Despite the firm’s revenue and profit numbers being in line with Wall Street estimates, the FinTech stock underwent a sharp decline. Pre-market trading saw the business lose 8% of its value overnight, with the company continuing to bleed out over the following few days. Then, a rebound took place. On May 13, shares of SoFi popped 19.26%.
In spite of the pop, SoFi share price has experienced a dramatic fall from grace. With investors inflicting such a brutal re-rating on the firm over the past year, you might be forgiven for thinking the financials are particularly poor for the San Francisco-based outfit.
But nothing could be further from the truth. The company increased its members by 400,000 during the period, adding a further 10 million accounts to its payment processing wing Galileo. SoFi also delivered a record-breaking adjusted net revenue of $322 million, with solid performance across all three of its Lending, Technology, and Financial Services segments.
So, is the situation really as bad as the share price would suggest? And if not, what kind of upside does the business still possess?
The Guidance Revision Wasn’t All That Bad
The big story investors seemed to focus on during its most recent earnings report was the news that SoFi had downgraded its earnings estimate for the second quarter of 2022. The company informed shareholders that they could expect an adjusted EBITDA in the region of $5-$15 million, a range significantly lower than the consensus figure of $23 million.
The irony is that the firm actually increased its full-year outlook, predicting an adjusted net revenue of $1.50-1.51 billion for fiscal 2022. This happened to be $35-40 million above its prior guidance.
To better understand the overreaction of the market to these developments, it helps to look at SoFi’s student lending business. The company had earlier stated in its Q4 & Full Year 2021 Summary Results that it anticipated total revenues of $1.57 billion during 2022, assuming that the student loan moratorium currently in place would end in May.
However, that assumption was scuppered when President Biden ordered the loan deferment period to be extended until at least August. Reacting to this change in circumstances, SoFi issued new guidance, reducing its full-year revenues to just $1.47 billion.
Where investors might have miscalculated is in overestimating the importance of the quarterly downgrading. For example, headwinds from the moratorium won’t last forever since the intervention is only intended as a temporary measure anyway. Indeed, SoFi must believe it can weather those headwinds; otherwise it wouldn’t have risked improving its full-year outlook at all.
In fact, Wall Street tends to agree. Analyst Dan Dolev of Mizuho Financial Group, Inc. responded to the sell-off, telling investors in a recent CNBC interview that “the fundamentals are hitting it up on all cylinders.” Oppenheimer’s Dominick Gabriele is also bullish, suggesting that its newly originated loans’ “super-prime” quality will ultimately see it through.
How High Could SoFi Go?
There’s a stark contrast between SoFi’s current price woes and the strength of its latest financial results. Highlights for the first quarter include the company’s net revenue spiking 49% year-on-year, while the firm closed the period with a total membership of 3.9 million customers.
Moreover, the business performed well on certain key metrics too:
- SoFi’s Lending division accounted for a record $2 billion of personal loan originations, up 151% from its total in the first quarter of 2021.
- The company’s Financial Services segment also saw total products grow 111% to 4.7 million, with Lending products up 20% year-on-year as well.
Given how robust its financial health is at the moment, investors will be wondering where SoFi’s stock valuation could go from here.
To begin with, SoFi’s revenue mix covers all aspects of the personal finance space. Its Technology segment, having been bolstered by the acquisition of payment processing platform Galileo in 2020, generated a net revenue of $61 million for the quarter. Plus, its Lending segment made $253 million, and its Financial Services segment made $23.5 million.
This diversification should work well for SoFi, giving it a substantial advantage over its closest competitors. For example, UpStart (a similar FinTech with a market cap close to SoFi’s) focuses almost exclusively on consumer loans and is way behind SoFi in developing the other components of its business ecosystem.
Looking at the firm’s valuation potential, it’s clear that the company is far cheaper than it was just a few months before. In fact, SoFi’s price-to-sales ratio has more than halved since the start of the year, falling from a multiple of 8.52 on the last day of 2021 to just 3.66 at the time of research.
This implies that if the company can get itself back to where it was at the end of last year, its price could easily double. And with a first-quarter like it’s just seen, that’s definitely a possibility.