Despite headwinds, SoFi’s third quarter earnings were impressive across the board

Many traditional banks lack the wide range of services (and speed) that people demand in a digitally connected world. As a result, the financial services sector is increasingly fragmented, allowing new players to emerge and gain market share from incumbent financial institutions. So far I think SoFi (SOFI -4.71% ) has been overlooked as a potential disruptor. The company’s recent third quarter earnings report shows it is on a mission to revolutionize banking.

Prior to the third quarter results, SoFi received three “buy” or buy equivalent ratings from equity research analysts. As a result, SoFi’s share price rose nearly 60% between the release of the research reports in September and the third quarter results in early November. Has the run-up been validated? Let’s take a look at the results and find out.

Financial performance

SoFi set a new quarterly revenue record in the third quarter of 2021 with net revenue of $ 277 million, up 28% year-over-year. Although the company was originally a loan company, SoFi has invested heavily in product development with the goal of creating a super mobile app. On this app, members can access a multitude of financial products and services, such as cryptocurrency trading and IPO investing.

In the third quarter of 2021, SoFi’s member base was 2.9 million users. A total of 4.3 million products were used by these people, meaning that on average each member uses more than one product. The total number of products used on SoFi’s platform increased from 3.7 million in the second quarter of 2021 to 4.3 million in the third quarter of 2021, while new members fell from 2.6 million in the second quarter of 2021 to 2 , 9 million at the end of the third quarter.

The fact that SoFi’s product growth outpaced its members’ growth in absolute terms in the third quarter could indicate high product satisfaction and a greater willingness to adopt additional products. It also reinforces the value of the company’s flywheel business strategy. In fact, SoFi recognizes greater adoption of financial services and technology products and is becoming less reliant on its traditional lending business. SoFi’s lending business accounted for over 80% of its total revenue in 2020, while financial services and technology products accounted for less than 20%. However, until the third quarter of 2021, loans now represent around 75% of total revenue, while financial services and technology have increased to almost a quarter of cumulative revenue for the year.

SoFi also achieved a record volume of personal and home loans, which grew 166% and 26% year-over-year, respectively. However, the volume of student loans remains depressed by the extension of the CARES Act’s moratorium on federal student loan payments.

Given the economic headwinds the company is facing in its credit unit, the growth in additional product offerings is particularly encouraging. In the third quarter of 2021, SoFi recorded a net loss of $ 30 million under GAAP, an improvement of nearly $ 13 million from its net loss of $ 42.9 million in the third quarter of 2020. Capacity of SoFi to reduce its losses can illustrate that its flywheel strategy is paying off. As members use more SoFi products and become more anchored in its ecosystem, the company generates more revenue per member without incurring additional acquisition costs.

What’s on the horizon?

Morgan stanley was one of three investment banks to have issued a purchase note or purchase equivalent on SoFi. Much of the thesis is the prospective approval of SoFi’s banking charter, which Morgan Stanley expects in early 2022. A banking charter would make it easier for SoFi to partner with other companies and offer sweeping accounts. , as well as access FDIC insurance. warehouses, among other financial services. Morgan Stanley noted that SoFi’s approval of its banking charter could increase total revenues by 10% in its first year, solely based on the benefits of having access to the same low interest rates as other banks. .

A banking charter could be such a transformative event for SoFi that the prospect of the charter itself has led to an increase in inventory over the past month. It is important to keep in mind that SoFi has other strategic opportunities that are not yet contributing to its revenue growth. For example, SoFi partnered with Pagaya at the end of October. Pagaya offers an artificial intelligence infrastructure that enables financial technology companies, banks and other loan providers to offer increased access to financial products outside of traditional lending models. Pagaya’s machine learning models aim to reduce risk for lenders and better inform credit risk. To date, Pagaya’s partnership with SoFi is the largest deployment of its technology in the FinTech market. This partnership makes sense because it will allow SoFi to offer its services to a wider audience without taking on additional credit risk.

Now what?

SoFi is worth keeping on your radar if you are looking for exposure to disruptive financial technology investments. While I will be monitoring SoFi’s ability to build a long-term divide, its strong financial data leads me to believe that SoFi is on track to establish itself as an industry leader. Despite short-term headwinds in its lending business, it is important to note that SoFi is investing heavily to continue to expand its product line, which may help it shift its revenue mix primarily from loans to other financial services products as it grows in business.