INGLEWOOD, CALIFORNIA – SEPTEMBER 08: (L-R) Los Angeles Chargers Owner and Chairman Dean Spanos, Los … [+]
As a shareholder in San Francisco-based financial services provider, SoFi Technologies, I regret that its shares trade 44% below their high.
Yet there are reasons SoFi shares could rise some 80% to its previous peak of $28.
SoFi stock — 4.3% of its float was sold short at the end of August (33% more than the month before), according to the Wall Street Journal — could go up for three reasons:
SoFi shares are risky — most notably if it does not exceed the high expectations embedded in Mizuho’s $28 price target and raise its guidance when it reports third quarter results, the stock could tank.
As I wrote in August, SoFi is a financial services company that was initially known for its student loan refinancing business. SoFi has since added new products including personal loans, credit cards, mortgages, investment accounts, banking services, and financial planning. Through its 2020 acquisition of Galileo
SoFi stock peaked in February 2021 at $28.26, according to CNBC, soon after its merger was announced with Social Capital Hedosophia Corp V — one of several Special Purpose Acquisition Companies (SPACs) taken public by Chamath Palihapitiya, a venture capitalist and early Facebook employee.
SoFi’s second quarter results significantly exceeded top line growth expectations and fell short on profit estimates. Revenue rose 101% to $231.3 million — 6% more than analysts expected, according to FactSet. Sadly its net loss of 48 cents a share — far exceeded the loss of 6 cents that FactSet had forecast.
My view on stocks in general is that they go up if they beat investor expectations for both the most recently completed quarter and the future — otherwise stocks plunge.
Hence ambitious forecasts for growth are a double-edged sword. If an analyst raises their forecast, the stock can rise in anticipation of the company meeting it. Yet if the company misses, the drop will be considerable.
Earlier this week Mizuho analyst, Dan Dolev wrote that he sees SoFi enjoying 40% average annual revenue growth between now and 2025.
As Nasdaq noted, Dolev envisions SoFi adding significant sources of new revenue. More specifically, he sees a transition from a revenue mix deriving from mortgages, student, and personal loans, to “a full-fledged mobile-first, super-app neo-bank with in-house next-gen issuing capabilities.”
This means that by 2025, Dolev expects that services will account for about 60% of SoFi’s revenue while mortgages and loans will drop from 83% to 40% of the total.
More specifically, cash management, trading and brokerage, robo-advisory, and crypto services will represent up to 35% of the total and processing consumer payments to merchants will account for another 25%. He estimates that mortgage and loan revenue will make up the balance.
The good news from this change in business mix is that the services could grow as fast as 150% by his reckoning while the mortgages and loans will grow between 20% and 25%.
I think the transition to faster-growing services bodes well for SoFi’s future. I’d advise management to keep inventing or acquiring new services because so many fintech markets grow quickly for short periods of time before they begin to slow down.
Unless a company is at risk of running out of cash, investors care more about revenue growth than profitability. For example, Tesla
SoFi has miles to go before it reaches profitability. In the second quarter it posted a $165 million net loss while its operations burned through $20 million in cash. Fortunately, SoFi’s balance sheet ended the quarter with $768 million in cash — which gives it time to become cash flow positive.
SoFi’s path to profitability hinges on its ability to lower its costs as it grows. To do this, SoFi will make the investments required to support new services and then encourage its customers to buy more of them. In so doing, SoFi will spread its costs over more products — achieving economies of scope — and through excellent customer service has the potential to add many new customers — thus spreading its costs over more customers.
As Dolev said, SoFi will encourage “user engagement, nurturing a flywheel effect of more users taking advantage of SoFi’s multiple services driving additional growth.” He expects this flywheel to create “operating leverage” as revenues grow — ultimately “shrinking losses and…delivering profits,” according to Nasdaq.
In the meantime, SoFi is in pursuit of a banking charter that will enable it to take deposits — giving it a source of low cost funds to lend out. To that end, SoFi announced in March that it would merge with Sacramento-based Golden Pacific Bank.
Stephen Fleming, president and CEO of River City Bank, told Comstock that he thinks the deal is all about SoFi’s ambitions to have a bank charter. Of SoFi, he said, “This was just [buying] a banking license.”
Mizuho sees SoFi being 3.5 times bigger in four years — growing from $800 million to $3.7 billion by 2025. His optimistic forecast is for 53% compound annual revenue growth to $4.4 billion in four years.
He thinks SoFi could be profitable by 2024 with its net loss shrinking to $62 million in 2023 and profitability emerging as early as 2024, noted Nasdaq.
SoFi could be a takeover target for large financial institutions seeking to expand their footprint in mobile financial services.
This week Goldman swapped some $2.2 billion in stock for buy-now pay-later home improvement lender, GreenSky. Goldman CEO David Solomon said, “We have been clear in our aspiration for Marcus to become the consumer banking platform of the future, and the acquisition of GreenSky advances this goal,” noted CNBC.
Could acquiring SoFi also help Solomon achieve his aspiration for Marcus?
The pressure is on SoFi to exceed investors’ expectations. If that happens, its stock will rise. If not, a large bank could scoop it up.
I ditched corporate America in 1994 and started a management consulting and venture capital firm (http://petercohan.com). I began following stocks in 1981 when I was in
I ditched corporate America in 1994 and started a management consulting and venture capital firm (http://petercohan.com). I began following stocks in 1981 when I was in grad school at MIT and first analyzed tech stocks as a guest on CNBC in 1998. I became a Forbes contributor in April 2011. My 15th book — published in November 2020 — is “Goliath Strikes Back: How Traditional Retailers Are Winning Back Customers from Ecommerce Startups.” I appeared eight times in the 2016 documentary: “We The People: The Market Basket Effect.” (http://www.themarketbasketeffect.com/). I also teach business strategy and entrepreneurship at Babson College in Wellesley, Mass. (http://www.babson.edu/Academics/faculty/profiles/Pages/Cohan-Peter.aspx)