Six Reasons SoFi Will Beat Earnings on Monday

And a couple reasons to be cautious

Will SoFi Beat on Revenue?

SoFi had $443M of revenue in 4Q22 and Wall Street is guiding for $442M of revenue in 1Q23. SoFi should beat that number easily. Here are three reasons why:

Reason #1 Deposit growth

The bulk of SoFi’s revenue comes from lending. Lending revenue will increase for one simple reason. Deposits grew by at least $2.3B in the quarter. Anthony Noto basically disclosed this at the recent investor conference:

We expect our absolute increase in deposit dollars to be equal to or greater than the levels we’ve seen in the last few quarters. For those that aren’t familiar in Q4, our deposits grew $2.3 billion in absolute dollars and in Q3 also $2.3 billion. So despite all the upheaval our model, our value proposition remains really robust and strong, which is allowing us to match or beat that level of deposit growth.

Why does that mean they’ll beat on revenue? In 4Q22, their deposits cost them 190 bps less than their warehouse lines of credit. $2.3B in extra deposits roughly translates to about $10M in quarterly interest savings. Rates have moved quite a bit in the quarter, and my rough calculations estimate that despite this savings, their weighted average cost of capital between deposits and warehouse facilities probably increased by about 50 bps overall during the quarter. This assumes they maintained the 190 bps improvement on deposits compared to warehouse loans (and I think they have). That means if their balance sheet didn’t grow at all, they would have lost about $10M in revenue even after the savings highlighted above (yes, it is just a coincidence that they both came out to $10M).

They will hit break even on net interest income by expanding their balance sheet by a paltry $500M that they are not raising their average interest on their personal loans (which they are). Just assuming they keep their capital ratios equal, they would expand the balance sheet by about $550M just by taking advantage of their retained earnings from 4Q. I expect them to add more than that and that revenue will increase.

Reason #2 Financial services growth

Since getting the bank charter, financial services revenue has grown QoQ by 29% in 2Q, 61% in 3Q, and 32% in 4Q. Even a moderated 15% QoQ growth rate would mean an extra $10M in revenue (again, this was just a coincidence). Keep in mind that this is the first quarter that they’ve had options trading for a full quarter and that margin rates have been skyrocketing. FS Revenue will increase.

Reason #3 Seasonality

The first quarter is historically an extremely strong quarter for financials in general and SoFi specifically. They have posted 15%+ overall revenue growth each of the last two first quarters. They just need to not be negative QoQ to beat on revenue.

Will SoFi beat on adjusted EBITDA and GAAP EPS?

SoFi had $70M of adjusted EBITDA and guided for $40M-45M of Adjusted EBITDA in 1Q23. That corresponded to a -$0.04 loss in EPS. Wall street is guiding for EPS of -$0.08 in 1Q23, which corresponds to an adjusted EBITDA of $40M if adjustments stay roughly flat. I also think SoFi beats that number. Here’s why:

Reason #1 SBC is decreasing

Almost nobody outside of SoFi itself understands their stock-based compensation (SBC) as deeply as I do. I don’t have time right now to go into all the details (you can read my Seeking Alpha article if you want the full story) but I expect SBC to drop by at least $5M in 1Q23 compared to 4Q22. That means that even with an adjusted EBITDA of $35M they would beat EPS.

Reason #2 Decreasing expenses in marketing

If you read my thoughts on LendingClub’s earnings that I posted earlier today, you’ll know that I think that they are pulling back on originations this quarter. One thing I didn’t mention there is that LendingClub highlighted something positive about pulling back on originations in their call. When you aren’t trying to originate as many loans, your marketing costs decrease. SoFi will still be marketing for financial services and tech platform, but they will be able to pull back on their lending marketing spend, which should help improve unit economics in the lending business. Here is the full quote from LendingClub’s earnings call:

Borrower demand remains strong; and while banks remain active, fintech competitors have pulled back slightly, giving us even more latitude to be discerning about who we approve while also being efficient with our marketing spend.

It’s important to realize that while there is decreasing demand from banks on nonbanks to buy loans, borrower demand has never been higher. Credit card rates are at their highest level in decades and credit card debt is also at all-time highs. Strong demand means you don’t have to work as hard to find borrowers who want to save money by refinancing from variable rate credit card debt into a lower fixed rate on a personal loan.

Reason #3 Financial services hit an inflection point

I highlighted above that financial services (FS) revenue has been growing very quickly. That growth came at a cost. Directly attributable expenses to financial services were growing even faster than revenue. However, the segment recently hit critical mass and it is now becoming more profitable every quarter. The maximum loss was -$53.7M in 2Q22. Losses improved slightly to -$52.6M in 3Q22 before seeing a much larger $9M improvement in 4Q22. That should get even better moving forward according to Chris Lapointe in the 4Q22 earnings call:

Moreover, Financial Services annualized revenue is now approximately $260 million. Contribution loss of $44 million improved $9 million versus the third quarter, even as we invested $13 million more in marketing in the fourth quarter. We saw this as a worthwhile opportunity to attract more direct deposit members. Even with this spend, variable profit, including all marketing costs, improved quarter-over-quarter and was nearly breakeven. We still anticipate the Financial Services segment will be contribution profit positive in 2023 as we continue to scale and monetize the business.

If they expect the segment to be contribution positive by the end of the year, it means those losses should continue to decrease each quarter. Another $9M in extra contribution profit is a welcome tailwind for both adjusted EBITDA and EPS.

Reasons to be cautious

I think SoFi will double beat, but I like to be honest in my assessments and here are some reasons for concern.

1. SoFi announced a small reduction in head count during their 4Q earnings call at the end of January. Those come with one-off charges that will be realized this quarter, which would affect EPS.

2. The tech platform contribution margins have been waning and revenue has been flat. I am hoping revenue will accelerate and margins will stabilize moving forward, but 1Q23 could have been one last quarter of investment before it starts to scale. The macro has also been largely negative for the tech platform, so there is even a chance that revenue declines here, although I think it will at least be flat

3. SoFi is scaling its credit card business. In order to do that, they have to recognize the CECL charges up front. This will also negatively affect EPS.

4. They might pull back hard on personal loan originations to preserve room on the balance sheet for the return of student loans (I don’t think this will happen, but it is in the realm of possibility)

5. There is a chance that they will not disclose any information about the Wyndham acquisition until 2Q23 since that is the reporting period when the acquisition occurred. There is also a chance they do disclose the details in the report or the earnings call. If Wall Street thinks they overpaid, it could hurt the stock. Conversely, if Wall Street thinks they got a good deal, it could help.

What am I doing about it?

I had some excess capital returned to me recently from some other investments. I had planned to DCA that money into the market over the next 5-6 months. However, because I think SoFi is undervalued and will beat next week, I am investing the portion I have earmarked for SoFi shares and LEAPS this week before earnings. I have also sold some $6 strike cash-secured puts. Additionally, I have been buying ITM calls that expire next week ($5 strike calls). After yesterday's huge move above $6, I’m already above my breakeven share price on them, so even if SoFi stays flat from today’s close price until next Monday, I will have made a profit. I pretty much only buy ITM options for earnings plays because it significantly decreases the risk of losing out gains from IV crush. Options are already a leveraged bet and I like to minimize the risk, especially on a stock like SoFi that has extremely high IV at earnings time.

I am putting my money where my mouth is. I think SoFi has a double beat and has at least a small guidance raise for both 2Q22 and the full year. Nothing in the macro has affected any of the assumptions they gave for their full year guidance, so I see the risk of a decrease in the full year guidance as small given that I think they beat this quarter.

Disclosure: I have a beneficial long position in the shares of SOFI either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

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