SoFi (News of the Week Sneak Peak because rhyming is fun)
SoFi's Anthony Noto interviewed with Morgan Stanley this week. I didn't double check for typos so I apologize in advance. Here are my notes:
On Macro from SoFi’s Perspective:
SoFi’s attempt to insulate itself from Macro-cycles is not new. Not only has it sought to do so through product diversification and the bank charter lowering cost of capital, but by adding more funding options as well. In 2018 when the taper tantrum was wreaking havoc on markets and capital markets grew timid, SoFi aggressively expanded its funding diversification. This ambition 4 years ago is paying off today.
The banking charter making loan holding more flexible and profitable helped greatly, but SoFi still taps into whole loan markets when the economics are better than simply holding. Its commitment and consistent delivery of variable profit margins per loan of 40-50% along with its relatively affluent borrower cohort have both kept institutional demand for its paper robust through all of this. SoFi’s 7-8% loss rate target is not a goal, but an imperative for the company -- this is how it maintains investor confidence as macroeconomic tailwinds shift to headwinds.
Luckily, SoFi’s institutional demand is satisfied in the Whole loan market and so it hasn’t needed to use ABS markets in a long time. Whole loan markets are more often “hold-to-maturity” players that don’t rely on quick flipping of loan pools to generate profits like in ABS markets. Whole loan markets are far more durable across economic cycles than ABS markets are. These whole loan purchasers -- per Noto -- are seeking out higher quality borrowers
and that’s exactly what SoFi provides.
SoFi’s weighted average cost of capital has risen in the very recent past with the sharp rise in treasury yields it uses as benchmarks. Luckily -- and again thanks to the financial health of SoFi’s typical consumer -- it has been able to pass on the vast majority of this cost increase to its borrowers with volumes still in line with expectations. The end of stimulus juicing loan demand is surely helping with pricing power here.
Quick Notes on Loans:
- Home loans “continue to under earn relative to where they could be long term, as it re-tool the back-end operations there for purchasing vs. just refinancing loans.”
- Student loan volume continues to operate below 50% of normal volume with the moratorium in place.
On Path to Profitability:
Noto told us this week that the financial services segment for the company would become contribution profit positive by the end of the year. Management likes to say that the segment is already there when you sub out marketing costs but that item was a massive piece of the top line growth allowing for this profitability inflection. By the end of 2023, the segment will be profitable enough to also cover fixed costs and will thus be generating a positive net operating profit like its other two segments.
Noto also reiterated that stock-based compensation as a % of revenue would fall from the mid 30% range to single digits by 2024. This is when SoFi expects to become GAAP profitable -- but this timeline is wildly conservative. It assumes student loans remains challenged with the moratorium through 2024 and doesn’t factor in things such as improvement in the home loan business or expected revenue segments blooming from the banking charter such as serving in a sponsor bank role for Galileo clients. These high probability tailwinds would move that profitability schedule up materially.
On the bank:
This has been the central piece of SoFi’s rapid success in attracting direct deposits (which greatly bolsters its customer lifetime value (CLV)). How? It has allowed them to pocket an additional 1.5% in cost of capital to offer the 1.25% APY savings rate profitably. It’s the only company with this rate in place without any deposit maximums. As long as the company stays above $100 million in new deposits per week, SoFi does not plan to raise this rate again. But it doesn’t sound like this rate will be lowered either which many, many analysts
expected out of the gate.
“We’ve only passed 25 basis points of the Fed’s rate hikes onto our consumers (raised APY from 1% to 1.25%) and it’s really doing well where it’s at.” -- Noto
This also puts SoFi in a better bargaining position with those aforementioned whole loan investors. Why? It gives SoFi far more holding period flexibility which raises the bar for what these investors must offer to justify SoFi forgoing the added net interest income.
SoFi was missing a multi-core technology across all products. It had it for lending and payments with Galileo but will use Technisys as a unifying layer to build one singular platform encompassing every product that an enterprise customer could need while also allowing SoFi to fully vertically integrate its product suite to drive faster innovation and lower cost.
“Technisys is really brining clients to the table from the traditional financial industry that wouldn’t have come to the table with just Galileo before…. it’s really complementing Galileo… Galileo was a huge home run and it looks like Technisys will be too.” -- Noto
On the reserve stock-split:
“The headline is that this is in case of emergency. I’ve lived through the GFC, and dot.com and we’re obviously going through a huge dislocation now… we wanted to give our Board the option to reverse split if we enter an even more irrational market. Our confidence is in no way reflected in the ask to vote. What is reflecting is prudent management… we’re one of the few companies to exceed Q1 expectations and raise guidance.” -- Noto
On the future:
SoFi will become an insurance principal at some point. It’s currently shipping about
a billion in premiums per year to referral partners but wants to bring this in
house in the coming years.
- It will enter tax planning and payment in the future as well.
- SoFi plans to launch “SoFi Plus” this year which will be like a subscription
service where you get a whole host of member benefits in loans, investing rewards
and more if you direct deposit with SoFi. This will be free for direct deposit
users but will be a paid subscription for others.
b) Insider Buying
Anthony Noto has entered Pac-Man mode with his insider buying pace. In the last 10 months, he has now made 22 separate purchases worth $3.9 million. This represents 2.6% of his combined net worth with nearly 15% of the net worth now in common shares of SoFi (not including options) alone.