Chit Chat Stocks - SoFi (SOFI) | Not So Deep Dive

Episode Date: September 28, 2021

SoFi operates a variety of financial services that includes student loan refinancing, mortgages, personal loans, credit card, investing, and even banking. The company even offers its own ETFs, including a weekly dividend ETF. Listen closely as Ian, Brett, and Ryan go through the history, financials, and future prospects of SoFi. Enjoy the show! Our Tuesday Not So Deep Dives are sponsored by Potential Multibaggers. Multis are looking for stocks that have the potential to go up 10x in 10 years. Check-out the service here: https://seekingalpha.com/checkout?service_id=mp_1308 Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to 7investing with the code "CCM" and get $10 off: https://7investing.com/subscribe/aff/4/ Interested in more of Ian's work? Follow him on Twitter: https://twitter.com/IanGrayLive  Rather watch us on video? Subscribe to our YouTube channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Contact us: [e-mail] Timestamps Company Background | (3:02) Industry | (10:05) Management & Ownership | (11:22) Valuation | (13:55) Earnings | (15:02) Balance Sheet | (18:25) Our Analysis | (20:49) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Welcome in. This is the Tuesday Not-So-Deep-Dive episode on Chitchat Money. We have Ian Gray joining us on the show, and we're talking SoFi Technologies, one of the most recommended

stocks we've gotten. I think probably the most thank you to everyone in the YouTube comments that goes hashtag or cash tag SoFi, please. Thanks. T-H-X. We're helping you out here. So hopefully you like this episode. We're going to go through it. They actually have a lot more than just that lending thing that I'll let Ryan talk about. I know me and Ryan haven't really learned about the company. Ian, have you dug into this company before the show? No, I hadn't dug in at all before the show. So it was new for me as well. all right so it's the uh it's well we initially it was part of the spac craze uh initially and so i think we like to wait a little bit that that is correct that is correct it was a chamath spac

um that was getting hyped up a lot back in you know last year or so but now they've been public they've had an audited financial statement well they have maybe or maybe that 10q was not audited i'll take a look yeah that's beside the point but that is besides the point we're going to let ryan introduce it, but first we have to talk about our presenting sponsor, Potential Multibaggers. Potential Multibaggers is a stock service like you've heard us talk about before that is aiming to find stocks that can go up 10X over the next 10 years or about 26% per year. And you think that's audacious. The track record has even been better so far. They picked Cloudflare at $39 a share, Shopify at $77 a share. Dare I say, one of the hottest stocks from this year that people

have been talking about that have just blown expectations out of the water. They were early on it as well. So really, really great track record. And Chris, the man behind potential multibayers is always buying and verifying as he calls it. He's keeping you updated. They have the community over there. If you really want someone to help you out with identifying, doing some portfolio management, buying growth stocks, I guess growth stocks, he calls it from growth to value so it's on a you know it's on a whole spectrum but if you're really interested in that this is a perfect service for us or for you to sign up for check it out he has a i believe two week free trial that's perpetually going so you can try it out talk with him and check out the

service it's great uh what else should we say oh yeah find him on twitter at from value but ryan do you want to get into sofi technologies yeah and i'm uh unfortunately not i believe the last 10Q is unaudited. Yeah, I think I misspoke. I realized that 10Qs are usually not audited. Anyway, so the first line in their S1, they say, we are a member-centric one-stop shop for financial services that allows members to borrow, save, spend, invest, and protect their money. So I will try not to go through every single nitty-gritty piece of SoFi because there is a lot to it, but they're basically trying to be one of those neobanks and integrate a whole bunch of different personal financial features into a single app. And so to kind of give an

illustration of the offerings that are included in the app, if I open the app, so I actually downloaded it, I'm going to find basically five tabs across the bottom. And on that, there's the homepage, which kind of lists out all your different options. And then they have money, which is cash management. You can open a basic checking account, either solo or joint. You can send money to other people. There's a credit card, which is the third tab. This is their typical credit card that they offer. It has a bunch of different perks. And then the fourth tab is invest. So there's IPO investing. There's a learning center. There's watch lists. There's typical investing. There's parts of stocks that you can buy. And then lastly is loans. And I'll

mention what all is included there in a second. So that's basically the mobile layout. It's a lot like the cash app, if you're familiar with that. A little bit of Robinhood mixed in, right? Yeah, there's a few more additional things. There's so much overlap between a lot of these cash service apps. The banks that aren't banks. Yeah. And so, and we'll talk about that as well. But from SoFi's view, they break down their products into three different segments. There's lending, financial services, and technology platforms. So lending, in this segment, they offer student loans, personal loans, and home loans. And maybe Ian can mention sort of how those are financed because I saw you had some notes

on that. But student loans, they primarily focus on the refinancing space for grad students. And this is really their bread and butter. This is what they started with in 2011, which I'll talk about. But it's pretty standard. They have their own algorithm for assessing risk and optimal rates. And then they have home loans, also pretty standard. They offer full-blown mortgages, or they also have refinancing.

And then there's personal loans as well. And so for personal loans and student loans, SoFi does all of its own servicing. So if you're not familiar with servicing, basically, there's the underwriting process, which is actually originating the loan and giving it to them. No one's allowed to do that anymore, though, except the government. For student loans, I think that, well, I think that might be under the FFELP. their specific programs. There's no one allowed to do it under that specific program, which was federally guaranteed on principal and interest payments, like 99%. But I think it's more nuanced

than that. But either way, the servicing aspect is basically the interface post-origination. So that is paying them back, collecting the money. Basically, any of the administrative stuff, that's kind of the servicing side. And then financial services, they call this SoFi. Well, there's three parts, but they have SoFi money. This is a cash management product that I mentioned. They're SoFi Invest. So this has brokerage services. So there's no commission. It has the payment for order flow system or arrangements on the backend. And then they also have their own ETFs and robo advisory stuff here. Going to mention something real quick. There was actually some pushback from the SEC because they were pushing some of the robo advisory members towards

their own ETFs without proper disclosure. And they do collect money through expense ratios on those ETFs. Kind of a bit of a red flag, but it might've just been more on the disclosure part. There isn't necessarily anything malicious going on with the ETFs. In fact, we definitely, if you're getting into investing and you have ETFs, that's great. Yeah. Their lower fees typically, it's always pretty easy. Yeah. And then there's also a whole bunch of other stuff that's attached to it. So within the financial services component, there's like third-party insurance being provided through here. Sometimes they're kind of the conduit. And then there's the credit card part gets lumped in here and there's a bunch of other small features. And then there's the technology platform is their

third segment. And this primarily consists of their Galileo platform, which they acquired in 2020, I believe for 1.2 billion. And so Galileo, and you can kind of correct me if I'm wrong here, is basically a white label neobanking solution. So if a financial institution wants to build their own digital offering, they can use Galileo APIs in order to do it. I'm not sure what sort of competition there is in this segment, but these contracts are multi-year, they're with bigger institutions typically. So it's a little stickier than say the other services that they're providing. Yeah. I think the description might've been slightly wrong on the neobanking. They don't let you become a neobank on your own through an API, but I'll talk about it in the future

growth opportunity. I think later the description of how that company makes money. Okay. And then as far as history goes, SoFi was founded in 2011 by four students who met at Stanford grad school. And the initial product was meant to basically just help student borrowing be more affordable. And so they started this with a $2 million loan program that was actually funded by 40 alumni. That's them serving essentially as a conduit. And then within a year, they raised their first round with Baseline Ventures, which I think it's absolutely remarkable how fast these companies can hit escape velocity if you're around the Stanford area. it if you're involved with stanford grad grad school just start any company yeah there's a

lot of cash flowing around you know a few million there just toss it around yeah get started you know yeah and so that was basically their bread and butter they would raise money they'd offer reduced rate student loan refinances to students that were at eligible schools and then i put here they'd cash out and bro down because they had tons of vc money yeah and it was basically this repeat cycle for the first four years, which was they were raising more money from different VC rounds. They were really hammering home this product. I think they're expanding the eligible schools. But then their first endeavor came in 2015, their first endeavor into other areas, which was when they entered the personal loans. And then since then, they've

obviously added tons of different products. If you go download the app, you're going to see how many different products there are. And they've received tons of VC funding since they actually hired Anthony Noto as CEO in 2018. And then on June 1st of 2021, they finally closed their SPAC merger with one of Chamath Palayapatiya's blank check companies. Yeah. Good history. They have it. If you just Google it, they have their history on the website if you want to check it out. But really, they're trying to do everything, which is why Ryan had a bit of a mouthful there. I'll hit industry and competition. Pretty simple. Again, since they hammer home that they want to be a one-size-fits-all finance app, they compete with basically everyone in the financial service

is industry. Maybe just, you know, maybe not Visa and MasterCard. I don't think anyone competes with them. Well, maybe American Express and Discover, but I don't think SoFi is going to go into that anytime soon. So their competitors include banks, credit card issuers, brokerages, credit evaluators, someone like Upstart would be a competitor here. Someone like OpFi, I think does personal loans as well. Someone like Lemonade would probably be a competitor or maybe a partner as well for the insurance stuff. But if they're going to get into insurance, then they'll be a competitor someday. So they really can be, you know, with someone like Square. I'd put Square as their number one. PayPal probably is their number two, just because of the specific things with the Cash App

and Venmo and PayPal. There's also Robinhood, Schwab, Bank of America, et cetera. I don't have a TAM number for you guys, but just look at the market caps of, you can't just say add a market cap of Square, PayPal, Bank of America, and Schwab, and that's SoFi's potential. But just add up those and there's a large market opportunity. I don't think you have to be worried about any sort of saturation here. It's all about execution from SoFi itself. Let's talk management and ownership. Ian, what did you find for us today? Yep. The current CEO, as Ryan was talking about, is Anthony Noto. And he has a pretty interesting history. And I kind of recommend watching some stuff, some of his videos or looking up his

history. But basically, I'll give you the short rundown here. He went to West Point and then spent a couple of years in the military. From there, he went to business school and got a job at Goldman Sachs and did well at Goldman Sachs, worked there for a number of years before eventually making partner and then transferring to or taking a job to be the CFO of the NFL. And he did that for, I think, about two years. And then after that, went back to Goldman and actually helped lead the Twitter IPO as part of the kind of the lead banker on the Twitter IPO, which is a big deal at the time. It was one of the biggest IPOs and a highly touted IPO. And then a year later, he was actually hired as the COO of Twitter when they were realizing

they enjoyed working with him and then they needed to hire a new COO. So he went over there and then he worked at Twitter until 2018 when he moved over to SoFi. So pretty extensive history and pretty interesting history, kind of a variety of different roles and some high profile companies. he made about $53 million in comp last year. And so he's definitely being well-paid, well-compensated for his services. Most of that, I believe, is in stock-based compensation. I think it was only a million or two in cash, but still a significant amount of compensation. He owns about $32 million in stock, which is a little less than 1% of the company, but still a fairly sizable stake. A couple of other major shareholders, the Galileo founder

owns about 7% of the company post that merger. And so he's actually the second largest shareholder. And then SoftBank is the largest shareholder with about 8% of the company. So they've got a couple of high profile, particularly SoftBank, but a couple of high profile kind of venture and private equity firms on the cap table. But pretty interesting company. Anthony Noto seems like a really interesting guy. And yeah, send it back over to you, Brett. Yeah. Social capital is going to own some of it too. Did they not? Did they have a... I bet that's in that SPAC presentation if anyone wants to look it up, right? The pro forma stuff on that. Yes, it should be. I'll take a look and see real quick, but we can keep moving. Yeah. I'll get to the valuation. Market

Cap, $12 billion. Ticker is just their name. It's S-O-F-I. Price to sales is 15 on a trailing basis. And then price to gross profit. Although for some of their business, I think gross profit and revenue is a good way to measure it. But some of it, they're getting the net interest income, so it's a bit different. But either way, it's kind of a mismatch. So price to gross profit, about 20.8. I would expect shares outstanding to rise steadily with the amount of options activity they're giving out. As Ian mentioned, they're not afraid to give out a lot of stock to their executives. But they're early to the public market. So I guess it's hard to tell. Really, I don't have anything else besides those two numbers. They're unprofitable,

but not crazy hemorrhaging money. And it looks like they're going to reinvest. So I think gross profit is a good one. I'd also probably look at their credit underwriting. And gosh, there's a lot of numbers on that in the 10Q. So it's a bit tough when you're looking at, uh, you're not an expert on, you know, how to evaluate like a bank type thing, um, with lending and stuff like that. But, you know, you want to look at that net interest income too. Uh, but besides that, yeah, price goes profit, probably the best Brian, do you want to hit earnings? Yeah. So their total members in the second quarter grew 113% year over year. So they call them, they call their users members by the way. So that's for anyone that doesn't know. Um,

And that reached 2.56 million total members. And so their gap net revenue for the quarter grew just over 100% to 231 million. Galileo accounts, which is for all the companies that are using, and correct me if I'm wrong, Galileo's API for every account they onboard, I believe that's what's being included here, right? Yeah. Okay. Yeah.

So yeah, the third, like Galileo is one step back. they're powering the other companies that are giving out credit cards or debit cards or I don't know, stuff like that. So that grew by over a hundred percent as well. And then revenue from lending grew by 73% year over year. So even with all the other stuff included, lending revenue still makes up about 72% of overall revenue. So it's still the leading driver there. And they report a 54% contribution margin in this segment. We'll talk about some of the adjustments that go on. But financial services revenue grew really quickly. It had a very small base. So worth noting that. But that part is operating at a pretty big loss right now. I think

essentially what they're trying to do is attract or cross-sell all these different features to their core customers and get them to use a bunch of different stuff. And then hopefully the lock-in is high. It's very similar to what the Cash App did in its early days and maybe is still doing now. But management expects just under a billion dollars in net revenue for the year with about 3% adjusted EBITDA margins. The actual gap EBIT margin for the first half of 2021 was negative 80%. Some of that's non-cash, right? Yeah. And they did have 82 million in operating cashflow for the first half of the year, but that's negative if you add back SBC or stock-based compensation. So I would love to paint- Well, one thing on a company like this,

I don't think operating cashflow can, they're going to have the working capital stuff with like funds held. I forget the exact term, but with lending products, I think you have to look at cash for financing activities too, because that's where some of that loans are going. I don't know the proper terminology, but basically when you have, you know, when you're a lender, you're going to have to look at not just operating cashflow because the working capital stuff can't get really fucked up uh excuse me sorry screwed up um and then uh cash flow from financing activities is where you're going to generate some of your money too okay um i guess just total conclusion on their financials in general they are going fast they have a lot of cash to

burn through which ian will talk about but something that bothered me was all the adjustments They are an adjustment-heavy company, and I love to – I try not to make excuses, even if I like the company, for all the adjustments. You want to be conscious of the true numbers that are going on underneath the scenes. So I wouldn't just take adjusted EBITDA at face value. And a lending business earnings can be misleading. I would look at what's the cash burn, stuff like that. How are they actually making money? Is it cash flow?

Is it going to be stuff from cash for financing activities, stuff like that? And Ian, you'll probably get to it with the balance sheet here. Yep. Yep. Get into that right now. So they've got about $462 million in cash that they can do whatever they want with. They've got another 300 million in restricted cash, which is generally some things that they're earning just a little bit of a little bit of a return on. Then they've got about a billion dollars in goodwill related to the Galileo

acquisition. Not a huge number given the size of their balance sheet. And then they've got almost $4.7 billion that are about $4.7 billion in loans receivable, which is the way that they're currently currently financing the loans basically that they're making. And so they've got they're transferring a lot of that risk to other parties and kind of fundraising for these loan portfolios soon. and I'll get into this in a second, but soon they're hoping to be able to use member deposits for loans itself, more like a traditional bank. And so their balance sheet, I have a note here that you should probably keep an eye on this balance sheet and particularly when the 10K comes out. And hopefully by that time, they have a bank charter and start to see exactly how they're going to function moving forward and how all that gets sorted out. This is definitely a business

that where the balance sheet is important and not necessarily from like a, uh, solvency standpoint, though that is important, but just from a, how are they actually, are they being most effective with their cash, cash, most efficient with their cash? Um, it's something, like I said, something to keep an eye on, especially as it changes over the coming months. Yeah. Taking credit risk is, uh, if that's how they're making money a lot of the times, then you have to look at the balance sheet for sure.

And I just want to check it. It's definitely, it's really hard to talk about this in audio form or just over video, but look at cashflow from financing activities. If you're investing in this company, there's a lot of stuff to look at on how, you know, they have repayment of debt proceeds from debt issuances. There's a ton of that each year. And there's also on the operating cashflow stuff, there's going to be something that a lot of people don't see before, but it's originations from loans and then proceeds from sales and repayments of loans. Watch that because that can really mask unprofitability and make cashflow look better

than it is in the short run. Not saying they're doing that on purpose, but it's something that can inadvertently happen. All right, Brian, did you have anything? I thought, nope. All right, let's hit the ad break and we'll get back for the second half. This family is on the brink of civil war.

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Tonight, La Quinta. Tomorrow, you triumph. Book your stay at LQ.com. All right, welcome back in. If it sounded a bit confusing before the first half, again, it's a little bit hard to talk about the balance sheet and the lending products. But for anyone that's a bit confused, SoFi is trying to get the bank charter, which we'll talk about probably in the future growth opportunities. But right now, since they're

not really, they're a little bit hamstrung, they do it a bit like how Square did when they have the loans and they sell them as securitizations and whole loan sales. And this is directly from their website. I'm quoting here, the buyers in these securitizations are institutions like pension and insurance funds, as well as other asset managers who pay a premium upfront for the future potential cash flows from the loans. We're able to make money through securitizations because investors trust the quality of our loans. So essentially, SoFi is aggregating this stuff, acquiring the customers, and then selling them to these institutions, hopefully offsetting some of the risk. However, they're going to get less of that cash flow because SoFi is going to get some

of it, the insurance companies and pensions are going to get some of it. I think that clears it up. However, when we talk about the bank charter, they're probably going to try to do more of that in-house over time, but we'll see. All right, we got anecdotal evidence up first. Ian, this one, We actually can do one this week. What do you think? Any anecdotal evidence here? Not direct, but one thing that happened was LMU held, my college held graduation at SoFi Stadium this past year.

Oh, huge. That's free customer acquisition. Wait, how was it? It looked awesome. I didn't actually attend it, but it looked awesome. People liked it. The stadium looks awesome. I've been watching, I don't know,

anybody who's been watching Rams or Chargers games so far. It's a pretty sweet stadium now. you know, whether that, whether that says something good about the company or something bad about the company that they, you know, have the naming rights and one of the most expensive venues in the world, you can leave that up for you to decide. But, um, it's, uh, I don't know. It's a pretty sweet looking stadium. There's is the LA one, right? SoFi stadium. Yes. The new Rams won like $5 billion, the best, the coolest quote unquote stadium in the world right now. Well, what about the Vegas one? That looks pretty cool. It's like,

yeah well this one's like bigger and better yeah that one's a bit smaller i think okay all right well uh this one has nothing to do with the stadium but i downloaded the app today uh i had no reason to do so but um i just wanted to check it out and see it it looks nice if you actually have a use case for it it's not like cash app i downloaded without having like a predetermined use case um so with sofi i wouldn't have i mean i stopped in the process of making an account i was kind of just doing it for research purposes i did hear that you can get 25 off stadium food at sofi stadium using the sofi app yeah um i kind of when it's like a ten dollar strategy right when it's a ten dollar hot dog that actually makes a little bit of a difference

right yeah 250 back there's no reason not to pay that way they better be asking on the conference It's called for the uptake and downloads in Los Angeles or else the stadium fees are, uh, might be going to a bit of waste. Um, I got nothing else to add except that I had no temptation to download the app. I think that kind of is going to come back to my big concern at the end is that why am I going to die? Like, no, I don't know why I would download this. And that is, um, maybe that's just me personally,

but I think that could apply to a lot of other people and it's why they're struggling compared to the cash app and Venmo. That's my anecdotal evidence, a bit negative, but, uh, future growth opportunities, Ian, what do you have? Yep. So I was touching on this just a second earlier, but one of the things that I want to focus on here is the bank charter. They've talked about a bank charter. We've heard other neobanks trying to become more traditional banks with these bank charters. They received preliminary approval for a bank charter last October. And then earlier this year, they announced an acquisition of a company called or a bank called Golden Pacific Bank Corp to speed up

the process. Basically, what should happen is once they complete this acquisition by the end of the year, then they'll be able to use that bank charter. They're going to put some more cash behind that bank and it should allow them to lend out member deposits rather than just contracting with external underwriters and securitizing their loans. And so in theory, I think it should allow them to, um, they'll both be taking on a little bit more risk, but then also have, um, a more efficient process for, uh, writing loans for, uh, being able to get, um, those, those, uh, those interest payments back themselves and just become a little bit more bank-like in that way. Like I said, this would change the way that their balance sheet is structured a little bit.

And so something to keep an eye on, but that's something that they've been positive about. they're excited about and they've been spending money trying to um get to that bank charter and i don't think you said bank like i think at that point they're just a bank they're very similar to bank of america they are a bank at that point um the reality is that they have more loans right now than they're talking about having uh loanable funds in that entity basically in that working through those paths and so i expect that they will still be securitizing some of their loans and then also um owning the loans for on other parts of it so i don't think it's going to be like it just totally switches to more of a bank format immediately i think there's going to be

um a little bit of both early on but that's something to keep an eye on something to watch you know i'm not i'm not exactly sure what their plan is there but yeah as you guys can tell yeah as any as any listener can tell we are not good bank analysts so any of that part you should probably disregard and do the research yourself but ryan uh what do you have yeah and so i guess Ian took the big one that really does unlock a lot of different ways they can tack on interest. Then you took the other one that I wanted. I have adding Roth IRAs to their SoFi Invest segment. That's not a huge… I don't know if that's a game changer. I'm not sure what the regulatory hurdles are to getting that done, but at least it leads members in the right direction.

There was some stuff, and maybe this is my personal preference or the way I like to invest, but there was some stuff that i wasn't that fond of on the uh well if i invest yeah have you seen their commercial if you've been watching football they've had a lot of commercials during the nfl have any of you guys seen that one i think some listeners probably have it's it's a bit like robin hood-ish and i would kind of want them to go anti-robin hood and try to right is that what you're getting i mean i don't so i don't like i don't like the payment for order for a model just in general because it incentivizes more transactions, which is hopefully what you're trying to minimize here if you're trying to empower people. Their mission is to basically

make finance great for everyone. I don't like some of the incentives that they have in there. Also, having the robo-advisory basically be a funnel through to their own ETFs, even if they are good ETFs and maybe the expense ratios are low. Non-proper disclosure on that was a little disappointing. Anyway, adding a Roth IRA at least gives people a tax advantage. Maybe they have the learning resources on there, which is great. Add a Roth IRA and then have the learning resources for it if you can. I think that would just be a step in the right direction. Yeah. That comes back to the bank thing as well. Me personally, and again, I'm just using ourselves as anecdotes because I think a lot of people are in the same boat because it's just simple.

everyone needs these types of types of things i really want someone to be able to combine charles schwab and bank of america into one because i don't see why one can't have the same qualities as the other bank of america has some really bad investment stuff like it's you know not very strong charles schwab has really good ones i thought there was a it's like merrill it's high fees i don't know i don't i thought there was a a law enacted that allowed them them not to be under the same branch well whatever so far is trying they're trying to do that so that's the that you know what i mean yeah so that's the i could be wrong about that too so maybe let's the uh but yeah but combining that that's kind of what so far is trying to get out

here where you know you park your money here but you can also invest cash app is doing it very similar to similarly to that value proposition is a lot stronger than a lot of other um personal finance companies. And the other thing I'd add before I let you get to yours is that I'm sure they have thought about or tried to do Roth IRAs. And I'm pretty sure anything that I'm thinking about for a future growth opportunity, they've probably thought about as well because they have been quite iterative in building out new features to the platform. But are you focused on cryptocurrency with 100% of your energy or Roth IRAs? That's the big, you know, decide what's better for the company yeah but if the if the goal is to just basically have features to attract as

many possible customers that they're going about it the right way sometimes when i looked at it it felt a little crowded like a congested app okay um that could be a concern yeah all right i'll hit galileo i think this is my favorite part of the business so this is the technology platform they bought it's a lot different than all the other ones you can look at the you know the quote synergies for everything else. This is a bit separate, although they use it to power a lot of what they're doing with their customers internally. So they bought it right at the start of the pandemic last year. It's a B2B API and software services company like Ryan described that SoFi was actually using before, but it helps companies easily build digital banking products.

So you can basically have stuff through an app that's very easily. And the very simple one that everyone will understand is issuing credit cards or debit cards. So they issue them, there's a fee on top of that. And then on every transaction, they get a little bit of a take rate. I forget the exact numbers. You can look it up. They have their pricing pretty transparently. They also have stuff for processing payments. For example, Wise, which used to be TransferWise, which is an international transfer currency conversion type thing that's very useful, very popular. They're a customer. So you can see how that could be a use case. I think Monzo Bank in Europe or United Kingdom is a customer as well. So they're growing internationally. They're trying to get

this down to Latin America and Asia as well. Accounts grew 190% last quarter and they are at 69 million in trillion 12 month contribution profits. So I think that's pretty strong and that's a huge part of this business going forward. Yeah. And I would add that the optics of buying this look good. It looks like they used it, thought the platform was so intuitive and easy that they were willing to pay up for it. I tend to like that. 1.2 billion and it's already doing 69 million in contribution profit on pace

to doing 100 million pretty soon. That's, you know, that doesn't seem expensive either. Yeah. All right. Go ahead, Ryan. Highlights, lowlights, Ian? The first highlight I'm going to mention is the mission statement actually makes sense.

I always like it when mission statements are related to what the company's actually doing. That's- You're changing the world. Nah, dude. You know, yeah, we work. I mean, that's not a vision. Yeah, right.

I'm not, I guess I'm not, but their mission statement is, quote, to help our members achieve financial independence to realize their ambitions, unquote. And I just thought that was a good way to put it. And they really focus on trying to create that holistic environment. And it seems like they do keep this at the center of it. I also understand the problem that they're trying to solve with, it is annoying, like you were saying, Brett, to have all these different accounts in different places whenever I wanted to try and do something.

And the more that it's centralized, it makes sense. i'd say one of the low lights though for that is that it just is like the sticking costs are both a a um highlight and a low light sorry the switching costs are a highlight and a low light because you have the highlight is once you get a customer then it's they stay there but it's also hard to actually get those customers especially when i'm already using schwab i'm already using chase um you know even for like i'm using venmo right to transfer money around so you're not just right it's hard it becomes hard to leave and so maybe at some point if i made a big radical change then i'd switch over to sofi and there's some things about that that are appealing but everything

is working well enough now that it seems like kind of a big hurdle and then the only thing else i'll mention as far as highlights is that uh they talked about the cares act and one of the things the cares act did was like pause some of the payments on student loans and with that have used to have been like such a big part of the business and what it originally started at they've kind of described it as a small blip for the business and not something that's taken the business down. And I think that just goes to show the strength of the business that it's not solely focused on those student loans anymore and that they were able to weather it and still continue to put up really impressive growth numbers despite that. Um, one low light

that I, another low light that I'll mention is execution. Um, it's trying to move fast and iterate like a software startup, but people expect it to act like more, more like a financial services company. And so there's a lot of complaints about things like long wait times, you can't actually get on the phone with anybody real. And so it's this kind of interesting space where it, people do like the software piece of it, but then they don't like the software service piece of it, right. With the software customer service side of it, you can't just totally ignore your customers when you're in a financial, uh, financial services company. And so that's kind of something that I think they're trying to work through, but it's, it's a little bit of a

low light for me right now. Yeah. My low light is similar to the one you mentioned, which is kind of a highlight and low light, which is this switching costs. And if you're a shareholder and if you're a proponent of the app and you're saying, well, they can attract young people or they have all these different offerings, it's way easier to have all these offerings in one place. Do you use it or do you still use your banking app? Exactly. That's how I thought of it as well. But accounts are growing 100%. Well, that could be misleading, though. I would look at how some of its financial services. How much of those use cases belong to all these additional features versus lending-based members? Highlights for me, they are operating

the entire lifecycle of student loans from underwriting to servicing in a single mobile experience. So that gets all those members pretty acclimated to the platform. And it also gives them kind of a good market position to cross-sell because they have those young members on the platform that are taking the student loans. And so then it's a little more intuitive for them to just move up and use the cash management product or use the credit card, whatever it is. And so that's a little easier than starting from square one. That is my big highlight. Galileo is also a highlight. It seems like a business model that looks perfect. And then lowlights for me, I get worried that I don't see the full picture. And I get worried

when some of the digital banks are growing too fast and then- If you're taking on credit risk and growing fast, that's tough. Yeah. I mean, you can, and so I know they're being funded by a lot of third parties right now, or it's being sold or securitized and sold. So they're not taking on necessarily all the risk, but if their goal is to become their own bank and then they have all these incentives to meet certain growth metrics, it seems like that could lead to a big problem down the road and maybe compromise the conservativeness of their underwriting, which I like to have in a financial services company. Also, there were a lot of outstanding

lawsuits that kind of just added up to a bit of a red flag for me. Some of them, as every company says, are without merit. They may have been, but when you see a page full of different lawsuits, it becomes a bit of a concern. Yeah, it's hard on lawsuits. You kind of just toss it up, But it's like everyone that's out there, there's a chance of paying fines or, you know, stuff like that. And I will also say I can't help. I wish I could look past this, but I can't help. But there is a stain on Chamath's SPACs for me, things that have come out of these. It seems like there's evidence of minimal due diligence.

And it could be not a problem here, but you're right. I mean, it also could be. Maybe two years down the road, I'd re-look at this thing. but the uh it's hard not to get rid of that stain in my mind yeah all right i'll hit my highlights uh galileo like you said ryan i love that business i think that a lot of the value is probably in there i love the walk-in of the consumer finance apps like you guys said is no we all know switching from your personal bank is not hard uh or sorry is hard and um below lights uh big one for me that you guys didn't hit was app store ranking so sofi is ranked number 65 in the finance category on

google play which is behind allstate mobile uh and a similar spot on the app store cash app which i would call their biggest competitor it's kind of a backhanded insult to allstate huh well i don't know who's downloading allstate mobile i am just you know maybe it's got a really good ui uh maybe or maybe people are down either way it doesn't matter that allstate is there it's number 65. cash app which is i would call them that their biggest competitor uh is number three overall on google finance or sorry not google finance on google play which is higher than instagram now this is very concerning for me um because cash app has what they're probably on pace for 50 million monthly active users gonna get close to 100 million downloads and so far is that like

three million that is just i mean if you like the economics of sofas members i think you should just by you know and there is yeah and there is i would say there's a good chance this ends up being sort of a winner take most industry maybe i'm maybe i'm wrong but like the success starts to compound on itself and especially with the neobanks and offerings like cash app there's definitely network effects oh yeah yeah i mean i use cash up i don't know i just chose it randomly they got good products uh i'm probably not going to leave uh they're doing a lot of stuff that's to be similar to sofi and then lastly on my highlight or low lights i think the stadium environment our deal is not we joked it's it's a negative for me uh the deal was 625 million

dollars over 20 years so that doesn't sound crazy but i think it's 625 million dollars that's wasted because you can call it sofi stadium it's broadcasted to what 100 million people in it every NFL Sunday. Uh, I don't know who actually is like, so far, what is that? Like, all right. Uh, you know, there's no, I don't think advertising on a stadium actually helps you with your business. Um, it's maybe better than like Qualcomm back in the tech bubble, getting a stadium deal. Uh, and I don't know, it just doesn't make sense for anyone. I think to advertise on a stadium. Uh, so that's, that's a little light for me. I think that's a huge waste of money, but let's move to bull case. Uh, Ian, what do you think of your right here?

Yep. For years, I've said to people that I don't expect that I'm going to walk down to a bank and open a bank account with my kids someday. Um, like I did as a kid, I remember walking in with my Ziploc bag full of money to open my bank account at the local chase. And, um, I just don't think that's going to happen 10 years from now. And I think part of the reason is because of companies like SoFi. And SoFi, I think is probably the closest to anyone who actually has a complete suite of services that makes sense for that to happen. And so my bull case is that they're going to grab a significant share of the financial services market, become one of the major financial institutions 10 plus years from now. If you look at their market cap in comparison to

things like Wells Fargo to Citigroup, obviously they have other segments of business and more of like the institutional and commercial banking and investment banking wings that are different than what SoFi is currently doing. But there's a lot of room for growth if SoFi actually does make that leap to being one of the major financial institutions 10 years from now. And so that's the bull case for me. Ryan? Yeah. Usually with a bull case on some companies, I'll try to paint a super rosy picture and maybe like a surprise to the upside but i don't think there's anything that's that sneaky here like if they just keep uh growing that total member count and they reach somewhere like 10 million members

those members have such high lifetime value and they're so sticky that i think that that would make it probably a pretty good investment um and i i do think it is possible for them to reach 10 million members uh given kind of their market position um and how they are sort of the lead in through student loans? Yeah. I would get worried about the number of their lending business. What is it? Number of lending products is only growing 14% year over year. There could be a slowdown because of that. Was the CARES Act the thing on the student loans, Ian, that you were mentioning? There could be a slowdown because of that got paused. That isn't growing that quickly. And if that's supposed to be part of their funnel,

that's a bit concerning, but I mean, it's still growing. So I'll have my bull case, similar to Ryan's, I think, you know, accounts got to probably get, you expect 10 million accounts growing quickly there. You got to expect product usage that grows quicker than active accounts. I would hesitate to look at the product usage number. I think that they had that, like, you know, financial services products growing 200 and something percent. That's great. But I don't, I don't know, just because someone buys an ETF that does not like, that's another one of the products that they talk off or someone downloading. So are using SoFi invest. Yes. There's so many ways to manipulate that number.

Yeah. It's like an MAU number that's really weak. So I wouldn't look at that, but like a total members, but also that product usage grows quicker than total members. And then Galileo, I think. Eventually it's just contribution profit from financial services. Like, is that growing? Yeah. True, true, true. That's the real number you want to look at. Those hopefully will be a leading indicator. And then I also think Galileo is, what's the market cap here? 12 billion. I think a good amount of the market gap, you could think of as Galawayo, if that continues to grow, it looks like a really great business. I think it's a lot better than the other parts of the business. So combine those together, that could be a great business. Bear case,

Ian, what do you think you go wrong here? The bear case for me is that people our age stick around with traditional banks and everyone older than us sticks with their traditional banks and traditional financial institutions. And those types of institutions actually move at the right pace that it keeps people around, right? Schwab innovates enough and Chase innovates enough to kind of keep me around and give me the services that I want so that I never end up making that switch to SoFi. I think that makes it hard for SoFi to gain customers, particularly when something like the Cash app or Venmo and some of these other apps are so popular among that younger generation. That's the question is, can SoFi actually steal any segment of this market and

start to grow, um, across, you know, wide swaths of the market. And obviously they've got users now and they're, they're making some good progress, but, um, that would be the bear case for me is that most people actually stick around with traditional financial institutions. All right, Ryan. Yeah, mine. I mean, that's, that's definitely a plausible bear case is that, uh, we're underestimating the stickiness of the actual, like the, the current habits of users. Um, and, uh, I think that's very possible. The other thing I would say is there, it feels like there's all this incentive to have to meet certain growth metrics.

Um, whether it's just the market's expectations are leading to lower funding costs. And so you want to keep that up. Um, yeah, they give them, they like give away money for people that download accounts. You know, I know a lot of people do that or a lot of companies do that, but yeah, I guess just like trying to move too fast and break things or whatever the VC model is. Um, and that's, I mean, that's kind of ingrained in their history now is that they can always find funding if they keep growing. Uh, I'm worried that maybe that leads to too much risk or taking on too much risk at some

point. Um, and, uh, that would be, and ultimately that ended up, you know, being explosive. And so that's probably my biggest, uh, bear case there. Yeah. I don't like, I think the likelihood of it is low, but I worry with something like this about a blow up risk with financial companies. It's just like something that maybe we just all have whatever they call it, the PTSD from the great financial crisis. But I don't know. It worries me. My bear case, I think I'll keep it simple. It's trading at 15 times sales, 21 times

gross profit trailing. And I don't think anyone's downloading the application. That's concerning to me, I think growth could slow down a lot. Let's just put in the numbers of what I remember from what the Cash App was growing at. I think SoFi has 2.7 million accounts or members. And that was basically, that's like a month of what the Cash App grows at. So each month, the Cash App is growing a SoFi. So that's concerning. I don't know. That's just hugely concerning to me. I don't know what else to say. All right. More or less interested. Let's wrap things up. Ian, what do you have? Yeah, I'd say I'm slightly more interested. It is an intriguing idea. I think they're hitting it right on the issue. And I think that if they can get members on there, that people will stick around.

That's the big question for me that I was highlighting is that just can they get enough members and grow fast enough and just get enough people on there that it really becomes one of the major financial institutions? because I think there's, there's a risk that they get boxed out here. Um, but I am more interested. I think Anthony Noto has a really, like I said, interesting history and I'm kind of curious to see where he can take this company. Um, but yeah, for me, slightly more interested. Yeah. I like, I like Anthony Noto as well. Um, seems good. And he followed me on Twitter like a few months ago. So I feel inclined to say that he ends up listening. Um, but, uh, I am sorry. I'm going to have to go less interested. And I know there's a lot of people, uh, a lot of listeners that like this company, Brad likes this company who's on, uh, every other

week. And it's just not for me. There's just, and maybe it's just the surface level research that we've done to this point, but there's it's what don't I know that worries me. I'm worried that there's risks that I'm not even aware of. Yeah, that's true. I would say Brad has done some great research uh that actually uh helped us out helped me out at least reading up on it so if you want to learn more about him i definitely follow his sub stack he does a lot of updates on him i think i'm more interested unless ryan did you have anything else or no okay i say i'm more interested just not close to this price if something at 15 times sales or 20 times gross profit you need like that's what you'd pay up for something like the cash app and i brought it up

like 10 times, but there's execution risk here and maybe, you know, the opportunity is there, but at this price, I'd really want to have like, I don't know, gosh, like cut in half from here. I'd maybe get interested just because I say that every time on every stock. Yeah. The thing is there's what I wouldn't be. This is one of those. I think we've said this a lot. I wouldn't be surprised if this was a $50 billion business in 2030 and I'd be some great returns. I mean, the valuation isn't insane if you think they can keep up this growth, but I worry about them keeping up this growth. And that's the risk that I don't think I'm getting adequately paid for, or excuse me, I'm paying too much for that at this price. I'm more interested in the business, definitely

will be following it. But yeah, just a bit concerning on that price there. Hopefully, we got a lot of recommendations on this one. So hopefully, people aren't upset. Hopefully, we brought up some concerns that, you know, you might look into and we're not, I mean, I don't know. Would you guys be surprised if this is like a big business one day? It seems like it's got a lot of opportunity. I don't know. Ian? I could see it happening. Like I said, I think if they do things right, I think this could become one of the major financial institutions of, you know, 20 years from now, but there's a, there's a lot of execution between here and there. Execution. Yeah, for sure. Ryan? Yeah. No, it could, it could certainly be a winner.

Uh, and I could be eating my words in a few years and maybe I'm paying attention to the things that don't matter as much and not focusing on the fact that the group members, triple digit percentages, maybe that's the thing you got to pay attention to. Yeah. Like I look at, yeah, I was saying that the down on stuff, but the number, I mean, they're growing that quickly. If they keep that up, I mean that, that faster growth, they can get a 10 million accounts pretty quickly.

Um, but let's not, uh, get too hard on this. we have a stock for next week and i believe i think it's me it's you did i yeah you took so far i chose so far yeah so it's you all right there's two so one of our listeners recommended 23 and me um that's public i i got an email that said it so i haven't looked but i assume it's public um and then the other one that i was looking into is boohoo group so i'll let you guys kind of pick between those uh ian have you heard of either let's go with 23andme yeah i think i'm gonna go with that one too that's more do it for the listeners that's more exciting 23andme is an exciting company everyone knows about so okay all right then that's it all right well

that's gonna do it for this episode thank you all for listening remember we are not financial advisors anything we say on this show is not formal advice or recommendation ryan and i are general partners at arch capital arch capital clients may hold securities discussed in this podcast thank you all for listening we'll see you next time this family is on the brink of civil war on september 18th mob land the hit original series is back on paramount plus we are the harrigans don't know the net and google us from the underworld of guy ritchie do you want to step I want Conrad dead. Starring Tom Hardy, Pierce Brosnan, and Helen Mirren.

Do I have to do everything myself? You want more? I'll give you more! Mobland, new season hits September 18th on Paramount+.