SoFi is lying to you (by sandbagging their guidance)

SoFi always sandbags their guidance. The first and most obvious example of this to me was when they released their full year 2022 guidance in 4Q21. They guided for $1.57B in revenue and $180M in adjusted EBITDA. At the time, student loans were expected to come back May 1, 2022 and were included in their guidance. Also at the time, I remember thinking that those were numbers they could hit even without student loans. Even without the extra 8 months of student loans, they still got very close to that original guidance, posting $1.54B in revenue and $143M in adjusted EBITDA. Considering that student loans is easily worth at least $30M/qtr in revenue and $11M/qtr in EBITDA (see my recent article if you want to know where I came up with those numbers), they would have easily crushed their estimates if payments would have restarted as planned.

SoFi is doing it again. I can believe that they will be GAAP profitable by 4Q23 or I can believe their adjusted EBITDA guidance, but I cannot believe both, because they are mutually exclusive. Let’s go through the numbers.

First, what is the difference between their GAAP net income and their adjusted EBITDA? Fortunately, this is spelled out very explicitly in their disclosures. We’ll just look at the last 5 quarters:

The difference between GAAP net income and adjusted EBITDA for these 5 quarters was $119M, $116M, $119M, $110M, and $110M, respectively. The big ticket items are always Depreciation & Amortization (which is increasing every quarter), and stock-based compensation (which is decreasing every quarter). I predict that SBC will not decrease quite as fast moving forward as it has the last couple quarters, but will still be shrinking over time. Depreciation & Amortization will increase more than it has recently since SoFi just acquired Wyndham Capital and will begin to write down that acquisition over time. The impairment expense and restructuring charges should be non-recurring, which should narrow the gap, but interest expense will rise since rates on their revolving credit facility are increasing.

The main takeaway is that SoFi needs a quarterly adjusted EBITDA of somewhere around $100M to break even. Let’s see if we can reconcile that with their guidance. Their 2Q23 quarterly guidance and yearly guidance from the most recent earnings deck are included here.

For the following calculations, I’ve just assumed the midpoint of the guidance. SoFi expects $55M in EBITDA in 2Q23 and $278M in EBITDA for the year. They made just over $75M in EBITDA in 1Q23. So their published guidance would have them making $130M in 1H23. Leaving only $148M in EBITDA remaining for 2H23.

Remember, they need like $100M in a single quarter to be GAAP profitable. That means that to hit the 4Q23 GAAP profitability target, they’d need to only generate around $48M in EBITDA in 3Q before more than doubling that number in 4Q23 to get to $100M to hit their profitability target.

Maybe SoFi is factoring seasonality into their guidance, and 4Q is usually a strong quarter for them and that can explain it? Let’s look at their EBITDA and revenue numbers and check.

Seasonality doesn’t explain it at all. SoFi is a steady grower, it isn’t a business fades during one quarter and then makes it up in the next. There is no inherent cyclicality to their business. In fact, in terms of revenue, the last two fourth quarters were actually the weakest in terms of QoQ growth in that year. If there is a quarter in the banking industry that is historically slightly weaker, it is actually the fourth quarter.

There is only one reasonable explanation if you believe that management truly thinks that they will be GAAP net income profitable by 4Q23. That explanation is that the adjusted EBITDA guidance is sandbagged.

Think of it this way. Let’s assume the 2Q EBITDA guide is correct and they only get to $55M in adj EBITDA and then they just take a linear step to profitability. That would be $77.5M in adj EBITDA in 3Q before going to $100M in 4Q. Just that linear path would lead to $308M in adj EBITDA for the full year, which is 10% more than their current guidance.

Remember that they guided for $40-45M in EBITDA for 1Q23 and then blew it out of the water with a $76M result. I am quite certain the 2Q guidance is also sandbagged. Even if they just repeat 1Q results of $76M for 2Q and 3Q before going to $100M in 4Q, that’d mean they will beat their current guidance by 18%. What I would consider the most realistic scenario is a fairly linear progression from the $76M we saw in the first quarter to $105M or so in 4Q23. That’d result in about $360M in adj EBITDA for the year, a 30% beat to their current guidance. This completely ignores the fact that I actually think they get GAAP profitable in 3Q23, but that’s a topic for another article.

Source: Seeking Alpha

It’s also worth noting that analyst estimates for the year are -0.17 cents. That means they roughly expect an quarterly adjusted EBITDA of around $55-$60M for 2Q, $70-$75M for 3Q, and then $90-$95M in 4Q. Their estimates are slightly above SoFi’s guidance, but fairly close. I think they are going to be wrong and there is upside here to capture.

So what does this mean for investors? It means that SoFi has left a lot of room for raising their guidance over the next 2-3 quarters between their publicly stated EBITDA guidance and what they actually plan on making. I expect to see an upward revision, and perhaps a fairly substantial one at that, on their full year guidance in their earnings in two weeks.

***EDIT***

It seems there has been some confusion on what the take-home message of the article is. It is that there is significant room for overperforming current guidance from both $SOFI and Wall Street and there is plenty of room for raising future guidance above Wall Street expectations. This is a good thing.

***END OF EDIT***

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Disclosures: I have a long position in SOFI.

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