There is a fascinating trend emerging in the world of financial technology that deserves our attention. In the first quarter of 2024, one of the sector's leading companies reached an impressive milestone - adding 622,000 new members, bringing the total to a staggering 8.1 million. This represents a 35% increase on the same period last year, which was reflected in the increase in the number of products used.

Most striking, however, is the steep increase in sales, which suggests that the company is successfully scaling its business. Thus, each new member not only contributes to the growth of the community, but exponentially supports the overall business. Which company will we be talking about today?

Company introduction

SoFi $SOFI is an American financial services company that was founded in 2011. SoFi's main goal is to offer modern financial products and services that make managing finances easier and improve the financial situation of its clients. The company is headquartered in San Francisco, California and its services are primarily available in the US.

SoFi started as a student loan refinancing platform. However, it has gradually expanded its portfolio of products and services to cover many areas of personal finance. It now offers a wide range of financial products, including personal loans, mortgages, investment options, savings accounts, credit cards, and even insurance.

One of SoFi's most notable services is its student loan refinancing option, which allows clients to consolidate their loans and receive better interest rates. It also offers personal loans that can be used for a variety of purposes, such as debt consolidation or financing larger purchases. Mortgage loans are another area where SoFi provides competitive interest rates and a simple application process.

SoFi also focuses on investments and wealth management. It offers the SoFi Invest platform where clients can invest in stocks, ETFs, cryptocurrencies and other financial instruments. This platform includes both individual investing options and automated investment advice (robo-advisory).

In the insurance space, SoFi offers various types of insurance, including life, health, auto and renters insurance, in partnership with reputable insurance companies.

One of the most interesting aspects of SoFi is its innovative approach to financial services. For example, the company has launched SoFi Money, which is a combination checking and savings account with favorable interest rates and no current transaction fees. In addition, SoFi offers credit cards with various benefits such as cashback or rewards for use.

History of SoFi

The history of SoFi is also interesting. The company was founded by four Stanford University students - Mike Cagney, Dan Macklin, James Finnigan and Ian Brady. Their original intention was to create a platform that would help students reduce the cost of education through community funding. The concept quickly caught on and SoFi began to grow and expand into other areas of financial services.

In 2021, SoFi became a publicly traded company through a merger with a specialized acquisition company (SPAC). This move provided SoFi with significant funding for further growth and expansion.

Today, SoFi serves millions of customers across the United States and is known for its modern approach to finance, which includes the use of technology, user-friendly applications, and an emphasis on customer satisfaction. The company is always evolving and looking for new ways to make it easier for its clients to manage their finances and improve their financial situation.

Why follow SoFi now?

SoFi is considered an exciting growth story. Starting with the numbers, the company's revenue has grown by more than 25% year-over-year for 12 quarters in a row. The company's membership has also been growing steadily, reaching 8.1 million members at the end of the first quarter, a 44% year-over-year increase.

By comparison, at the end of the first quarter of 2020, SoFi had just 1.08 million members. In other words, the number of members has increased nearly eight times in four years, not a bad performance.

While many growth companies struggle with profitability - and some formerly growth companies like Zoom Video Communications (ZM) and PayPal (PYPL) now more closely resemble deep value stocks than growth companies - SoFi is actually delivering profitable growth.

SoFi sees 2024 as a transition year. Until now, the company's growth has been led by its lending business, but it is now focusing on its technology platform and financial services segments. These two segments are expected to account for nearly half of its revenue in 2024, up from 38% in 2023.

In anticipation of challenging macroeconomic conditions, SoFi has slowed lending and expects its 2024 lending revenue to be between 92% and 95% of 2023 levels. The company has the capacity to increase lending if conditions become more favorable as its capital ratios are well above minimum regulatory requirements.

SoFi is also focused on growing its book value - a key metric for financial services - and expects its tangible book value to grow by $500 million to $1 billion in 2024. The company raised its estimate during the first-quarter earnings call, and the high end of the updated estimate is double the previous forecast.

What makes SoFi interesting?

1. Rapidly growing membership base

SoFi surpassed 8 million members in Q1 2024, a significant increase from less than 2 million at the start of 2021. The lowest year-over-year growth since then was 44%. Financial products such as bank accounts, brokerage accounts and credit cards, as opposed to loans, saw the largest growth. The ratio of financial products to loans rose from 4.1 to 1 in 2022 to 5.9 to 1 today. This is significant for two reasons:

• Banks can fund their lending activities more cheaply with deposits than with loans. SoFi's deposit base has grown from zero at the beginning of 2022 to nearly the level of its loan portfolio.
• More bank customers means more opportunities to cross-sell additional products and lower product marketing costs to new customers. As the ratio of financial products to loans grows, this should help reduce the cost of acquiring new customers.

2. The potential of credit cards

SoFi offers a proprietary credit card, but so far this segment is relatively small and accounts for about 1.1% of the company's total loan portfolio. However, company management stated that the credit card business is still in the "full investment" stage. During the 2023 earnings conference call, management mentioned the broader credit card portfolio as a potential future growth driver.

In general, credit cards can be an excellent source of profit. The average interest rate on credit cards is now around 25%, which, with a reasonable default rate, leaves plenty of margin. If SoFi gets serious about competitive products with benefits for its customers, this could be a significant growth driver.

Why has SoFi stock struggled?

Several parts of SoFi make stock valuations potentially tricky. However, there seems to be an explanation for the stock's poor performance to date. Simply put, the company's financials couldn't justify the valuation at the time it went public. SoFi was trading at 4 to 6 times its book value in the summer of 2021, a really expensive multiple for a bank stock.

As you may know, the growth stock bubble burst in early 2022. The valuation of speculative stocks plunged. Why hasn't SoFi picked itself up off the floor, so to speak, especially given its tremendous growth?

In short, SoFi did not meaningfully increase its book value per share for most of 2022 and 2023. In fact, it has seen a decline here. Moreover, SoFi dramatically increased its share count in 2022 and 2023, more than offsetting the company's gains in overall book value. Finally, it was a weaker Q2 2024 earnings estimate that pushed the stock to lower levels.

Q1 2024 Quarterly Results

SoFi Technologies released its financial results for the first quarter ended March 31, 2024. CEO Anthony Noto commented that the first quarter was an exceptionally strong start to 2024, demonstrating strong revenue growth and diversification towards the financial services and technology platform segments. The company achieved adjusted net income of $581 million, up 26% year-over-year. Revenue from the financial services and technology platforms segments grew 54% and represented a record 42% of consolidated adjusted net income, offsetting flat revenue from the credit segment due to a more cautious approach in the face of macroeconomic uncertainty.

SoFi achieved adjusted EBITDA of $144 million, a 91% year-over-year increase. This equates to a 57% incremental margin of adjusted EBITDA, with all three segments profitable on a contributory basis. The company also strengthened its balance sheet and increased tangible book value by $608 million, ending the quarter at $4.1 billion, and tangible book value per share was $3.92, up 16% from the prior year quarter.

SoFi also successfully executed two key transactions in the quarter. It issued $862.5 million of convertible notes due 2029 with a coupon of 1.25% to reduce overall financing costs. It also exchanged $600 million of convertible notes due 2026 for SoFi stock at a significant discount, further strengthening its balance sheet for long-term growth. These transactions reduced upcoming maturities, had minimal impact on fully diluted 2024 EPS, and were accretive to tangible book value and tangible book value per share. SoFi's total capital ratio increased 200 basis points to 17.3%, well above the regulatory minimum of 10.5%.

Deposits grew a record $3.0 billion, a 16% increase during the first quarter to $21.6 billion at the end of the quarter. More than 90% of SoFi Money deposits (including checking, savings and cash management accounts) came from direct deposit members. For new direct deposit accounts opened in the first quarter of 2024, the median FICO score was 744, with more than half of newly funded SoFi Money accounts setting up direct deposit within 30 days. This primary account usage increased debit card spending more than three times year-over-year to more than $1.9 billion. The company benefited from strong cross-purchase trends from this attractive member base into credit and other financial products.

Growth in high-quality deposits brings lower loan funding costs and increases flexibility to achieve higher net interest margins (NIMs) and optimize returns, a critical advantage in the context of macroeconomic uncertainty. The net interest margin increased to 5.91% year-over-year in the quarter. SoFi Bank, N.A. generated GAAP net income of $100 million with a 21% margin in the first quarter of 2024, and the annualized return on tangible equity was 11.7%.

The Technology Platforms segment reported revenue growth of 21% year-over-year, while contribution margins increased from 19% to 33%. The Loans segment derived 82% of adjusted net income from net interest income, up from 76% in the prior quarter and 62% in the same quarter last year. This growth is a direct benefit of the strong performance of balance sheet assets. The percentage of adjusted loan income to net interest income has more than doubled since SoFi Bank began operations two years ago.

In the first quarter of 2024, SoFi achieved several key financial accomplishments, including total GAAP net income of $645 million, an increase of 37% over the prior year period of $472.2 million. Adjusted net income for the first quarter of 2024 was $580.6 million, a 26% increase from $460.2 million in the same period of the prior year. Adjusted EBITDA for the first quarter was $144.4 million, a 91% increase from $75.7 million in the same period of the prior year.

SoFi achieved its second consecutive quarter of GAAP net income, at $88 million for the first quarter of 2024, which includes a one-time benefit of $59.2 million from the convertible debt exchange in the quarter. This compares to a loss of $34.4 million in the first quarter of 2023. Diluted earnings per share for the first quarter were $0.02, which did not include the benefit from the convertible debt exchange in the quarter.

Early potential for growth?

For SoFi Technologies it was a tough stock market entry, but things may soon be moving in a new direction. The fintech startup is set to report second-quarter 2024 earnings results. SoFi confirmed that it will do so on July 30.

Analysts say: If the upcoming earnings report shows growth in any key metric, the stock could launch the recovery that is due to it.

However, the company remains cautious, which has weighed on its Q2 2024 outlook. For the second quarter, SoFi has forecast adjusted revenue of between $555 million and $565 million and net income of $5 million to $10 million. Analysts polled by FactSet were expecting revenue of $580.8 million and net income of $13.9 million.

For 2024, the company predicted adjusted sales in the range of $2.39 billion to $2.43 billion. Its previous estimate was $2.37 billion to $2.41 billion.

Analysts' outlook

Based on 16 Wall Street analysts who have offered 12-month price targets for SoFi Technologies over the past 3 months. The average target price is $8.35 with a high forecast of $12.00 and a low forecast of $4.00. The average target price represents a 28.07% change from the last price of $6.52.

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