1. Shopify (SHOP), Lululemon (LULU) & PayPal (PYPL) – Holiday Performance Divergence

a) Shopify (SHOP) – Strong

Shopify’s volume growth this holiday season was expected to abruptly slow to 9% YoY as the company lapped its toughest, stimulus-related comps perhaps in its existence. Instead, over the Black Friday-Cyber Monday weekend, Shopify’s merchant volumes rose by 19% YoY (21% constant currency) while its 3-year compounded annual growth rate (CAGR) came in at a robust 37%. I guess commerce isn’t dead and Shopify isn’t either. Who knew?!

Even when accounting for inflation, the 11%-12% real growth was a positive surprise and one I take with significant optimism. For context, Adobe, Salesforce and Sensoramic reported data throughout the weekend hinting at 2%-6% nominal growth and so negative real growth for commerce overall. For e-commerce specifically, growth was around 9%-12% depending on which vendor we use. But regardless, Shopify is outperforming both online and in-store by a handsome margin.

b) Lululemon (LULU) – Anecdotal Hints

Lululemon, as expected, didn’t publish overarching data from the holiday weekend, but there were some encouraging anecdotes published elsewhere. According to BMO Markets, Lulu was able to restock its popular belt bags just in time for the holiday season which then very quickly sold out. This is a high margin product for the firm. There are other small hints circulating around the internet that lines for Lulu stores were comparatively long vs. the competition all weekend long. But again, this is all anecdotal and could either be a small positive or irrelevant.

c) PayPal (PYPL) – Weak Sauce

While Shopify’s holiday season performance was admirable, the data we have from PayPal was not. It lagged all available demand metrics from the vital 4-day period. Over the weekend (per Deutsche Bank and Salesforce), overall adoption for PayPal checkout fell 8% YoY across the globe and 4% in the United States. There were some other metrics pointing to underperformance especially in places like Ireland, but considering the company has de-prioritized its business and investments there, that’s not concerning. The global underperformance, however, certainly is concerning especially considering competition like Apple grew adoption by over 50%.

Some silver linings amid the negative headline:

Baird and Wedbush came out with notes saying holiday season results bode well for companies including PayPal and Q4 estimates. I guess they weren’t expecting much.
PayPal commerce skews far more discretionary than does Apple Pay. Discretionary spend is severely challenged by the macro climate at the moment -- so this may not be a PayPal-specific issue.
PayPal’s deepening relationship with Apple and new integrations mean the two could theoretically benefit from each other's success.

Regardless of these notes, I’m disappointed in this result, and so I’ve decided to pause adding to the name until I have a better sense of what this actually means for its long term compounding prospects. The data leaves more questions than answers, and I need those questions resolved before I resume buying shares. The two growth engines for PayPal will continue to be Braintree and Venmo, but legacy PayPal needs to maintain reasonable health to keep the cash flow churning, the margins expanding, and the investor community happy.

2. SoFi Technologies (SOFI) – CFO Interview & Product Updates

a) CFO Chris Lapointe Interviews with Credit Suisse

On Student Loans:

SoFi was expecting a ramp in student loan refinancing (refi) volume this month in anticipation of the moratorium ending. With the moratorium now having been extended to June 2023, that will not come. This will hurt SoFi’s Q4 and 2023 results. As an aside, I hope its first 2023 guide offered just assumes the moratorium lasts all year. Force any surprises here to be positive surprises… please & thank you.

Just like the last two years, Lapointe expects SoFi to continue to gracefully overcome this obstacle:

“Again, given the diversification of our model and ability to allocate capital effectively, we feel like we’ll have another strong year of growth and profit improvement the same way we’ve done the last 2.5 years.” – CFO Chris Lapointe

This is a frustrating headwind… but not one that relates to SoFi’s execution, value proposition, operating leverage and vast opportunities ahead. So? It’s a headwind that I’d likely add into if Mr. Market continues to punish the stock enough. It’s already a large position, so I’m being overly patient and picky here on any future accumulation regardless of the high conviction.

On Path to Profitability & Stock-Based Compensation:

Lapointe reiterated what leadership has been telling us all along. By the end of 2023, all 3 SoFi segments will be net operating income positive and in 2024 the company will produce GAAP profitability for the year.
- He also confirmed financial services would have a positive contribution margin as we enter 2023. That would mean significant sequential improvement is coming.
Of the $75 million in quarterly stock comp, $25 million is from share units awarded via the IPO. THESE WILL CONTINUE IN 2023, and then end at the start of 2024 when SoFi expects stock comp as a % of revenue to fall below 10%.
- At that time, if it’s still rapidly compounding and expanding margins (which is fully expected), that would actually be comparatively reasonable vs. other hyper-growers.

On Customer Engagement & Lifetime Value:

Lapointe was pressed on user engagement as SoFi only discloses cumulative members and products, but not things like monthly active users (MAUs). He told us that engagement is high and continues to rise with monetization per member growth being the direct evidence.

Lapointe also told us that metrics like MAUs are less relevant for SoFi than the cumulative stats as the company’s mission is to:

be that one-stop-shop in banking
build a decades-long relationship with customers
maximize lifetime value.

These life-long users will ebb and flow in terms of engagement as their needs evolve. The longer term engagement trend will be up and to the right as things like cross-selling take hold, but that trend will not be linear. To be honest, I found this explanation to be a bit lame and I’d still like to see them disclose MAUs or something along those lines. More relevant info is always better.

On Customer Acquisition Cost:

“We’ve had a tremendous amount of progress in terms of marketing efficiency over the last few years driven by growth in brand awareness, cross buy rates and financial services.” -- CFO Chris Lapointe

On Personal Lending:

SoFi’s large market share boost of 4.5% last year to 6% this year HAS NOT MEANT any deterioration in loss or delinquency rates. Its current credit trends remain “really strong.”
- Broken record alert: It’s good to cater to affluent individuals in 2022.
Lapointe thinks these updates are helping with the gains:
- Moving from 8 days to 2 days to fund loans for customers.
- Upgrading its 2-tiered pricing model from 2018 to “pricing across dozens of cohorts and able to dynamically move pricing day-to-day” to the outperformance.
SoFi’s unwavering dedication to responsible, FCF-based underwriting and its seamless pricing power (allowing it to raise weighted coupons with rising benchmark rates) have helped it preserve margins. BUT, the biggest help has been SoFi’s wildly effective hedging program which has allowed gain on sale and life of loan margin preservation amid all of the macro volatility.
- As soon as SoFi originates loans with rate sensitivity, it locks in terms with a hedge to guarantee acceptable cash flow per loan. It does not seek out upside through hedging -- it just wants to eliminate downside risk. The program has been a savior for the lending segment’s results this year.

On Home Loans:

Lapointe again hinted at wanting to buy a backend purchase mortgage vendor to take control of that process and accelerate SoFi’s time to fund improvements.

On SoFi’s decision this year to repurchase $1 billion in loans:

“Generating deposits means we need to earn a return to cover costs. We do that via originations or purchasing loans. In this case, we bought $1 billion of loans we originally underwrote and were servicing, which we viewed as a great asset. These are SoFi members. We know them and understand their loss profiles. These were seasoned loans so overall losses were less than for new originations. It came down to generating the highest return on our cash. We will continue to do this given the opportunity.” -- CFO Chris Lapointe

IMPORTANT: Any time SoFi makes a move like this, the conversion of cash to loans on the balance sheet shows up as operating “cash burn.” So, in 2022, this led to a billion of negative free cash flow which is why people think it’s so irresponsible with cash. In reality, it isn’t. Also in reality, this move isn’t one that burns cash, but simply changes the firm’s asset structure and bolsters net interest income. It’s a weird GAAP accounting artifact. And furthermore, if SoFi were pressed for cash (which it isn’t) it could easily liquidate these pools to bolster liquidity.

On the Tech Platform:

Overall customer concentration has fallen considerably (no specific % given) from 2021 when it last disclosed that 5 clients equated to 65% of its sales. More client wins will continue to lower this risk.

“We couldn’t be more pleased with Galileo’s technology, scalability, robustness and ability to innovate. We believe we’re second to none… the technology is superior and lower cost… We continue to steal share which we expect to continue… And with it Technisys, we’re in discussions with large financial institutions (FIs) we never were in before. We feel like we’re well positioned to win larger FIs operating with legacy, siloed providers as a matter of when, not if.” -- CFO Chris Lapointe

Noto said something very similar last week.

b) Two Product Updates

SoFi raised its savings account annual percent yield (APY) to 3.25% for direct deposit customers. This is still below what it can offer with its banking charter in hand while still being better off than it was using warehouse facilities pre-charter. Specifically, Lapointe hinted at another 250 basis points in leeway here for the company to raise the APY. 3.25% is already well over 100X the national average.

Not only are these direct deposits lower cost for issuing new loans, but they also juice high margin revenue segments such as debit interchange fees which direct deposit customers use more frequently.

In other news, SoFi has finally begun its launch of options trading. The product features 0 fee contracts and a slick user interface (similar to Robinhood’s). For now, the product only offers the ability to buy contracts, but selling calls and puts will be added soon.