Is SoFi a bank... or the future of banking?

Fifteen years ago, four students at the Standford Graduate School of Business founded a little company called SoFi.

At the time, it was an alumni-funded lending platform for students to refinance their loans. But it’s grown intensely since then to include almost 16 million members, offering:

SoFi, which went public on June 1, 2021, under the ticker SOFI is also now one of the most closely watched financial technology (fintech) stocks around. Everyone seems to have an opinion on it, with analyst assessments varying widely.

Citi, for instance, has a Buy rating on SOFI with a $30 price target. (It was trading at $17.46 this morning.) Barclays, Cowen, and Goldman Sachs all have it as a Hold. And Morgan Stanley, which believes it will fall to $15, lists it as a Sell.

Then again, they can’t even agree on what SoFi is. Some consider it a cyclical lender with slowing loan growth, rising capital requirements, and margin pressures. Others believe it’s an emerging technology platform disguised as a bank.

Seeking Alpha contributor Steven Fiorillo, for his part, falls into that latter category. I’ve known him for almost a decade now, and I’ve long since come to respect him and his market insights.

So when I sat down with him for this week’s Wide Moat Show, I was intrigued to learn that not only is SoFi one of his highest-conviction investments…

He believes it’s building the future of banking.

Personally, I didn’t even bother to look at SoFi before. It was just one more fintech upstart trying to compete with the big boys in my book. But after digging through the company’s details at Steven’s prompting, I’ve changed my mind.

SoFi is definitely worth following. And here’s why…

SoFi has come a long way from the student loan refinancer it used to be. Under CEO Anthony Noto (who I reached out to interview), it’s now a fully integrated financial ecosystem with one of the most fascinating fintech platforms around.

That transformation began in 2020 with its acquisition of payments processor Galileo, which gave it a payment infrastructure. And it continued two years later when SoFi bought up banking platform Technisys with its banking core software.

Management estimates that these moves save the company $60 million to $70 million annually, allowing developers to build new products in-house rather than rely on outside vendors. That’s a big competitive advantage, and I applaud Noto for making it happen.

Speaking of Noto, his resume is exceptional. A West Point graduate, he served as an Army Ranger, went on to become a Goldman Sachs executive, and then served as CFO, first for the NFL and then for Twitter.

But what really impresses me is his willingness to sacrifice near-term earnings for the sake of long-term value creation.

Many CEOs are all about wowing investors quarter to quarter. Noto, however, aggressively pursues new products, technology, and customer growth in intelligent ways. That’s why SoFi’s deposits keep growing and its cross-selling keeps accelerating.

As Steven showed me, the company adds members at an extraordinary pace while efficiently encouraging existing customers to try out more SoFi products. Wall Street can say what it wants about the company’s valuation. But its operating results show continued improvement.

The company reported record revenue of $1.41 billion in the second quarter, up from last year’s $1.04 billion. Net income, meanwhile, more than doubled from $71.1 million to $166.7 million.

Yet shares fell anyway. In fact, they’ve been falling for a while, down over 10% in the last month and 37% year to date as investors fixate on the company’s lighter loan volumes.

The market also isn’t happy with SoFi’s modestly declining CET1 capital ratio, which weighs its core liquid equity against its total risk-weighted assets. In short, management chose to retain more loans on its balance sheet rather than sell them into the secondary market.

Stock investors clearly disagree with that move.

Yet the options market tells a different story about SoFi. There, implied volatility has fallen notably, suggesting traders expect smaller day-to-day price swings going forward.

And CEO Noto remains optimistic regardless, if his 15,545-share purchase this May is any indication. That means he put roughly $249,000 of his own capital into the stock, which is quite the vote of confidence.

Perhaps that’s because, unlike the traditional banks SoFi has been lumped together with, it routinely generates 35%–40% annual free cash flow growth. That’s one of the points Steven made that really got my attention.

Along those same lines, traditional banks don’t tend to own their own payment rails or core financial software either. Nor do they build entire AI-enabled financial ecosystems to support them.

That infrastructure is an enormous factor in why Steven sees so much potential in SoFi. Because of its Galileo and Technisys acquisitions, it could license its technology platform to other financial institutions in the future.

Instead of simply competing with regional banks, it could make money from powering them.

So, no. This isn’t just one more fintech company building apps off someone else’s technology. From what Steven and now Wide Moat Research can see, SoFi might very well have aspirations to BE the technology.

Which would mean we’re looking at a fully integrated financial ecosystem built for the next generation of banking… that’s trading on the cheap.

Now, SoFi doesn’t pay a dividend, which certainly sets it apart from Wide Moat Research’s typical recommendation. We’re usually all about purchasing quality companies at undervalued prices that give us quarterly or monthly bonuses.

However, we’re also about diversification. And SoFi – a clear quality company – provides an intriguing direct opening into the fintech world.

A cheap one at that.

As the FAST Graphs chart above shows, shares currently trade at approximately 15.4x price-to-free cash flow (FCF) compared with their normal 25.7x. Combine that with consensus FCF growth – which is approaching 30% annually – and there’s real potential for truly attractive long-term total returns.

After discussing the business with Steven Fiorillo and then diving into the numbers myself, I have to agree with him: The market may very well be focusing too much on quarterly loan volumes and not enough on what SoFi is becoming.

This isn't simply another digital lender. It’s not even a true Robinhood (HOOD) peer, though people try to compare the two together often enough.

Robinhood is primarily an investment platform. SoFi, however, is evolving into a fully integrated financial ecosystem built for the next generation of banking.

All told, Wide Moat Research sees real potential in this fintech player. As such, we're initiating coverage today.

Happy SWAN investing!

Brad Thomas
Editor, The Wide Moat Daily

P.S. A big thank you to Steven Fiorillo for joining us on The Wide Moat Show. I hope you'll tune in to watch the full interview on Thursday.

P.P.S. Another huge shoutout to all of you Wide Moat Daily readers for being part of our growing community of more than 150,000 subscribers. We couldn’t do it without you!

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