SoFi ($SOFI) – A Bearish Note With Some Thoughts & a CEO Interview – July 13, 2024
Bearish Note with Some Thoughts
KBW came out with a bearish note on SoFi this past week. In it, they set a $7 price target, but recommended shorting the stock into this month’s earnings report. Its bearishness stemmed from the assertion that charge offs would rise faster than expected and that there was risk to SoFi’s 7%-8% life of loan loss rate target. I think they’re wrong (and Barclays does too as it issued a note on credit trends “materializing as expected” this week). We have a leadership team that delivers on their promises and has for years. It consistently reiterates (over & over again) that this 7%-8% target is firmly intact. In CFO Chris Lapointe’s latest public appearance, he echoed that yet again while adding how “exceedingly confident” he was. That was new & incrementally upbeat. Loss rates among its newer loan cohorts are well off of the previous cycle peaks that kept them within this target range as well. Its higher loss rate cohorts from late 2022 and into 2023 are maturing as its better performing borrowers make up a larger portion of the current book. KBW’s research was also based solely on SoFi’s personal loan book, and ignored the lower loss rate make-up of its student loan book (home loans are still too new and small to matter).
Short interest is rising, bears are becoming louder and more emboldened… and I’m staying the course. Bears can scream about fair value accounting all they want to. If the stock was at $10 today, they’d be radio silent. I remain steadfast in my belief that SoFi’s accounting is actually MORE transparent than CECL, as it provides more frequent booking of potential losses on the income statement. And if last quarter was any indication, SoFi has significant flexibility to wind down fair value premiums on its loans while still delivering upside to profit forecasts.
The company continues to march towards its $0.67 2026 GAAP EPS target, which completely forgoes inclusion of any new product (like planned credit cards). It has delivered a needed margin inflection, the beginnings of a tech platform re-acceleration, financial services profitability, balance sheet stability and strong, cross-cycle capital market demand at hefty gain on sale margins. It’s navigating through this nasty period for consumer credit better than any fair assessment would have foreseen.
With all of that said, I’ve added what I want to add to this name. I own the shares that I want to own at my current portfolio’s size. While I don’t agree with this opinion or other bears, I could always be wrong. Their views are still to be considered and some of their minds are certainly bright. I have to guard against being wrong by treating this like the still speculative investment that it is. This cannot be an anchor holding alongside Meta or Amazon just yet. I own enough to enjoy explosive returns if it continues to deliver, but I want the position to become massive on its own. I believe in SoFi for the long term. I believe if it keeps doing exactly what it’s doing then this investment will work fabulously well. But I’d be doing you all a large disservice if I spoke as if these outcomes were certain. There is more to prove and still the hearts and minds of many bears to win over. Just keep compounding profits and I’ll keep holding. Just keep executing and the stock will take care of itself.
CEO Interview
CEO Anthony Noto delivered his annual Sun Valley interview with CNBC this past week. Because we are so close to earnings, he had to be pretty careful with what he actually told us. Still, there were some highly encouraging hints. First, he all but dispelled the concerns outlined above from KBW. Here is what Noto had to say about the firm’s credit health:
“We’re really happy with how our credit has performed in line with our tolerance levels & expectations.”
This is him telling us (yet again) that the 7%-8% life of loan loss rate target is firmly intact. This probably buys us about 48 hours of tranquility before bears forget this confirmation and again loudly proclaim SoFi’s targets will be breached. They just do not believe in this leadership team, despite years of strong, trustworthy execution to point to. Oh well, profit compounding will trump skepticism eventually.
Furthermore, Noto spoke about more fed funds rate certainty today than SoFi has seen in the past two years. It’s this rate certainty that will allow SoFi to more confidently price loans and lean back into personal loan originations… and it’s rate certainty that is now building in the eyes of leadership. It has been hyper-conservative with funding personal loans as it favors waiting for better macro rather than risk blowing up the balance sheet by originating while rate expectations rapidly swing. As I’ve said before, this is the responsible and correct decision. It means lower revenue today, but a more sustainable grower with a healthier balance sheet tomorrow. Even so, the end of the forgone short term revenue may be near. I know I’ve been bombarded with SoFi personal loan offers for the first time in nearly a year over the last few weeks. Just something to note, as leaning back into origination volume would be the single most impactful driver of revenue and profit upside.
Lastly, SoFi is rooting for cuts. That may seem odd to traditional bank investors. Shouldn’t cuts hurt its net interest margin? Yes and no. The reason cuts hurt NIM is because they pressure the yields a bank can earn on things like deposits. SoFi is not like these banks. It raised its savings yield while the fed funds rate soared to pass most of the added yield back onto its customers. Wells Fargo and Bank of America certainly didn’t. SoFi savings accounts serve as a powerful top-of-funnel for customer acquisition, which makes SoFi more than happy to make this concession. After all, these high yield deposits are still a materially cheaper source of capital than the warehouse debt it had been using to fund loans.
Additionally, rate cuts will help pretty much every other product. They’ll be great for financial services volume; They’ll be a large tailwind for payment processing volume from its tech segment clients. They’ll be great for deal scrutiny, as it pursues more tech clients. They will, per Noto this week, be great for its student loan refinancing business, and will let it get more aggressive on taking advantage of currently pent-up personal loan demand. Cuts will be “great” for SoFi … and cuts are coming.
