The digital bank is going places, even as its stock has fallen.
SoFi technologies (SOPHIE -3.67%) The stock drop has to be one of the biggest disappointments of the year. It entered 2024 at record highs, more than doubled from last year and the company was profitable for the first time.
It continues to report strong growth and posted its third straight quarterly profit, but SoFi stock is down more than 20% this year. The market makes a mistake and you can benefit from the stock falling before the market gets involved.
SoFi is disrupting traditional banking
SoFi is a complete financial services platform that offers lending services, banking products and more in its digital application. It has no physical branches and targets the student and young professional population. This cohort values ​​a digital, consumer-focused experience. SoFi attracts millions of members who are looking for a better product, and because these customers are younger, it has a long runway for growth as this market matures and increases engagement with the SoFi platform.
The Q2 earnings update was full of positive news. Membership grew 41% year-over-year to nearly 8.8 million, adjusted net income grew 20% and produced $18 million in generally accepted accounting principles (GAAP) net income. Management raised its outlook for adjusted net income and earnings per share (EPS) in 2024 and expects positive net income for the third quarter and full year.
SoFi is more than a lender
It’s not immediately obvious exactly what’s troubling the market, although concerns about slowing credit growth are likely to be weighing on the share price. But what it does show is that while SoFi is eager to show off its new segments and how it’s protecting against lending pressure, it’s not yet taking over the lending business.
SoFi has expanded its business to encompass a wider range of services. Outside of its core lending segment, it now has two other segments: the Tech platform, or financial infrastructure services under the Galileo brand, and financial services, which are non-lending services.
These two businesses are growing at a much faster rate than lending and attract a large population even in difficult conditions when the lending business is under pressure. They add more revenue and ease credit pressure, but what they really accomplish is creating a broader service base from which members can build engagement. The positive results of this model are already present, but will be even more beneficial over time as more members join the platform.
However, the lending segment remains much larger. It accounted for 55% of revenue in Q2, so while the other segments are booming, the core segment isn’t growing much. Lending segment revenue was $341 million in Q2, up 3% from last year. The other two segments grew 46% year-over-year in Q2, but are still much smaller.
Profit from lending contribution was $198 million, or 8% more than last year. Together, profit from the financial services and technology platform contribution was $86 million. That’s where you really see the value of SoFi’s business lending platform. So when the lending contribution is up just 8%, that looks worrisome, even though the technology platform contribution is up 82% and financial services has turned from a loss to a gain.
Overall, the company reported profit. But much of that profit comes from a slowing lending business. Until these other segments take a larger share of the business and contribute more to consolidated results, the market is feeling the pinch.
Wake up before the market does
Fortunately for SoFi and its shareholders, the pessimism the market is pricing in seems unwarranted when you consider the long-term opportunity. The market is not ready to trust the new business potential of SoFi, even if it is already showing results. This is a visual representation of how the non-credit segments are growing.
Image source: SoFi.
SoFi’s expansion plan is working, and new members and increased engagement should eventually eclipse the short-term weakness in the lending segment. However, interest rates will likely be lowered before then, and when that happens, SoFi’s lending segment should rebound. Together, this makes for a dynamite long-term investment.
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