SoFi is breaking investment barriers

What happened

On 29 January 2024, our Fintech holding SoFi announced record financial results. It marks a significant milestone with positive GAAP net income for the first time since its IPO in 2021.

Notably, all three of SoFi's business segments – lending, technology platform (including banking-as-a-service and APIs), and financial services (such as investment products) – are performing robustly. However, the highlight is the introduction of a platform for investing in alternative products. This innovative move enables SoFi's 7.5mn “members” to access a diverse set of investment strategies, previously limited to institutional investors and high-net-worth individuals.

Impact on our Investment Case

Banks beware: the technological revolution won’t stop

SoFi's introduction of strategies like pre-IPO, private debt, and real estate investments at the platform launch represents new opportunities for its clients. Although they have only disclosed a requirement for a “low minimum investment” without specifying an amount, the mere 0.5% fee on subscribed amounts is noteworthy.

This initiative echoes the democratization of financial services we've seen before, reminiscent of SoFi's move in 2021 to offer IPO access. While not the first to offer alternative strategies to retail investors, SoFi's scale, with 7.5mn potential investors, sets it apart from the field.

The implementation of such offerings is a testament to the power of technology, leveraging automated processes for subscribing and redeeming financial products. Emerging technologies like blockchain promise to further revolutionize financial inclusion by enhancing operational efficiency, liquidity, and reducing minimum investment thresholds.

To be exhaustive, it remains to be seen how regulators will react to such developments. While alternative strategies offer diversification away from traditional assets, they also carry unique risks that may not be suitable for all investors.

Remaining selective with neobanks

SoFi has an history of beating Street's expectations. Reaching profitability already in 2023 while the Street did not expect such progress before 2024 is a clear example of why we like this stock. Thanks to its banking license, SoFi can accept deposits, fueling the historical growth of its loan book and reducing funding costs.

Yet, the success story of SoFi is not a universal narrative among neobanks, many of whom struggle to achieve profitability. Higher interest rates pose challenges, particularly for those reliant on third-party funding. We remind that lower rates in 2024 should be positive for the ecosystem.

Being selective with neobanks continues to hold true. We only like banks with a charter and that can rely on a diversified offering. For these players, technology is key to limiting the acquisition cost of new customers and reduces the maintenance charges per existing customer. These banks gain market share over traditional banks.  

Our Takeaway

At the end of Q3 2023, SoFi was the 80^th largest bank in the United States by assets, a significant leap from its 449^th position just 18 months prior. Projecting forward, reaching the top-50 would require doubling the size of its balance sheet, a goal that is not out of reach over the medium term.

SoFi targets revenue growth of 20-25% per year through 2026. For 2024 specifically, the company guided conservatively, assuming a deterioration of the macroeconomic environment and a slowdown in the growth of its credit book. Although the firm is known for "under-promising", and then "over-delivering", growth will come from its financial services and technology platform. Net revenue from lending should only account for 50% of the company, while they accounted for 75% in 2021. The long-term investment strategy of the firm helps diversify its revenue stream. In particular, new products like the offering of alternative funds will help cross-selling efforts and attract new users.

The future of SoFi and the fintech industry at large may well involve expanding their innovative approaches from individual customers to businesses. The corporate banking sector, ripe with inefficiencies, presents an opportune target for technological disruption. It would not be surprising to see SoFi announce acquisitions (like they did when they acquired Galileo for the technology platform) or launch new products aimed at small and medium-sized businesses in the next three years. SoFi's growth is far from over.