1. SoFi Technologies (SOFI) -- Silicon Valley Bank, Potential Ripple Effects & a Lawsuit

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a) Silicon Valley Bank & Bank Customer Impacts

Silicon Valley Bank (SIVB) -- a top 20 U.S. banking institution by assets -- collapsed this week. Here, we’ll explore what happened, why this situation is unique and why SoFi is not in pressing danger of following suit.

So, what happened? The nearly 50 year old bank is a key piece of venture capital and technology banking. It has a dominant presence in Silicon Valley culture and was a big piece of the institutional funding from this most recent boom. Founders of innovative start-ups routinely parked their money at the company, and so deposits soared. These deposits were used the build an $80 billion fortress of mortgage backed securities (MBS) at an average yield of 1.5% while rates were held at 0.

Then rates rose, rose and rose some more. Souring macro led to an abrupt weakening of its banking niche as its customers raced to extract deposits for funding operational cash burn to stay afloat. The bubble uniquely propped up this piece of the economy; the aftermath has uniquely hit it. For context, SIVB’s average client cash burn is double the rate of 2020 -- that hole had needed to be plugged somewhere and was plugged via SIVB withdrawals. Concurrently, mark-to-market valuations of its low yield bond portfolio tanked as interest rates rose. Both issues placed pressure on reserve ratios as the value of fixed debt reserves fell.

So to summarize:

• Mark to market bond portfolio valuation cuts.
• Rapid client withdrawals.

This recipe pushed SIVB dangerously towards its reserve requirement minimums. It collectively forced it to sell off $21 billion from its treasury bond portfolio in a panic and at a large loss to satisfy liquidity requirements. It took a $1.8 billion loss on this transaction and subsequently tried to sell a little over $2 billion in equity to re-strengthen its balance sheet and cover accelerating withdrawals. This sale failed and so have early attempts to find an outright buyer. Fear surrounding that failure led to a further acceleration in withdrawals to get funds out of an institution perceived to be at risk of blowing up. There were lines outside of SIVB branches throughout yesterday as the bank run took place. As a result, the FDIC shut down SIVB for now and took over its deposits.

Is this bank as important to the national financial plumbing as a Bank of America? Not even close. Is this another Lehman Brothers or Bear Stearns? Absolutely not. But still, to think this massive banking entity exists in a vacuum with no implications for the rest of the economy is not correct. Venture capital and innovation will power future economic production growth. This institution was a core part of providing the liquidity to fund that growth. There will be ripple effects.

Already we’ve seen Bill.com have to come out and assure investors that its banking relationship with SIVB is easily replaceable. Separately, we’ve heard Roku warn that it had roughly  $500 million in capital at SIVB with the timeline to recouping those funds unclear. Countless companies including Stock Market Nerd holdings like Duolingo, Shopify, CrowdStrike and others have some exposure. These accounts are clearly in excess of the $250,000 FDIC insurance maximum -- but the firms should be fine. SIVB has over $200 billion in cash, securities and loans. Even with its current liquidity commitments, it could all be used to cover deposit liabilities.

b) SoFi Bank Implications

So what does this mean for SoFi? First, it has drawn $40 million in credit from SIVB. This credit is “unaffected by the FDIC’s receivership of SIVB” per SoFi. It has no other direct ties to the bank. But could SIVB’s issues eventually spell weakness at SoFi? Is SoFi vulnerable? Let’s dig in.

Starting with a high level overview of the balance sheet. The company has $1.42 billion in cash & equivalents. With over $7 billion in deposits, it’s required to maintain a reserve ratio of 10% of deposits -- or about $720 million. As we can see, it has about 200% of this needed funding in its most liquid asset bucket. Not to mention it has another $5 billion in untapped warehouse capacity.

Specifically, SoFi Bank capital ratios are all well in excess of their required minimums. They grant miles of leeway of potential (not certain) mark to market losses on loans and bonds before becoming at all concerning:

• Common Equity Tier 1 (CETI) risk-based capital ratio is 14.6% vs. a 7% minimum and a well-capitalized minimum of 6.5%.
• Tier 1 risk-based capital ratio overall at 14.6% vs. an 8.5% minimum and an 8% well-capitalized minimum.
• Total risk based capital ratio is 15.1% vs. needing to be over 10.5% and a well-capitalized minimum of 10%.
• Leverage Ratio is 15.3% vs. needing to be over 4% and a well-capitalized minimum of 5%.

“As of December 31, 2022, our regulatory capital ratios exceeded the thresholds required to be regarded as a well-capitalized institution, and meet all capital adequacy requirements to which we are subject. There have been no events or conditions since December 31, 2022 that management believes would change the categorization.” -- From the 10K dated March 1st 2023

SoFi’s major capital ratios overall (not just SoFi Bank) sit over 20% with over 1000 basis points of wiggle room for all of them. So much flexibility. That’s why CFO Chris LaPointe tells us SoFi has “excess liquidity” every single call.

So what about the bond portfolio? Could mark-to-market losses move the needle enough to force it to allocate more capital to cover reserves? Simply put, no. It has $195 million in debt securities which encompasses its treasury holdings. In the extremely unrealistic scenario where this had to be written down by $100 million, it could easily allocate balance sheet funds to cover this and still comfortably maintain liquidity requirements. Furthermore, this book transaction will only be temporary as eventual interest rate reductions will turn those mark-to-market valuation changes back to positive in the future.

The only possible negative read-through here is rate volatility and rising loan deliquency (associated with systemic credit issues) hitting SoFi’s loan performance. That’s certainly not ideal as it would diminish net interest margin and possibly make ABS markets less open, but it’s miles better than what SIVB is dealing with. Furthermore, SoFi has been able to raise weighted interest rates enough on loans to create more valuable originations. To increase comfort even further, its hedging program has, in a surgical manner, offset volatility associated with rate fluctuations to date. Finally, its life of loan loss rate remains a full 35% below its risk tolerance with delinquencies well below 2019 levels. The book is in great shape several quarters into macro turmoil. This all ensures ample, predictable liquidity continues flowing in and that the loan book stays valuable.

Ok but what about withdrawals draining balance sheet liquidity like we’ve witnessed at SIVB? Consider who SoFi’s direct deposit customers are. They boast an average annual income in excess of $150,000 and a FICO well over 740. Its deposits don’t come from cash burning start-ups, but instead affluent individuals less prone to macro cycles.

As a sign of insider confidence, CEO Anthony Noto bought another $1 million in stock. I reached out to leadership for their take on the matter and will update you all with anything I learn.

c) Lawsuit

SoFi is suing the Federal Government to block its Student Loan payment pause. I don’t like this decision. It puts a regulatory target on its back and likely won’t result in any kind of positive resolution. Just a distraction. The company should continue to focus on controlling what it can control and powering the growth and operating leverage that markets will eventually reward. Even if the student loan industry vanishes for good, there is still so much growth and leverage to be enjoyed here. Executing will take full focus.

I understand that some believe this could create bad publicity for loan customers and hamper growth there when student loans finally return. I don’t really agree. This will be a loud headline for the next few days before the public moves on to the next topic and puts this out of mind. Remember when the misinformation policy at PayPal was going to lead to their accounts vacating the platform? Yeah, me neither. That lasted for a news cycle and was gone. This reminds me of that.

2. Shopify (SHOP) -- CFO Jeff Hoffmeister and President Harley Finkelstein Interview with Morgan Stanley

On 2023 Guidance, Year to Date Performance & Profits:

“The guide was mindful of the environment we’re in… I would say explicitly, we’re not seeing what caused us to be more cautious on the overall economy [play out] in our business. Our business is doing very well. The guide was out of an abundance of caution as it relates to some of the news out there.” -- CFO Jeff Hoffmeister

The company took more market share in Q4 2022 than it did in Q3 2022 and that has continued for both offline and online commerce in 2023. Hoffmeister reminded us that the 10%+ share of e-commerce figure floated around frequently is now 15 months old. The current Shopify market share is materially higher. Hoffmeister was also directly asked about his profit philosophy vs. the old CFO who aimed to “invest all gross profit dollars into more growth.” He assured investors that Shopify will take a more balanced approach to profitable growth going forward.

“We were being prudent with guidance. The business is rocking.” -- COO/President Harley Finkelstein

On Commerce Components by Shopify (CCS):

Shopify Plus was borne to allow smaller merchants to endlessly scale into large enterprises on the Shopify platform. The product later morphed into a lead generator for winning larger brands outright by displacing alternative vendors and home-grown solutions.

Commerce Components by Shopify is the extension of this subscription package that is more geared towards the largest of enterprises. As a reminder, this allows merchants to pick and choose pieces of Shopify’s platform to integrate with the pieces of their legacy tech stack they’d like to preserve. Shopify ensures these integrations can take place without sacrificing latency, shopping experience, data sharing and operational excellence. It shied away from these integrations in the past, but now sees its infrastructure as capable of handling it as its suite of APIs continues to be upgraded and things like headless commerce take hold.

This product has been over 2 years in the making and is expected to “take a much larger chunk of the larger enterprise market” per Fintenstein. Mattel, Spanx and Black & Decker were just the first dominos to fall.

Unlike Plus and its more basic subscriptions, which lean on partner referrals and some organic word of mouth for growth, CCS takes a different go-to-market approach. Because most massive enterprises prefer embarking on platform overhauls through system integrators (SIs), Shopify established partnerships with several of the largest in tandem with developing CCS. Shopify was missing out on these opportunities because SI selling partners weren’t trained on selling Shopify products and also not incentivized to do so. Now they are. When pairing this with its enterprise resource planning (ERP) program which ensures all data sets can be queried into the Shopify Admin, it can now sell itself as a better giant brand partner than it has in the past.

Interestingly, its go-to-market for CCS also includes request for proposals (RFPs) which it had refused to partake in, in the past. With these tools, it now sees RFPs as worth its time.

On Shopify Fulfillment Network (SFN) & Re-Thinking CapEx Post Deliverr M&A:

Like he did on the Q4 call, Hoffmeister all but told investors that once Deliverr integration work is done, Shopify will be updating its SFN total CapEx investment projections. Deliverr’s team, tech, partners and industry understanding “accelerated thoughts related to how Shopify can do this in a more CapEx-light way.” It sounds like Shopify is again re-thinking how much warehouse capacity it needs to self-operate and thinks it can use the Atlanta facility and perhaps one more as models for partner proof of concept to integrate its fulfillment software.

“We can do this in a much more thoughtful way than we were before.” -- CFO Jeff Hoffmeister

The team was asked yet again if SFN will make money on its own or if it’s just a “cost of doing business” and a service merchants expect. The company adamantly responded (again) that it will make money on its own.

On Price Hikes:

• There was “virtually no pushback from merchants on price hikes.”
• Price hikes were the result of benchmarking vs. all available competition and seeing room to raise while still being “by far the best value out there” per Hoffmeister
• It is considering hiking Shopify Plus pricing but is not yet ready to do so.

On The Shop App:

Shopify just added a new ChatGPT integration to the Shop App. This enables AI-powered directing to available goods based on conversational product searches.

3. Meta Platforms (META) -- Layoffs, CFO Susan Li & COO Javier Olivan Interview with Morgan Stanley & Twitter Competition

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a) Layoffs

Meta will fire another 13% of its staff in a move to trim costs further. As I said on Twitter, this is the byproduct of over-hiring for the last 2 years. That over-hiring is why we see videos of employees enjoying days of lavish perks, relaxation and 0 productivity. This is the necessary normalization of that excess. It stinks for those impacted, but luckily they’ll be entering a labor market that remains impressively strong outside of tech.

b) Executive Interview

Efficiency or some variation of word was used 21 times during the short interview.

On Key 2023 Priorities:

Leadership continued its 2023 theme of calling this the year of efficiency. Specifically, COO Javier Olivan identified a few specific areas of cost controls that have been most powerful including:

• Consolidating measurement, creative and recommendation marketing teams into one group and doing the same with its business and user integrity teams along with its various department level AI teams.
• Matching cost per project with accurate shared costs of things like memory. This has allowed project teams to become more disciplined & precise with matching cost to value creation.

“And what we're finding, though, is by focusing on these things, you start finding ways to actually drive incremental revenue in much more efficient ways.” -- COO Javier Olivan

On Cost Controls & the Quarter so Far:

CFO Susan Lee told us that the Q3 macro overhang lightened a tad into Q4 and into 2023. Recovery in Europe has disappointed while recoveries in LatAm and APAC have exceeded expectations. In North America, things are about as expected.

“The Q4 expense guide considered this was a year of efficiency and reflected the cost-saving measures we had identified. But that work has been ongoing… When I look at all the work we’re doing right now, I expect some of these efforts will translate into further cost savings. We’ll update investors as we make those decisions.” -- CFO Susan Li

The layoff program announced yesterday will surely help.

In terms of CapEx, the company is still hyper-focused on long term cost structure rationalization. This will mean automation and scale-building investments for a short term margin drag and higher margins at maturity. The data center 2.0 footprint with more flexible scaling is a great example of this. The overhaul of its footprint costs money. But it makes META a more efficient company for the long haul (There was also a large gap in AI-powered computing capacity between META and its competition that it needed to address to stay as competitive as possible). All of this established data center capacity is being used for ads and app content -- not Oculus. The net impact of all of this will be falling 2023 expense growth. I just included the long term tidbit to show that Meta is still investing in its future and not cutting as aggressively as it could be.

“CapEx as a percentage of revenue we expect to bring down over time.” -- CFO Susan Li

On AI Investments:

AI is greatly enhancing campaign automation (and so ease of use) through products like Advantage+ which lets you “test 150 different combinations of targeting and ranking to optimize campaigns.”

The company continues to fixate on bringing conversions on-site rather than re-directing ad clicks to external sites and losing reporting/measurement control. Apple’s cross-app data restrictions necessitated this change. Commerce, Reels and click to message ads are all helping mightily here with more work to do. Within commerce specifically, it now has the ability to conduct real-time decisioning on whether to send clicks externally (if external reporting will allow) or to keep them on-site to maximize conversion.

Admittedly, it’s very hard to track the efficacy and return of these investments. The evidence is in things like +20% YoY ad conversions, lengthened accurate attribution windows and bolstered return metrics for the demand side. These factors mean the investments are working with Oppenheimer this week specifically raising ad revenue estimates by 2% for 2023 due to the new tools driving improvements.

On Reels Monetization Progress:

• Most (not all) ad formats for stories and feed are now available for Reels.
• Monetization still has a lot of catch up to do. And this could take longer than it did for Stories considering there’s “not as much opportunity to introduce ads per time between content.”
• 40% of Family of App (FOA) advertisers are using Reels.
• It’s incremental to overall engagement. Should be revenue neutral by Q1 2024 at the latest.

WhatsApp:

Olivan spoke about a General Motors ad campaign in Brazil through WhatsApp. 60% of their car sales in the country were attributed to WhatsApp conversions.

“It's hard for people here in the United States to understand what is it to live in a country that really communicates on WhatsApp. But even for me, it was hard to understand what is really happening with people communicating with businesses in places like Latin America and Southeast Asia.” -- COO Javier Olivan

c) Twitter Competition

Meta is building a social media platform for text-based updates. It will integrate with ActivityPub which is used by Mastodon and it will be a direct competitor to Twitter if it can find any traction.

4. Uber (UBER) -- CEO Dara Khosrowshahi Interviews with Morgan Stanley & Freight

a) CEO Interview

On Macro & Competition:

Uber being “ahead of the curve” on cost discipline positions it to avoid pulling back on operating expenses further like its competition is now compelled to do. This has helped it secure a top market share position in 80% of its largest mobility markets and 70% for delivery. And it has established this domination while its margins have exploded higher -- even in the wildly competitive delivery space where it continues to outperform its EBITDA as a percent of gross bookings targets. This was credited to Uber’s R&D teams implementing “cost-saving process efficiencies” to cut cost per delivery by 20% YoY last quarter. The higher margin advertising business outperforming growth expectations is helping too.

Dara talked up Uber’s scale advantage creating an inherent data advantage. This allows it to do things like run more extensive split testing to uncover rider and driver preferences and perfect its offering and promotional offer timing. This is the Duolingo playbook being exercised in a different market.

“It’s the small improvements that compound and are difficult for competition to match… The output from this that you’re seeing now is our delivering on both the top and bottom lines and our category position.” -- CEO Dara Khosrowshahi

On Lyft Shifting its Insurance Structure & Pricing to Reflect Uber:

“There have been no changes in competitive intensity at this point. The Insurance team has done a great job in reducing incidents. Any adjustments they’re making -- on a relative basis we haven’t had to make. This is a bigger headwind for Lyft than for us… it seems like they’re taking the necessary steps to adjust to the realities of the marketplace going forward.” -- CEO Dara Khosrowshahi

On a Change in Cost Structure:

Uber is currently decommissioning its own data center footprint to migrate to the cloud with Google and Oracle. The added cloud usage will show up in operating expenses while maintaining its own footprint was largely capital expenses-related. This will lead to “much better free cash flow” generation and its EBITDA and free cash flow margins converging over time. This change will allow “allow engineers to focus on value-add work vs. recreating what has already been built by the cloud providers” per Dara.

In a savvy move by the team, the team structured these cloud contracts in a way that allows easy shifting of volume between the cloud operators. This will offer it more powerful negotiating leverage when these contracts come up for renewal due to lower Uber switching costs.