$SOFI Strong Q3 Beat Ahead of Profitable Q4
SoFi Technologies, Inc. (Nasdaq: SOFI) has been one of this year’s best-performing stocks with its stock up more than 77% YTD – outperforming the market in the process. While the stock is down 8.6% since our last article covering it, it may be poised to rebound soon as its Q3 earnings are set to come out pre-market on October 30th. Analysts expect the Fintech to report net revenues of $511.6 million as well as an EPS of -$0.077. However, the digital bank may shatter these estimates, which is a tradition for it considering that it beat estimates in its last 9 earnings. In addition, student loan repayments resumed this month, and given that the company dominates the student loan refinancing market with a 60% market share, its expectations of turning a profit in Q4 seem to be realistic. In light of this, taking a long position in SOFI stock may prove to be profitable.
SOFI Fundamentals
Q3 Forecast
Last June, we expected SoFi to surprise investors by reaching profitability sooner than management’s expectation of Q4, however, that was before the company posted its Q2 earnings report. While the Q2 earnings were generally positive, they led us to revise our stance since management shared in the Q2 earnings call that SBC as well as depreciation and amortization expenses will increase in the second half of the year.
Although we’re projecting SoFi to report a net loss in its upcoming Q3 earnings, analyst estimates may be too low for the company. First, analysts forecast the fintech to report $511.6 million in Q3 revenues which might be a low figure.
SoFi has been adding members at an impressive rate so far, with Q2 witnessing a record increase of 584 thousand new members. This increase could be due to the digital bank attracting a large portion of customers migrating from regional banks following the banking crisis earlier this year or customers looking to refinance their student loans ahead of repayments resumption as we covered in 2 previous articles.
That being said, there is a strong correlation between SoFi’s revenue and customers with a correlation coefficient (r) of 0.982.
We can get an estimate of SoFi’s member number by taking the average of new members added for the past four quarters. That would see the digital bank adding around 480 thousand new members in Q3 2023, making its total members more than 6.7 million.
According to the graph above, at 6.7 million members, SoFi could report $523.1 million in revenue which is more than analysts’ estimate of $511.6 million. That said, these figures may differ if it adds customers at the same pace as Q2 due to attracting customers looking to refinance their student debt or migrating from traditional banks.
Moving on to non-interest expenses, we can a projection based on each item as a percentage of revenue. The first expense is technology and product development. This expense represented between 24% – 26% of SoFi’s revenue for the past 4 quarters, which means that it averages around 25.29% of its revenue. Therefore, Q3’s forecasted technology and product development expenses should be $132.3 million, according to the projections.
Using the same method, we can forecast SoFi’s sales and marketing expenses, operations expenses, as well as G&A expenses. In this way, these expenses are projected to be $196.2 million, $96.6 million, and $140 million, respectively.
Moreover, SoFi recognizes provisions for credit loss as part of its non-interest expense. Over the past 4 quarters, this expense averaged $13 million which is the number we are taking into consideration when forecasting the digital bank’s Q3 non-interest expense. Adding all of these expenses, SoFi’s forecasted non-interest expense is $578.2 million in Q3.
These figures are consistent with management expectations in the Q2 earnings call as sales and marketing costs, operations costs, and G&A costs represent a smaller percentage of revenue compared to Q3 2022.
Now, only income tax remains to calculate SoFi’s Q3 EPS. In the first half of the year, the fintech reported $1.6 million and $1.7 million as an income tax benefit. The company shared in its Q2 earnings report that it doesn’t expect any other significant increases or decreases in unrecognized tax benefits within the next 12 months. Accordingly, we can the average number to forecast Q3’s income tax benefit which is $1.7 million.
Quarter Income Tax
Q1 23 $1,637,000
Q2 23 $1,780,000
Q3 23 $1,708,500
Based on these figures, we can project SoFi’s Q3 net loss to be around $53.4 million or an EPS of -$0.056 which represents a beat against analyst estimates of -$0.077.
Net Revenue $523,116,864
Tech & Prod Dev $132,319,238
Sales & Marketing $196,275,579
Cost of Operations $96,608,021
G&A $140,017,955
Provision for CL $13,072,500
Loss Before Income Tax -$55,176,429
Income Tax Benefit $1,708,500
Net Loss -$53,467,929
OS 950,114,369
EPS -$0.056
Student Loan Payments Resumption
The resumption of student loan repayments is the biggest catalyst for SoFi as it will be a major factor in the fintech reaching profitability in Q4. Some analysts expect the resumption of student loan repayments will only have an incremental impact on student loan lenders due to the current high interest rates.
The appeal of federal student loans is that they are eligible for mass debt forgiveness plans such as the one struck down by the Supreme Court recently. Currently, the Department of Education is attempting to cancel large amounts of debt for a second time through the Higher Education Act. This plan may not be in full effect before the 2024 elections, and even if it is, it is expected to witness legal challenges to prevent it from being implemented. However, if the plan is successful, those refinancing with private lenders like SoFi won’t have any of their debt forgiven.
That said, SoFi’s members may find its refinancing offers compelling since its student loan borrower’s weighted average income is $163 thousand with a weighted average FICO score of 768. These members have excellent credit which allows them to find offers with a low interest rate. Therefore, those borrowers may find SoFi’s offering attractive to extend the term of their loans and lower their monthly payments.
As is, the interest rate on federal student loans this year is 5.5% for undergraduate loans, 7.05% for graduates, and 8.05% for professional students or parents of students. Meanwhile, SoFi’s repayment APR ranges from 5.24% to 9.95% for fixed-rate loans, and starts from 6.24% for variable-rate loans, with the maximum APR capped at 13.95%. It is worth noting that borrowers with better credit scores pay a lower APR, which comprises most of SoFi’s members.
SoFi is also attempting to make its offering more attractive as it is offering a 0.25% autopay interest rate reduction which requires borrowers to make their scheduled monthly payments by an automatic monthly deduction from a savings or a checking account. This discount will reduce interest each month and more of the monthly payments will be applied to the principal loan balance – allowing borrowers to pay off their loan faster. If this offer gains traction among borrowers, SoFi’s member growth could be at the same pace as Q2 in the coming quarters.
Risks
The biggest risk facing SoFi is the delinquency rates of its customers as delinquency rates have been growing since the beginning of the year and are approaching pre-pandemic levels at 2.36%, according to the latest data from the Fed. That said, SoFi’s delinquency rates remain healthy as 90-day personal loan delinquencies were 0.4% in Q2, according to the Q2 earnings call. Meanwhile, its annualized personal loan charge-off rate was 2.94%, which is lower than the assumed weighted average default rates in its fair value model of 4.6%.
Another risk facing SoFi is its declining revenue per member which has been dropping sequentially since Q3 2022. According to the aforementioned members and revenue projections for the fintech’s Q3 earnings, its revenue per member is forecasted to be $77.84, which would represent a 2.4% decline QoQ. While this decline could be attributed to the macro environment of high-interest rates, this trend could lead to SoFi’s revenues stagnating in the future.
Quarter Members Revenue QoQ Growth Rev/Member
Q3 22 4,743,000 $423,985,000 424,000 $89.39
Q4 22 5,223,000 $456,679,000 480,000 $87.44
Q1 23 5,656,000 $472,158,000 433,000 $83.48
Q2 23 6,240,000 $498,018,000 584,000 $79.81
Q3 23 6,720,250 $523,116,864 480,250 $77.84
Technical Analysis
On the hourly chart, SOFI stock is trading in a bearish trend as it is in a downward channel below the 200, 50, and 21 MAs. However, the RSI is approaching oversold at 35 and the MACD is approaching a bullish crossover which are bullish signs.
With its Q3 earnings right around the corner on October 30th, SOFI stock could be a good investment at current levels given its history of parabolic runs following its earnings. As is, the aforementioned model expects the fintech to beat analysts’ estimates for revenue and EPS ahead of reaching profitability for the first time in Q4, per management’s expectations.
SOFI Forecast
With the fintech’s Q3 earnings coming up next week, SOFI stock could be an opportunity at current levels as it may beat analysts’ revenue and EPS estimates, based on our model. With that in mind, the company can beat our projections if its members grow at a similar pace to Q2 where it witnessed a record 584 thousand new members. Meanwhile, the resumption of student loan repayments is a major catalyst for the digital bank since it could help it achieve its target of becoming profitable in Q4. Given the quality of SoFi’s members, a large number of borrowers may refinance their student loans with SoFi, especially with its 0.25% autopay interest rate reduction that makes its offering more compelling.
SOFI Fundamentals
Q3 Forecast
Last June, we expected SoFi to surprise investors by reaching profitability sooner than management’s expectation of Q4, however, that was before the company posted its Q2 earnings report. While the Q2 earnings were generally positive, they led us to revise our stance since management shared in the Q2 earnings call that SBC as well as depreciation and amortization expenses will increase in the second half of the year.
Although we’re projecting SoFi to report a net loss in its upcoming Q3 earnings, analyst estimates may be too low for the company. First, analysts forecast the fintech to report $511.6 million in Q3 revenues which might be a low figure.
SoFi has been adding members at an impressive rate so far, with Q2 witnessing a record increase of 584 thousand new members. This increase could be due to the digital bank attracting a large portion of customers migrating from regional banks following the banking crisis earlier this year or customers looking to refinance their student loans ahead of repayments resumption as we covered in 2 previous articles.
That being said, there is a strong correlation between SoFi’s revenue and customers with a correlation coefficient (r) of 0.982.
We can get an estimate of SoFi’s member number by taking the average of new members added for the past four quarters. That would see the digital bank adding around 480 thousand new members in Q3 2023, making its total members more than 6.7 million.
According to the graph above, at 6.7 million members, SoFi could report $523.1 million in revenue which is more than analysts’ estimate of $511.6 million. That said, these figures may differ if it adds customers at the same pace as Q2 due to attracting customers looking to refinance their student debt or migrating from traditional banks.
Moving on to non-interest expenses, we can a projection based on each item as a percentage of revenue. The first expense is technology and product development. This expense represented between 24% – 26% of SoFi’s revenue for the past 4 quarters, which means that it averages around 25.29% of its revenue. Therefore, Q3’s forecasted technology and product development expenses should be $132.3 million, according to the projections.
Using the same method, we can forecast SoFi’s sales and marketing expenses, operations expenses, as well as G&A expenses. In this way, these expenses are projected to be $196.2 million, $96.6 million, and $140 million, respectively.
Moreover, SoFi recognizes provisions for credit loss as part of its non-interest expense. Over the past 4 quarters, this expense averaged $13 million which is the number we are taking into consideration when forecasting the digital bank’s Q3 non-interest expense. Adding all of these expenses, SoFi’s forecasted non-interest expense is $578.2 million in Q3.
These figures are consistent with management expectations in the Q2 earnings call as sales and marketing costs, operations costs, and G&A costs represent a smaller percentage of revenue compared to Q3 2022.
Now, only income tax remains to calculate SoFi’s Q3 EPS. In the first half of the year, the fintech reported $1.6 million and $1.7 million as an income tax benefit. The company shared in its Q2 earnings report that it doesn’t expect any other significant increases or decreases in unrecognized tax benefits within the next 12 months. Accordingly, we can the average number to forecast Q3’s income tax benefit which is $1.7 million.
Quarter Income Tax
Q1 23 $1,637,000
Q2 23 $1,780,000
Q3 23 $1,708,500
Based on these figures, we can project SoFi’s Q3 net loss to be around $53.4 million or an EPS of -$0.056 which represents a beat against analyst estimates of -$0.077.
Net Revenue $523,116,864
Tech & Prod Dev $132,319,238
Sales & Marketing $196,275,579
Cost of Operations $96,608,021
G&A $140,017,955
Provision for CL $13,072,500
Loss Before Income Tax -$55,176,429
Income Tax Benefit $1,708,500
Net Loss -$53,467,929
OS 950,114,369
EPS -$0.056
Student Loan Payments Resumption
The resumption of student loan repayments is the biggest catalyst for SoFi as it will be a major factor in the fintech reaching profitability in Q4. Some analysts expect the resumption of student loan repayments will only have an incremental impact on student loan lenders due to the current high interest rates.
The appeal of federal student loans is that they are eligible for mass debt forgiveness plans such as the one struck down by the Supreme Court recently. Currently, the Department of Education is attempting to cancel large amounts of debt for a second time through the Higher Education Act. This plan may not be in full effect before the 2024 elections, and even if it is, it is expected to witness legal challenges to prevent it from being implemented. However, if the plan is successful, those refinancing with private lenders like SoFi won’t have any of their debt forgiven.
That said, SoFi’s members may find its refinancing offers compelling since its student loan borrower’s weighted average income is $163 thousand with a weighted average FICO score of 768. These members have excellent credit which allows them to find offers with a low interest rate. Therefore, those borrowers may find SoFi’s offering attractive to extend the term of their loans and lower their monthly payments.
As is, the interest rate on federal student loans this year is 5.5% for undergraduate loans, 7.05% for graduates, and 8.05% for professional students or parents of students. Meanwhile, SoFi’s repayment APR ranges from 5.24% to 9.95% for fixed-rate loans, and starts from 6.24% for variable-rate loans, with the maximum APR capped at 13.95%. It is worth noting that borrowers with better credit scores pay a lower APR, which comprises most of SoFi’s members.
SoFi is also attempting to make its offering more attractive as it is offering a 0.25% autopay interest rate reduction which requires borrowers to make their scheduled monthly payments by an automatic monthly deduction from a savings or a checking account. This discount will reduce interest each month and more of the monthly payments will be applied to the principal loan balance – allowing borrowers to pay off their loan faster. If this offer gains traction among borrowers, SoFi’s member growth could be at the same pace as Q2 in the coming quarters.
Risks
The biggest risk facing SoFi is the delinquency rates of its customers as delinquency rates have been growing since the beginning of the year and are approaching pre-pandemic levels at 2.36%, according to the latest data from the Fed. That said, SoFi’s delinquency rates remain healthy as 90-day personal loan delinquencies were 0.4% in Q2, according to the Q2 earnings call. Meanwhile, its annualized personal loan charge-off rate was 2.94%, which is lower than the assumed weighted average default rates in its fair value model of 4.6%.
Another risk facing SoFi is its declining revenue per member which has been dropping sequentially since Q3 2022. According to the aforementioned members and revenue projections for the fintech’s Q3 earnings, its revenue per member is forecasted to be $77.84, which would represent a 2.4% decline QoQ. While this decline could be attributed to the macro environment of high-interest rates, this trend could lead to SoFi’s revenues stagnating in the future.
Quarter Members Revenue QoQ Growth Rev/Member
Q3 22 4,743,000 $423,985,000 424,000 $89.39
Q4 22 5,223,000 $456,679,000 480,000 $87.44
Q1 23 5,656,000 $472,158,000 433,000 $83.48
Q2 23 6,240,000 $498,018,000 584,000 $79.81
Q3 23 6,720,250 $523,116,864 480,250 $77.84
Technical Analysis
On the hourly chart, SOFI stock is trading in a bearish trend as it is in a downward channel below the 200, 50, and 21 MAs. However, the RSI is approaching oversold at 35 and the MACD is approaching a bullish crossover which are bullish signs.
With its Q3 earnings right around the corner on October 30th, SOFI stock could be a good investment at current levels given its history of parabolic runs following its earnings. As is, the aforementioned model expects the fintech to beat analysts’ estimates for revenue and EPS ahead of reaching profitability for the first time in Q4, per management’s expectations.
SOFI Forecast
With the fintech’s Q3 earnings coming up next week, SOFI stock could be an opportunity at current levels as it may beat analysts’ revenue and EPS estimates, based on our model. With that in mind, the company can beat our projections if its members grow at a similar pace to Q2 where it witnessed a record 584 thousand new members. Meanwhile, the resumption of student loan repayments is a major catalyst for the digital bank since it could help it achieve its target of becoming profitable in Q4. Given the quality of SoFi’s members, a large number of borrowers may refinance their student loans with SoFi, especially with its 0.25% autopay interest rate reduction that makes its offering more compelling.