For the September idea competition, I decided to pitch SoFi. I think the value of this competition is to find mid-cap or even small-cap companies and not well-known names so SoFi fits well into this segment as it is a $4.2B market cap company.
SoFi is one of my picks because it checks all the boxes on what I am looking for:
- Moat
- Growth despite macro
- Exceptional management
- Compelling valuation
SoFi is a fintech company and its business segment breakdown is quite unique:
- Moat
Sofi is a fintech company offering the full array of financial products you can think about. It started out by offering student loans but has since then expanded to consumer & housing loans, and a full array of financial service products such as checking accounts, stock investing, crypto, IPO, etc. It also has its own software branch with Galileo and Technisys.
Both Galileo and Technisys offer banking infrastructure as a service. And their clients are the most famous Fin-tech companies all over the world. Because SoFi has the whole know-how from the loan business to financial service business you get a closed flywheel effect where clients are being onboarded and start using one Product but then organically expand to multiple ones.
The flywheel effect gets even better when their software unit develops and offers top-of-the-notch infrastructure to SoFi’s loan and financial service segments as one of the first clients to be able to test them out. The flywheel effect can be seen very well from this chart as it shows that the number of products/services sold on SoFi is growing faster than their total members and revenue growth.
But the flywheel is still in it’s early innings:
The second moat SoFi has is that in 2022 it has been granted a bank charter to become a national bank. With it, SoFi can now offer much more competitive rates on both checking
accounts as well as loans which help with user growth and margin expansion.
- Growth despite macro
Even though SoFi has been growing over 63% in 2021, in 2022 the growth is not slowing
down meaningful vs some of its peers. In Q2 2022 revenue grew 57% and looking at their user growth this is not a chart you will see at any bank or even fintech company in this period:
Yes, they are adding 10% of their total user base each quarter!
- Management
SoFi had a sexual harassment scandal in 2017. With that, a huge management shakeout happened and the CEO left. Those were the darkest times for SoFi. But in February 2018 famous Anthony Noto (former COO of Twitter) joined the company as CEO and build a “superstar” management line-up:
And the way management is executing is one of the best I have seen. Keep in mind before
2019 SoFi had only one business line and that was the loan business. In 3 years, management made two new business segments that both have even more potential than SoFi’s existing business and are responsible for most of SoFi’s moat and account for already more than 1/3 of the company's revenues.
- Compelling valuation
In recent filling, SoFi is guiding for $1.5B in revenue this year (50% YoY growth) and for $104-109 million of adjusted EBITDA. The stock is currently trading at $4.25B. Even more interesting is looking at the balance sheet. SoFi’s latest book value is $5.186B. That’s lower than JPM, BAC, WFC.
Even after excluding all Good Will (but keep in my Sofi bought both software companies Galileo and Technisys) its book value is still $3.56B. So, putting 0 value on Goodwill the company is trading at a P/B of 1.2. This company is being valued as a traditional bank, even though its user growth is over 40% YoY and it has a Software business with $248 million in annual revenues (LTM) growing at 38% YoY. A stand-alone API SaaS banking infrastructure business would probably fetch an EV/S of around 8-10 in current conditions. So, Galileo and Technisys alone would be worth between $2B-$2.5B.
Conclusion
I have high conviction in the company for the long term and believe SoFi will grow into one
of the key FinTech companies in the world. The risk/reward is also very compelling to me at this point.
Open to questions/comments & I would appreciate it if you like this post!
