Table of Contents
- Section 1 – SoFi Basics
- 1a. Company Basics
- 1b. Team Introduction
- 1c. Overall Edge
- Section 2 – Lending
- 2a. Borrower Demographic
- 2b. Secured & Student Lending Products
- 2c. Personal Loans
- 2d. Credit Health & Capacity (As of September 2024 …
- 2e. Balance Sheet Control
- 2f. Loan Macro, Monetary Policy & NIM
- 2g. Fair Value Accounting Practices & Commentary
- Section 3 – (Non-Lending) Financial Services
- 3a. Core Product Suite
- 3b. More Products & New Products Coming
- 3c. Growth Philosophy & An Important Inflection
- 3d. Growth Engine Context
- Section 4 – The Technology Platform
- 4a. Core Product Suite
- 4b. Future Opportunities
- 4c. The Growth Engine & Macro
- Section 5 – Quantitative & Risks
- 5a. Demand Data & Commentary
- 5b. Margins, Returns & Book Value
- 5c. Balance Sheet
- 5d. Stock Comp, Incentives & Ownership
- 5e. Valuation
- 5f. Overly Simplistic Modeling & Thoughts
- 5g. Scenario Risks
- Concluding Thoughts
Section 1 – SoFi Basics
1a. Company Basics
SoFi aims to be the one-stop shop for consumer financial needs, with an owned tech stack that it also sells to customers like Robinhood and H&R Block. While it started as a student loan company, it now offers a full line of core financial services and lending products. It fixates on having every single tool a customer could possibly need and delivering high-quality experiences through those tools. This, in practice, means higher lifetime value (LTV) without material incremental customer acquisition cost (CAC) when cross-selling additional items. That helps it stand out in a highly competitive sector, creates more valuable customer cohorts and justifies leaning into things like more growth marketing. It doesn’t base its offering on what carries the highest return on equity (ROE). Instead, it offers slick, useful, interoperable, digitally-native tools for everything to give consumers zero reason to ever look elsewhere. CEO Anthony Noto describes this approach as helping customers answer “what they need to do, should do and could do” in their financial journeys. SoFi has you covered for everything.
The company caters to a relatively affluent and young crowd that has been “underserved” by existing institutions. This makes other credit vendors like American Express a better read through to SoFi’s results than companies like Discover. That affluence means a higher LTV ceiling and a more resilient credit book, which we’ll explore in detail later on. The value proposition has resonated for several years now, and that’s understandable when we consider the environment. 50% of Americans use more than one bank account, with about 80% doing so because the one-stop shop they want isn’t an option. Furthermore, 50% of all bank accounts in the USA are with 10 legacy vendors not offering the end-to-end suite that many yearn for. Enter SoFi.
1b. Team Introduction
Anthony Noto has been the company’s CEO since early 2018. He’s a no-nonsense individual who will speak his mind and do so candidly. Through beating revenue & EBITDA estimates in every quarter since going public (despite student loan headwinds discussed later), as well as mid-quarter updates that always prove accurate, he’s a CEO whose words I take seriously. The fundamental execution track record is excellent, and so is his resume. Before starting with SoFi, Noto spent 4 years with Twitter as the COO and CFO. Before that, he was the Co-Head of Global Technology, Media, and Telecommunications (TMT) Investment Banking at Goldman Sachs and the CFO of the NFL.
Chris Lapointe has been with SoFi since June 2018 and has been the CFO since April 2020. Before SoFi, he was a Director and Head of Corporate Financial Planning & Analysis (FP&A) with Uber and a Vice President of TMT Investment Banking at Goldman Sachs as well. The rest of the team features several more impressive resumes:
- Arun Pinto is the Chief Risk Officer and started with SoFi this year. He came from Wells Fargo where he was the Chief Risk Officer for their Consumer and Small Business Banking. He was the Chief Risk Officer of Auto and a Managing Director at JP Morgan before that. He has also been a Senior VP at Bank of America. Great resume.
- Jeremy Rishel is the Chief Technology Officer and has been since June 2022. He was an SVP of Engineering at Splunk and the VP of Engineering at DoorDash and Twitter.
- Derek White is the CEO of Galileo. Before that role, he was the VP of Global Financial Services Cloud at Google and the Chief Digital Officer at U.S Bank.
- Lauren Stafford Webb is the Chief Marketing Officer. Before starting with SoFi in 2019, she was the VP of Marketing at Intuit and a Senior Brand Manager at Procter & Gamble.
- Stephen Simcock is the firm’s General Counsel. He recently started in this role, after spending 10 years as JP Morgan’s Consumer Banking General Counsel. Before that, he was the General Counsel for Citibank’s Consumer Banking division.
- Anna Avalos is SoFi’s Chief People Officer. She was the Senior Director of Human Resources at Stryker and a Human Resources geographic lead for Tesla too.
- Eric Schuppenhauer is SoFi’s Borrow Business Unit Leader. He comes from Citizens Financial Group where he led consumer lending. He also previously led Capital One’s mortgage business.
1c. Overall Edge
This section will sound somewhat familiar for those of you who read our Nu (NU) deep dive. Banking is a commodity, and it’s hard to differentiate given that reality. The way to drive unique value when competing products are similar is via cost advantages. In financial services, those cost advantages generally come from a few places.
With legacy incumbents, bank charters allow participants to fund loan books with lower cost deposits. Non-banks are reliant on more expensive sources of capital like warehouse debt. Higher cost of capital means more difficult net interest margin (NIM) preservation and a lower ability to get aggressive on originations, as fewer of them are adequately profitable. SoFi has a bank charter, which allows it to unleash its deposit base for funding its loan book. And since getting this charter, it has worked hard to shift its warehouse-funded credit to deposit-funded credit. This process is part of “balance sheet optimization,” which simply means making SoFi’s liabilities as cheap as they can be and its assets as yield-producing as possible. Charters significantly bolster optimization potential.
SoFi’s charter removes the innate cost advantage that incumbents have over this firm. Furthermore, it allows SoFi to act as a sponsor on some corporate banking activities, which means another high margin revenue opportunity that other next-gen players cannot match.
On the disruptor side, it offers more cost advantages. Like other disruptors, it doesn’t have a large physical branch presence. This means lower input cost intensity, which it can use to profitably offer higher savings yields to its customers or cheaper rates on loans. That’s the standard cost edge for disruptors vs. incumbents, but SoFi has another advantage. Through the acquisitions of Galileo and Technisys (much more later), the company has essentially acquired its entire tech stack and owns it internally. This greatly diminishes 3rd party vendor fees, drives superior interoperability and, all else equal, raises SoFi’s margin ceiling beyond both disruptors and incumbents. It also turns those previous vendor fees into new revenue opportunities by licensing this tech to others.
Finally, its willingness to offer every product that a customer needs rather than only the most profitable tools helps here as well. Consider the following: When SoFi sells its Money product (bank accounts) to a new customer, CAC is $40 and variable profit is $85 with a 34% margin. If it sells an individual personal loan product, CAC is $825 and variable profit is $938 with a 45% margin. Both margins are respectable. At the same time, when it cross-sells a loan product to a Money customer, there’s no added CAC, variable profit jumps to $1,763 and the variable margin soars to 86%. This concretely illustrates why SoFi’s one-stop shop concept is an edge in its own right. It creates more touchpoints for product cross-selling, which means a large spike in its potential customer margin profile.
Bank accounts with strong yields are not unique; lending products aren’t unique; its other financial services are not unique; its bank charter is not unique; its asset-light next-gen model is not unique; its technology business is not unique. What is unique? Combining all of these ingredients into a business model and an LTV/CAC dynamic that nobody can currently touch in the USA.