Chamath’s best performing SPAC: SoFi Technologies $SOFI

The Revenge of Cathie Wood?

Hello and welcome back old friends and new friends.  Many of you are onboard with the commodity supercycle thesis, or the “revenge of the old economy.”  My portfolio is chock full of the periodic table of the elements.  But I have a sinking suspicion that there is a possibility we will see the revenge of Cathie Wood as well, or instead, or first, or after, I don’t know the timing.  But I do know that a lot of very interesting small caps crashed into 2022, their fundamental businesses have improved for the last two years, and the stocks can’t catch a bid.  At some point that trend will change and the fundamentals will overcome the sentiment.

Today I want to dive into SoFi Technologies (SOFI) which is doubly hated as not only a Cathie Wood pick, but a Chamath Palihapitiya SPAC.  

SOFI wants to be a one-stop shop for digital financial services.  This marketplace was, before AI, and before Ozempic, one of the hottest sectors as it was believed to be a “winner take most” market just like most modern network goods.  Even Goldman Sachs embarrassingly tried and failed to compete over retail banking.  I am less convinced that it will be a “winner take most” market, as banking regulations make offerings so standardized, and customers are not concerned with using the same bank as their peers, friends, customers, suppliers, family, etc.  But this marketplace does have very sticky customers, it takes a lot to get someone to switch their primary bank.  The stickiness of customers makes SoFi’s performance all the more impressive, and their customer base all the more valuable.

SoFi added 643,000 new customers last quarter, bringing the total to 8.774 million users, a 41% increase year over year, and revenue grew at 34% in 2023 as well.  Although it is worth noting that guidance for 2024 is only a 17% to 19% revenue growth rate.  Out of those 8.8 million users, 1 million have enabled direct deposit, making SoFi their primary bank.  A growth rate of between 34% and 41% would make a traditional software company trade at over 10x sales, but a growth rate of 17% to 19% would make a traditional software company trade at around 6x sales.  Trailing twelve month revenue was $2.3 billion, and the market capitalization is $7.8 billion.  As a value investor, it’s hard for me to think of this as cheap, but in the land of disruptive tech platforms, it would be undervalued compared to a $14 billion to $23 billion valuation.  

SoFi offers financial services in 8 different categories, with more to follow: 

2011: Student loan refinancing platform.

2013: Personal loans.

2014: Credit cards.

2017: SoFi Invest, a brokerage platform.

2019: SoFi Money, a cash management account.

2020: SoFi Relay, a personal finance management tool.

2021: SoFi Protect, a term life insurance product.

2023: SoFi Home Loans.

As SoFi acquires more customers, those customers deepen the relationship by using other additional services.  I am particularly enthusiastic about the new mortgage origination segment with falling interest rates.  I had been following Rocket Companies (RKT), and this is similar to their business model, customers who originate a mortgage through their app have zero acquisition cost.  For a traditional mortgage origination fee, marketing costs are approximately half.  

The fintech aspect of SoFi has been growing rapidly, and for the trailing twelve months, the loan income was only 57% of revenues compared to 90% two years ago.  Assets under management for the brokerage business grew by 58% year over year.  SoFi has already made it possible for retail investors to participate in IPOs, and if Goldman Sachs and Morgan Stanley are correct, capital markets are heating up and we might be about to enter an IPO wave.  

SoFi is probably most well known for, and heavily criticized for, their personal loan platform.  The most common bearish argument is that spiking defaults will destroy the lender.  Their 2017 vintage of personal loans had an 8% default rate, but SoFi has been working diligently to bring that number down.  The 2022 vintage is outperforming the 2017 vintage by a full percentage point. 

There are things I don’t like about tech generally, the dilution from stock based compensation and the frequent insider selling primarily.  But what is usually good about tech is that the CEO is often the founder.  In this instance, SoFi has a hired CEO, but Anthony Noto has been engaging in aggressive insider buying, and has been executing at a very high level since he came onboard seven years ago.  After seven years of excellent performance and buying shares, Noto is at least as good as a founder, maybe better as cash purchases of shares is often a better psychological incentive alignment than a founder’s sweat equity.

Trying to nail down the valuation on SoFi is a bit tricky, some of their segments have grown revenue by 70% to 80% over last year, and this is at high interest rates.  Lowered interest rates, a housing cycle, and a potential IPO wave, etc. all go toward making future predictions very difficult.  But what is amazing is that SoFi switched to profitability three quarters ago, and the market is giving them almost no credit for it.  

SoFi is guiding toward growing tangible book by $800 million to $1 billion in 2024, and they are currently trading at 1.35x tangible book.  Without any multiple expansion, investors in SoFi should expect a 14.5% annual return.  But multiple expansion is highly likely given the incredible performance and the eventual redemption arc of the rabid hatred of all things Cathie Wood and Chamath Palihapitiya.  This is not the price chart of a tech company with aggressive growth that just achieved profitability:

Once again, I am pleased to have found something that paid subscribers might find interesting: