm-shifting product and I’m excited to see how it continues to develop and grow.

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SoFi pulled a much bigger beat out of its hat than I was expecting, or quite frankly, anyone was expecting. They crushed analyst expectations with their biggest revenue beat ever. I’ll use my predictions as a framework to discuss the results.

Members

SoFi added more members in Q3 than ever before with 756k new members, eclipsing the previous record of 717k new members from Q3 of 2023. That was more than I expected and it is a testament to their ongoing marketing efficiencies. I also think it justifies what CEO Anthony Noto has been saying all along. He has said that the biggest thing standing between them and being one of the largest banks and financial institutions in the USA is brand awareness. People need to trust them before they give them their money. What is more, their quarterly customer acquisition cost is now consistently and meaningfully lower than it was in 2022. They are getting more members for less dollars.

I think there were several things that I underestimated when I made my prediction of 675k new members. The first is that I underestimated their marketing efficiency. I predicted that originations would be higher, which means greater marketing than usual. Last year in September, Noto said only 25%-30% of new originations come from existing members. While cross but has hopefully increased as total members has grown, it’s probably reasonable to assume that at most 30%-40% of new originations are from existing members.. That means large origination numbers will often correspond to higher new members as well. I mentioned that in the preview in relation to student loans, but underestimated the company, a mistake I'm ok making.

One last quick note on members is that they removed 157k members from their total member numbers this quarter. These churned members were inactive or maybe residual crypto-only accounts that were removed. Just something to be aware of, although I consider it inconsequential. It’s a good thing to remove inactive accounts in my opinion.

Originations

I'm feeling pretty vindicated when it comes to originations. One of the best theses in the stock is that the growth was completely down to having extra room on the balance sheet from becoming a bank. Last year I wrote that the core driver of growth was member growth, and that balance sheet growth was how they were choosing to grow, but not why they were able to grow. My contention was that originations track with membership, and when they filled up the balance sheet, they'd find other ways to monetize the origination demand. Since then, they created their structured certificate program, and more recently, the loan platform business. I predicted $4.75B in originations and they came in with $4.89B, so I was very close, but was not bullish enough. As expected, personal loans originations still track mostly with total membership.

Multiple ways to monetize

As LendingClub is fond of pointing out, holding loans to maturity is actually the best way to monetize them, and results in the biggest returns per loan (see their slide below on lifetime value). So if you have room on the balance sheet, you should use it to maximize returns. Is that capital intensive? Yes. Is it the best decision to maximize revenue and profits? Also yes.

Does it mean that growth will grind to a screeching halt when the balance sheet is full? Absolutely not. Many said that was the case. I said it was bullcrap. I still think I’m right. These are high yielding assets and people are willing to pay healthy premium to buy them. Now that SoFi’s balance sheet is close to full, they’ve pivoted to the capital-light business of selling more of those loans. This includes whole loan sales of their existing portfolio ($375M sold in Q3), senior secured loans ($312M sold and $594 refinanced and paid off in Q3), or the new loan platform business ($1.0B originations sold in Q3). Bears would have had you believe they are balance sheet constrained. I said when the balance sheet was full, they’d sell loans. They sold ~$2.3B of loans in the quarter. And they matched their highest gain on sale margin ever for the whole loans, sold the senior secured loans at par, and got a very healthy 5.6% in fees from the $1B in loans sold through the loan platform business, with an additional $5.5M servicing strip included as well, making the total gain on sale around 6.1%.

Now, obviously, some of this is macro dependent and has to do with how much liquidity there is in capital markets and the banking system. However, these loans are assets that perform great with high returns, so there is always going to be some level of demand. The recent crisis has also highlighted how valuable shorter duration assets can be for banks who want to diversify their portfolio away from assets with duration risk (like long-term bonds and mortgage-backed securities) or commercial real estate. Short-duration, high-yielding assets like personal loans are seeing a demand tailwind as liquidity returns from falling rates. The loan selling is also still accelerating. They also said in the earnings call that “Quarter-to-date in Q4, we've already done close to $1 billion in sales across our products as well.” And remember that they don’t count the loan platform business in that sales number.

They are killing it in personal loan originations. They originated more personal loans in Q3 than Upstart did in the absolute peak of the stimulus-fueled zero interest rate policy days of 2022. They are selling a ton of these loans into capital markets at high margins to bolster their noninterest income. They are gobbling up market share while still maintaining high FICOs. Their personal loan market share EXPANDED relative to LC and Upstart in Q3 to 60.1%, its highest figure ever. They are expanding into lower FICO areas with absolutely no balance sheet risk and no loss share agreements. They are manufacturing capital-light, fee-based revenue to supplement their net interest income from holding the loans on the balance sheet. They are winning.

It’s still going to grow

There was one fascinating tidbit from the earnings call that I think is really worth highlighting. Here was an awesome question from Morgan Stanley’s Jeff Adelson:

Could you just talk a little bit more about the expectations for the Loan Platform Business, how you expect that can grow from here? I know you said expect that to continue growing, but how meaningful can this become? It seems like, if we look at the numbers today, it's already at a $4 billion run rate. You've got the Fortress relationship, which, correct me if I'm wrong, is additive to that. So that's already $6 billion.

And should we be thinking about the economics as close to a 5.5% take rate based on the revenues you reported this quarter? And then I'm just curious, are you going to maybe deemphasize the loan sales a little bit more from here? I mean, it came in a little bit lower at the $375 million versus the $1 billion for the last 3 quarters as you maybe prioritize the Loan Platform Business from here?

I won’t quote the entire responses from CFO Chris Lapointe and CEO Anthony Noto, but here were the important parts:

Chris Lapointe

Part of that $1 billion of originations that we did, Jeff, in the period, a portion of that did come from the Fortress transaction that we announced earlier in the quarter. So it's not additive to your $4 billion run rate. It's inclusive of that, but we do expect to see continued strong growth in the segment. […] In terms of the take rate, what I would say is, we're looking at apples and oranges when you're trying to compare this take rate to what you see in the general originate to sell business. […] What we're receiving is a platform fee for our underwriting capabilities, our marketing capabilities, and our overall operational capabilities, and that platform fee will vary depending on the partner.

Anthony Noto (my emphasis added)

A couple of points just to emphasize. One is, the partners in the Loan Platform business, many of which are new incremental partners on loans as opposed to the wholesale loan buyers or ABS buyers that we've typically had, they're not all incremental, but a large percentage of them are, including in the most recent quarter. In addition to that, Chris has mentioned a couple of times, these are loans we wouldn't have otherwise originated, and we only originate when we actually have a contract. So it's not a zero-sum game. It's incremental. And the outlook for it is pretty significant as we go into 2025 in excess of what you articulated.

Four key takeaways. First, don’t count on 5.6% returns, it’s going to be partner dependent. Second, a portion of the Q3 originations did come from the Fortress deal. Third, most of these are new partners, so it should not cannibalize existing securitizations and sales, it allows them to expand their credit box. Fourth, they expect greater than $4B-$6B going into 2025.

As a reminder, this is Upstart’s entire business, and SoFi just confirmed that they will do more originations in 2025 than Upstart has done in the trailing twelve months. This is MASSIVE.

Student Loan Originations

I nailed this one. I predicted $950M in student loan originations and SoFi ended up with $944M. Slow rate cuts will be a consistent tailwind for this part of the company. Trump winning the presidency and dispelling the constant stories about student loan forgiveness will be a tailwind for this product. People won’t be waiting on the possibility of forgiveness to refinance. This business will be a nice consistent grower over the next several years.

Deposits

I was too bullish here (the first time I can say that). It looks like the drop in APY did slow the deposit growth. They do need to continue to build these over time, but the fact that their warehouse lines are so low and they are intentionally letting certificates of deposits expire without renewing them (time deposits in the below graph) makes it seem like they aren’t particularly worried about pushing deposit growth. I predicted $3B+ in demand and savings deposit growth this quarter and they only got $1.98B.

Revenue

Lending

I talked a lot about lending above, so I won’t rehash the discussion again here, but the pivot to capital-light business is huge. Even though the revenue from the loan platform business goes to the financial services segment (except the servicing strip), lending revenue still came in at $391.9M, well above my expectations of $352M. Lending growth is well and truly back, to the tune of 14% YoY. They also revised their guidance to lending revenue of at least 100% of what they did last year. It will not be that low, it’ll be much higher.

Financial Services

I thought meeting their revenue guidance here was a bit of a stretch. 80% growth from 2023 levels seemed like a tall task. That was before the lending platform business surprise. I modeled out that they needed around $210M in revenue in the segment in the quarter and that was my prediction. They came in at a whopping $238.3M, crushing my estimates and everyone else’s as well. For those who whine about lack of products and innovation, the rapid scaling of this business is proof positive that there is still innovation to be had, including from sources that nobody saw coming. I was concerned that SoFi would need to get above $22/member in FS revenue to meet their guidance.

SoFi made my concerns look laughable. They came in north of $25/member. That is a massive jump. It’s a 27% QoQ jump. This was a metric that appeared to be topping and then they pulled this out of nowhere. Huge props to SoFi for finding and leveraging this new business. And especially being able to do so in a way that does not cannibalize their existing business. Look at what happened to their QoQ overall growth in the segment. It’s mind boggling:

Tech Platform

Even a blind squirrel sometimes finds a nut. I’ve predicted $103M in tech platform revenue for three straight quarters. It came in at $102.5M. Nothing to write home about, but it is a step in the right direction. They really need 3-4 straight quarters of consistently increasing revenue to really get me excited again about the tech platform. The commentary about the pipeline was pretty similar and they also lowered the bottom range of growth guidance, which is not a particularly positive signal. We also didn’t get any new Tech Platform metrics, so this segment will remain in the penalty box for me until it shows better execution.

Corporate Revenue

This one is a head scratcher. Corporate revenue was way down this quarter, and I really have no good explanation why. The biggest portion of corporate revenue is the interest they are paying on the revolving debt facility they have and the senior convertible notes. However, that number was mostly flat from Q2 (-12.7M) to Q3 (-12.9M). Corporate revenue, however, tanked from -$13.7M to -40M.

That is almost double the worst previous quarter. The only hint we have here is that the change is due to “net interest income (expense)”. Unfortunately, this line item is not well explained even in the 10-Q. The corporate revenue line also makes up for differences in their Funds Transfer Pricing (model). FTP allocates their net interest income (NII) to the different business segments. Sometimes there is a bit of a mismatch between how much NII goes to the lending segment and financial services segment. If the amount of NII being given to financial services is larger than the amount being charged to the lending business for consuming it, then corporate revenue will be more negative. The corporate revenue line fluctuates depending on how much of a discrepancy there is between the two. I will reach out to Investor Relations and hopefully get more information here.

Total Adjusted Net Revenue

The midpoint of SoFi’s guidance was $635, analysts expected $633.8M, and I predicted $654M. SoFi came in at a whopping $689.4M. That is the biggest beat relative to their guidance that they’ve ever had. Top line growth has reaccelerated in a very meaningful way.

Not only that, but YoY growth reaccelerated back to 30%, which is extremely encouraging.

Adjusted EBITDA

SoFi guided for $162.5M, analysts expected $167.28M, and I predicted $169M. The massive revenue beat also trickled down to the bottom line. Actual adjusted EBITDA set a new record at $186.2M.

I thought they’d have incremental margins of 55% and it came in at 56%. That means they are still driving really high efficiencies even with accelerating lending. This is seriously great performance on both the top and bottom lines this quarter.

Net Income and EPS

Analysts estimated $0.04 EPS. I called for $49.3M in net income, which rounds up to $0.05 in net income. SoFi delivered $60.7M in net income, which rounded down to $0.05 on a fully diluted basis.

Guidance

I thought SoFi’s guidance would be $665M at the midpoint for revenue and $170M at the midpoint for adjusted EBITDA. SoFi’s FY2024 guidance implies $675M at the midpoint and $174M. Analyst estimates were $640.3M and $167.8M, respectively, so the guidance, especially the revenue guidance, was also a pretty big beat.

Conclusion

The call itself did not have the same energy as the Q2 call, but it was still extremely positive. Analysts asked a lot of questions about the new loan platform business, which I think took everyone completely off guard. Management was positive, they have a really good trajectory, and I think they have a clear path to meet or beat their 2026 guidance. At this point, honestly, I don’t think management has to be bombastic or over the top. They just need to deliver, and there is nothing that this management team does better than execute. This quarter was an inflection point to accelerating growth across every fundamental metric and justified the run up in the stock over the past several months. Moreover, I still think the stock is undervalued and has plenty of upside from here.

Subscriber update

The DDI YouTube Channel has started! My first video was a live Q&A on the day of earnings. I plan on making a video at least once every two weeks. A sincere and heart-felt thank you to those who support my work.

Paid subscribers get three perks.

1) Access to a private X chat.

2) I buy stocks every week, and every week I send out my weekly DCA weighting list to subscribers

3) I send out a portfolio snapshot at the beginning of each month which shows my total allocation to each of my positions.

If you are a paid subscriber and not in the X chat, please email me at datadinvesting@gmail.com and let me know and I’ll get you added. If you have any other ideas for things I can do to bring value to my paid subscribers, don’t hesitate to reach out.

Disclosures: I have long positions in SoFi and LC.

The information contained in this article is for informational purposes only. You should not construe any such information as legal, tax, investment, financial, or other advice. None of the information in this article constitutes a solicitation, recommendation, endorsement, or offer by the author, its affiliates or any related third party provider to buy or sell any securities or other financial instruments in any jurisdiction in which such solicitation, recommendation, endorsement, or offer would be unlawful under the securities laws of such jurisdiction.

Last quarter I thought that SoFi needed to come out swinging and control the narrative around the stock. They did so by sharing extra information they hadn’t before, like they did around loss curves, and by setting the tone in the call. Noto and Lapointe came out with a chip on their shoulder and did a masterful job. I sincerely hope they bring that same energy and swagger to this call. I don’t pretend to know what will happen to the stock after the call, but I believe that if they can combine that enthusiasm with their typical execution, the momentum should continue to drive to higher highs over the next 12 months.

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Let’s get into my predictions for this earnings.

Members

Members are the key driver in the customer-facing SoFi business. The faster membership grows, the faster the business grows.

Q3 in 2023 was the largest member growth quarter of all time. It had the advantage of being supported by Taylor Swift performing for six nights at SoFi Stadium. SoFi gives nice perks for members at the stadium, so that almost certainly bolstered new membership. With the exception of that outlier, it’s been a pretty steady upward trend. Their marketing spend might be a little higher this quarter because I think they are leaning back into lending (more on that below), which might also bolster membership numbers. They are also one of the only companies who offer in-school student loans, so that might also contribute to slightly higher membership growth. I think those factors combined will leave them with around 675k new members this quarter.

Originations

Personal Loans

SoFi started pulling back on originations in Q3 of last year. The trigger to get to growth in the lending business was rate cuts. In Q4 and Q1 they played it very safe as they waited for the macro picture to crystallize. They talked about taking it easy in Q2 as well, and then completely blew all estimates out of the water with almost $4.2B in originations.

By the time Q3 was in full swing, a dovish Fed had emerged and they had all but guaranteed the first rate cut in their September meeting. It turns out it was a 50 bps cut. While I don’t expect the floodgates to completely reopen, I do think that originations will continue to increase. Q3 had been the highest quarter in originations per member in 2020, 2021, and 2022. That did not happen in 2023 because of the intentional pullback in originations, but I expect this Q3 to again be higher than Q2.

I think that it is reasonable to expect at least $500/member of personal loan originations in Q3. Which would end up being $4.72B in originations. If they really got back to a more normal level of originations of around $550/member, it would result in $5.2B in originations. I think they’ll come out closer to the lower end of this range since I don’t think they are going full speed ahead yet. I expect $4.75B in personal loan originations.

Student Loans

Rates moving down will be a tailwind for student loans. Additionally, Q3 is when people return to school and there was a large increase in rates on federal loans. While I do not expect a massive increase in originations, I do think there will be a slight tailwind from in-school loans, resulting in $950M of student loan originations.

Deposits

I was taken off guard last quarter because SoFi let so many time deposits expire without replacing them, resulting in total deposits being lower than I projected. However, what I actually care most about is their demand and savings deposits, because that is their lowest cost capital. I think this quarter they get just over $3B in deposits in checking and savings because of the strength of their member growth. I also think their time deposits will continue to decrease, which I’m fine with.

Revenue

Lending

As I said earlier, I think that we see record originations this quarter for personal loans. Because SoFi uses fair value accounting, they do recognize some of the revenue up front from these originations. SoFi guided for lending revenue to be “at least 95% of 2023 levels” and I think there is not a chance that will happen. I think lending revenue will grow this year relative to 2023. And I think lending revenue for this quarter comes in at $352M, which would be 3% YoY growth.

Financial Services

I’m going to be honest here. I know that SoFi usually sandbags their guidance, but I think their Financial Services guidance is a pretty big stretch. They said they will have FS revenue growth of “more than 80% versus 2023 levels”. Total FS revenue last year was $436.5M. 80% growth means they need $785.7M in revenue this year. They only had $326.7M in the first two quarters, which means the back half of the year they need $459M in Q3 and Q4 to make it happen. That means around $210M in Q3 and $250M in Q4. That would be massive growth. Here is their FS quarterly revenue growth.

In order to hit their guidance, they need around $34M in QoQ growth in Q3 and then $40M in growth in Q4. That is a very big ask. Average revenue per member probably needs to go from $20/member to $22.20/member this quarter and then around $24.40/member in Q4 to get that kind of growth. While SoFi has made big strides in this regard, a lot of that was from replacing higher cost capital (warehouse lines) with lower cost deposits, boosting their net interest income in Financial Services. That gravy train will be slowing down now as their warehouse lines now have smaller balances. Expanding their balance sheet with more loans would also help, but even still, it’s going to be a stretch to hit that guidance.

All that being said, management has earned my trust, so I’m prediction $210M in FS revenue this quarter.

Tech Platform

Tech Platform revenue has been flat for three straight quarters, and has been disappointing for a full two years now. Growth has completely stalled out and needs to reaccelerate. It’s time to put up real results here. This is the third straight quarter my prediction is $103M in TP revenue, and they’ve let me down the previous two quarters. They absolutely need that as a bare minimum to hit their full year tech platform guidance. It’s time to show results here. No more excuses of long sales cycles and slowly ramping revenue on new contracts. If they want to be the AWS of fintech, they need to start showing growth.

Corporate Revenue

I think corporate revenue now returns to it’s typical levels of being dominated by the interest they are paying on their convertible notes and corporate revolving line of debt. The SOFR (on which their corporate revolving line of credit is based) moved down in Q3 relative to Q2, which means corporate revenue should be a less of a drag than the -$13.7M it was last quarter. I’m predicting -11M for corporate revenue.

Total Adjusted Net Revenue

That makes for a total adjusted net revenue of $654M. The midpoint of their guidance is $635M and analyst expectations are $633.8M. They’ve never missed the midpoint of their guidance and the average beat is $22M of their own guidance. My estimate here is a beat of $19M above their guide. Although as I said, that Financial Services number would be very impressive.

Adjusted EBITDA

SoFi has shown excellent incremental EBITDA margins for several years now. I assume that they’ll continue to do so for the near future. I’m assuming an incremental QoQ EBITDA margin of 55%, which would result in an adjusted EBITDA of $169M. Their guidance is for $162.5M, and analyst estimates are for 167.28M. My estimate is only a very modest beat. They’ve never missed the midpoint of their own guidance and the average beat is $19M.

Net Income and EPS

With the exception of Q4 of last year, which was a quarter that broke every trend across the board because of their push for profitability, adjustments between adjusted EBITDA and net income have hovered right around $120M for the last two years or so.

I expect a similar amount this time, so I’m prediction $49.3M of net income. Fortunately, all the preferred shares have been retired so we won’t get weird dividend payments subtracted from the net income when calculating the EPS. I’m assuming 1.08B average shares outstanding, which leaves $0.046 cents of EPS, which rounds up to $0.05. Analyst estimates are for $0.04, so this would be a small beat.

Guidance

The midpoint of SoFi’s yearly guidance and Q3 guidance implied a Q4 guidance of $632M, which would be slightly down from Q3. Similarly, their yearly guide for EPS was $0.095 at the midpoint, implying that Q4 EPS was expected to be $0.025, which would also be a decrease from Q3. Analysts are predicting $641M and $0.03, respectively. Given their aggressive Financial Services guidance, the fact that I expect they are leaning back into lending, and the $2B forward flow agreement they just announced last week, I can’t see Q4 being worse than Q3.

They will once again raise their guidance. I expect that it won’t be too far beyond what they do in Q3. Predicting their guidance is even harder than predicting results, which I also almost never get correct, so take this with a grain of salt, but I predict their revenue guide will be for $665M at the midpoint, their adjusted EBITDA guidance to be for $170M, and EPS to be $0.05.

Commentary

Last quarter, I was concerned about NCOs and delinquencies and while I thought that the fears from analysts like KBW were overblown, SoFi’s actual NCO results were monumentally better than what people, including myself, were predicting. Delinquencies actually came down last quarter, so I’m optimistic that we will see NCOs top out this quarter. While I think the risk here is lower than it was last quarter, I do think that analysts will be keen to see if there is any weakness.

From a narrative standpoint, I think the most important thing is maintaining momentum. The quarter and guidance I predicted here I would think would justify the recent run and see continued momentum if paired with enthusiasm and a positive outlook in the call. I honestly think that SoFi might have some product updates that they talk about in the call. They don’t always do that, but I think they might talk about their updated SoFi Plus rollout, we’ll probably get commentary on the credit card beta program, and they’ll probably give more detail on the $2B agreement with Fortress.

Predictions in one place for easy reference:

Members: 675k New Members

Personal loan originations: $4.75B

Student loan originations: $950M

New deposits: $3.0B

Lending revenue: $352M

Financial Services Revenue: $210M

Technology Platform Revenue: $103M

Corporate Revenue: -$11M

Total adjusted net revenue: $654M

Adjusted EBITDA: $169M

GAAP Net Income: $49M

GAAP EPS: $0.046

Subscriber update

I am right on the cusp of starting my YouTube channel. I just need a few more paid subscribers to get there.

Paid subscribers get three perks.

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Disclosures: I have long positions in SoFi.

The information contained in this article is for informational purposes only. You should not construe any such information as legal, tax, investment, financial, or other advice. None of the information in this article constitutes a solicitation, recommendation, endorsement, or offer by the author, its affiliates or any related third party provider to buy or sell any securities or other financial instruments in any jurisdiction in which such solicitation, recommendation, endorsement, or offer would be unlawful under the securities laws of such jurisdiction.

Affirm: +389%
Upstart: +243%
Robinhood: +230%
SoFi: +83%

The worst part about it is that SoFi is just as good or better as a company than the others on this list, but you wouldn’t know it from the stock price. It’s frustrating, and leads lots of people to regret their decision buying the stock. I get daily responses on X about the opportunity cost of holding the stock. I focus mainly on the company and its fundamentals, and will continue to do so, but I want to share the reasons that I think the stock price will see a sustained move up over the next 6-12 months.

I realize that SoFi has seen a lot of catalysts that have come and gone without a significant move in the stock price. This includes moving to GAAP profitability, the end of the moratorium (although the massive run of 100%+ from the summer of 2023 did materialize from the news of the moratorium ending, it has not gotten back to those highs since), and rate cuts, among many others. I understand those who are jaded and say this time will be no different. Here are the reasons I think this time really will be different.

Full-year profitability

SoFi’s Q3 2023 GAAP results were hampered significantly by the goodwill write down of their Galileo and Technisys acquisitions, resulting in a quarterly GAAP EPS of -$0.29. Despite the fact that SoFi has been GAAP profitable every quarter since then, the trailing twelve month EPS still looks terrible. That number will be replaced by a positive number as soon as SoFi reports Q3 earnings. Algorithms, institutions, quants, and many investors look at that number when making financial decisions. In about three weeks, nobody will ever be able to point to any published trailing or forward-looking number and say that SoFi is unprofitable. That does count for something. On the chart below, the orange line, which is TTM EPS, will jump from where it sits now below the blue line (the quarterly EPS) at -$0.24 to above the blue line at +$0.09 or more.

Index inclusion

That brings me to my next point, which is that in addition to a sentiment change around profitability, there is another important reason that having a positive TTM EPS is important. It is a requirement for inclusion in indexes like the S&P indexes. I’m not talking about S&P 500 inclusion in the short term. I think S&P 500 inclusion is unrealistic until 2H 2025 at the earliest and it is much more likely to be at least 2026 before it happens.

However, the S&P Midcap 400 is a real possibility in the near future. The market cap requirements for S&P 400 inclusion are from $6.7B to $18B, and SoFi already meets the liquidity, share structure, and all other requirements. Full-year profitability is the last remaining hurdle. I think that it’s possible for SoFi to get in at the next rebalance at the end of the year, but I think it is very likely to be included when the rebalance happens in the Spring. Some people will try to front run index inclusion, which typically leads to buying pressure. Moreover, once the stock has been included, it usually leads to an initial pop and buying pressure afterwards as funds buy shares. For example, Duolingo jumped over 5% the day of its inclusion in the S&P 400 Midcap earlier of this year, and it has seen significant appreciation overall since then as well. hims & hers just got news of inclusion in the S&P SmallCap 600 yestaerday and was up 5.5% after hours on the news. There are also other funds that have similar restrictions where SoFi will be added as they reach TTM profitability, but the S&P funds are the most consequential.

Shifting macro and rates

I already spent an entire article describing why it is that rate cuts help SoFi’s business. However, they also help SoFi’s stock in other ways. Despite the fact that SoFi is now a profitable business, those profits are still fairly limited at this point. It’s FWD P/E is 80, so we aren’t talking about a company that currently has significant profits. It’s still only marginally above breakeven on a GAAP basis. That means the majority of its returns are in future dollars, which also means you need to account for them by discounting them back to the value of today’s dollars.

One of the big reasons that stocks as a whole dropped so hard in 2022 was not only because of the fear of recession, but also because alternatives to holding equities, like holding bonds, became much more attractive. The risk free rate of return went from almost nothing around 0.5%, to its peak of 5%+. Instead of investing in stocks, you could just buy a treasury and guarantee yourself a 5% return (see the 10-yr treasury yield below as an example). That means investors have to demand a much higher return from equities because they have inherent risks that bonds do not. That means a higher discount rate, which means lower valuations.

Companies with high potential future profits, but fairly low or even negative current profits, like SoFi, were especially hurt. Uncertain future returns have to be discounted back to current dollars using a discount rate. The discount rate, in theory, takes into account both the risk-free rate of return that you could get by just buying bonds, and the risk premium associated with the equity you are holding. So if the risk-free rate of return goes up by 5%, the discount rate goes up by 5%, and the value of those future earnings goes down, and it goes down by a lot.

To illustrate how big of a difference this can make in a stock’s valuation, let’s use my discounted cash flow model (DCF) for SoFi. I previously had a post on valuation that talked through the assumptions of a DCF generally, and how I set up this specific DCF for SoFi if you want to see the details. Below are the results of two DCFs which are exactly identical, except for the discount rate. The first has a discount rate of 12%, while the second has a discount rate of 10.75%. This mimics the 1.25% drop in the 10-year treasury yield that we’ve seen since its peak in October 2023. The key number here is the “Estimated Intrinsic Value” number in the green box on the right. That is how much the stock should be trading for today if my assumptions are accurate. Also take note that “Cash Per Share” is actually tangible book value in this case.

12% Discount Rate DCF Results

10.75% Discount Rate DCF Results

As you can see, a drop in long-term yields, and therefore a drop in the discount rate assumptions for stocks, makes a large difference in the current valuation of the company, even if the company’s results would be exactly the same in both scenarios. With the assumptions of my model, a 1.25% difference in the discount rate makes a 20% difference in the estimated intrinsic value of the stock, making it increase from $22.05 to $26.17. Independent of all the benefits associated with rate cuts for their core business, SoFi stock should see multiple expansion solely due to the continued decrease in rates.

Fundamentals will continue to get better

One of my favorite charts to share about SoFi is this one that shows their fundamentals compared to their stock price.

Why do I love this chart so much? Because I think Peter Lynch was right when he said, “Often, there is no correlation between the success of a company’s operations and the success of its stock over a few months or even a few years. In the long term, there is a 100 percent correlation between the success of the company and the success of its stock. This disparity is the key to making money; it pays to be patient, and to own successful companies.”

This is a successful company. The results speak for themselves. Investors in successful companies are rewarded in the long term. I can be patient and wait for that to happen.

It also brings to mind this timeless clip from Jeff Bezos about Amazon and its stock price.

The whole clip is great, but here is the part I most want to highlight:

The stock is not the company and the company is not the stock, so as I watched the stock fall from 113 to 6, I was also watching all of our internal business metrics. [...] Every single thing about the business was getting better, and fast. So as the stock price was going the wrong way, everything inside the company was going the right way [...] so we just needed to continue to progress.

Substitute the numbers to 24 and 4, and that quote could easily be written about SoFi. Selling because of price action when the fundamental company just keeps improving seems extremely short sighted to me. The stock does not reflect the strength of the improved fundamentals. All the internal metrics are going up. At some point, as they continue to progress, the stock will also go up.

Analyst revisions

Let me put up what I find to be an interesting chart from several stocks that have seen significant appreciation over the past several years. Let’s look at hims & hers, Duolingo, Palantir and Robinhood. These graphs show the stock price and analyst EPS estimates for 2024 and 2025 (labeled FY1E for 2024 and FY2E for 2025). See if you notice a correlation.

HIMS

DUOL

PLTR

HOOD

Every move up has coincided with, or been sustained by, upward revisions in the EPS estimates for the company. Let’s look at that same chart for SoFi.

SOFI

I think one of the reasons SoFi stock has not run is that analysts are still underestimating the future prospects of the business. If you’ve read my previous article on how Sofi gets to 60 cents of EPS in 2026, you’ll know that I think these analyst estimates are woefully inadequate. I expect that, starting with Q3 earnings, analysts are going to begin to see how off they are. Analyst expectations for 2025 and 2026 for EPS are $0.20 and $0.41, respectively. If SoFi only succeeds in hitting their own guidance, I estimate that they would end up with $0.31 and $0.64, which are each 50%+ greater than analyst estimates. My own predictions, from that same article, are $0.36 in 2025 and $0.85 in 2026. I think that starting at the end of this month when Q3 earnings are reported, there will be more significant upward revisions which will likewise be reflected in the stock price.

Valuation and execution are risks

Everyone should recall that my track record on short-term price action is atrocious, so I could be way off and overly optimistic.

There are also real risks to the stock price in this same time period. I’ll cover several that I find probable. I’ve written at length about why I find this company ridiculously undervalued. However, there are plenty of others that disagree. No matter how well SoFi executes, there is a chance that the market will continue to believe it deserves to be “valued as a bank”, which in this case means a P/E ratio of around 10 or a P/TBV (tangible book value) around 1-2. If that happens, even as it goes from marginally profitable today to $0.60+ of earnings in 2026, the stock wouldn’t move much, if at all. I think that type of thinking is unjustified, and that this outcome is pretty unrealistic. I think the stock will be rewarded if the company continues to show consistent 20%+ revenue growth and 100%+ EPS growth for the next several years. However, I acknowledge that this is a possibility. If it happens, I’ll continue to hold because the thesis would hold, even if I’m not rewarded with an increase in the stock price.

Another risk is that SoFi could fail to meet their guidance. They’ve always hit it in the past and so they’ve earned my trust. I expect them to succeed in meeting their targets moving forward. However, past performance is certainly no guarantee of what will happen in the future. They could fail to execute and miss their guidance. For example, they lowered full year 2024 tech platform guidance down in Q2. That is the first time that they have given quantitative guidance that it looks like they will fail to achieve. While they stated that the overall tech platform growth guidance through 2026 is still in place, this is a small chink in the execution armor. Overall, their execution has truly been incredible, and while that does give me a lot of confidence, it does not guarantee anything.

Additionally, not everything is under management’s control. A previous wildcard for years has been uncertainty around the future of the student loan business. While every quarter this is a smaller and smaller part of the business, it still drives part of the narrative, and narrative drives price in the short term. Nevertheless, Harris has completely avoided the topic of student loans during this election cycle. It has been a very public failure of the current administration that they were unable to deliver on their forgiveness promises, and it appears Harris has completely distanced herself from the issue. The student loan payment moratorium has also now been completely rolled back after more than four years of extensions and 11th-hour modifications. I think the student loan payment and forgiveness saga is mercifully drawing to a close regardless of the outcome of the election. There may be a surprise here, but I think the odds of there being future student loan drama are diminishingly small.

Finally, the economy is still on somewhat uncertain footing. I continue to think that the bulk of the macroeconomic data is directionally positive. I think the most likely path forward is slow and measured rate cuts as the economy normalizes and that the US has a shallow recession or avoids a recession entirely. However, if we see a large downturn in the economy and a spike in unemployment, SoFi could easily miss their 2026 guidance. I do not believe SoFi will struggle to maintain their current profitability even during a downturn, but their growth would almost certainly stall, causing them to miss. Additionally, as I’m sure almost everyone reading knows by now, many people love to bet against SoFi as a hedge to a deteriorating economy. Selling and shorting have kept this stock suppressed even as the fundamentals have rapidly improved. In the hard landing scenario, the stock will probably suffer worse than most, even though I think the selloff would not be supported by deteriorating fundamentals.

Conclusion

SoFi the company has continued to outperform even as SoFi the stock has been basically flat for over a year. I think there are significant reasons to be optimistic about both. It has been a while since I’ve been as enthused in the lead up to an earnings as I am for the Q3 earnings at the end of this month. I think an inflection point is coming. I’ll continue to focus on the fundamentals, and make my decisions based on those, but I do expect that those holding the stock will see some significant share price appreciation in the next 12 months.

New DDI Paid Subscriber Perks

I’ve tried to figure out how to add additional value to paid subscribers, and I’ve come up with two ideas, which I am going to start this week.

I am less than 10 paid subscribers away from the goal that I set for myself to start a YouTube channel. That would mean more appearances from me on the SoFi Weekly, possibly collaborating with others on a regular stream about HIMS or other stocks, and of course, releasing my own videos as well. These articles get several thousand views, so if less than 1% of the people who read this were to sign up, I’d get those 10. It’s totally voluntary, and it’s $5/month. I don’t paywall anything I write, but if you want to see more content from me, this is how it’s going to happen. Here are the new things I’m rolling out to hopefully provide more value to those who do voluntarily support my work:

New Paid Subscriber Benefit #1: My Weekly DCA list

I dollar-cost average every single week. I adjust what percentage of my DCA I am allocating to different stocks based on my conviction and their current valuation. From here on, every week when I execute my DCA, I’ll send out my list to paid subscribers. It usually doesn’t change much from week to week, but often shifts quite a bit over several months. Paid subscribers will know what stocks I’m buying every week.

New Paid Subscriber Benefit #2: Monthly portfolio updates

Additionally, I will share my portfolio through Savvy Trader with my subscribers every month. It won’t show absolute numbers, but it does show percent allocation to each position (and you will see that I am absolutely putting my money where my mouth is with SoFi).

Hopefully that will also lead to more questions from paid subscribers so I can better interact with those of you who are out there.

I do also have a paid subscriber chat on X. If you are a paid subscriber and have not been invited to join, please reach out to me at datadinvesting@gmail.com or just send me a DM on X.

Disclosures: I have a long positions in SOFI, HIMS, DUOL, and PLTR.

The information contained in this article is for informational purposes only. You should not construe any such information as legal, tax, investment, financial, or other advice. None of the information in this article constitutes a solicitation, recommendation, endorsement, or offer by the author, its affiliates or any related third party provider to buy or sell any securities or other financial instruments in any jurisdiction in which such solicitation, recommendation, endorsement, or offer would be unlawful under the securities laws of such jurisdiction.