Chit Chat Stocks - SoFi Technologies (Ticker: SOFI) Not So Deep Dive

Episode Date: July 11, 2023

SoFi Technologies Inc. (SOFI) is a company that offers a range of financial products and services, including lending, investing, and banking solutions, with a focus on leveraging technology to provide innovative and user-friendly financial experiences for its customers. At the end of the month, we will publish an Arch Capital episode that will cover the company: Coupang. Listen closely as Brett and Ryan go through the history, financials, and future prospects of SoFi. Enjoy the show! ****************************** Subscribe to our Substack to receive free show notes and charts that go along with every episode: https://chitchatmoney.substack.com/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Contact us: [e-mail] Mine Safety Disclosures Blog: https://minesafetydisclosures.com/ Timestamps Company Background | (2:05) Industry | (17:32) Management & Ownership | (21:31) Earnings | (26:21) Balance Sheet | (31:52) Valuation | (33:50) Our Analysis | (35:02) 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

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 Not So Deep Dive episode on Chitchat Money. My name is Brett Schaefer, and I'm joined as always by Ryan Henderson. Today, we are talking SoFi Technologies,

otherwise known as just SoFi. I think people are aware of that brand, or at least maybe our younger listeners are. They do a lot of ads. So I think a lot of people are at least aware of that logo, the ocean blue, the dancing ads and all that good stuff. But we'll get into that, their marketing strategy, their growth strategy, all that good stuff on these episodes, which again are the not so deep dive episodes. Every Tuesday, we go through one individual stock, just Ryan and I cover history, business model, ownership, financials, what we think about the stock, whether we're going to research it further, whether we're going to put it on our watch list, blah, blah, blah, all that good stuff, really outsourcing our research process and hopefully

helping you, the listener, at the same time. Side note, or just as a heads up, we say this on every Tuesday episode, we do a newsletter with our show notes and charts that go along with each episode. So if you want to look at that, they'll just have the show notes. If you listen, When you see a chart we referenced or something like that, you can do that. It's free. The link will be in the show notes. Subscribe to that. It really helps with our research, and we think it will help with yours as well.

Ryan, let's get right to it. What does SoFi do? It seems like they say we do everything in consumer finance, right? I think that's a fair description. Yeah, let's go through it. The first line of their annual report says, we are a member-centric one-stop shop for financial services. Now, typically when someone says something like that, I probably roll my eyes because

it feels like a lot of fintechs try to describe themselves as that, but it's probably the most succinct way to describe the business operations for SoFi, especially because the end markets aren't all consumers. People think they kind of resonate, or I think the SoFi name kind of resonates with the consumer market, but they have an enterprise side as well. But today, SoFi is a mix of a consumer finance app, which is probably what most people are familiar with, a bank, which they got their charter through an acquisition last year. I'll talk about that in a sec, and an enterprise software business, essentially. I'll go through each one of these, but I think I should start with how

they actually fund their operations. So the bulk of this business is lending money. And most people in their head probably think, okay, lending, that's pretty simple, but it's hard to lend money if you don't have money. So I think it's helpful to start with where they actually get their money. About 40%, as of today, about 40% of their cash available to lend out is from consumer deposits. I'll start with the overall volume. They have about $20 billion in cash that's available for them to lend. And for anyone that hasn't looked at a financials before, they might describe this as their liquidity, their funding capacity. It's really all the same thing. Yeah. And basically, you want your funding to be as low of cost as possible, essentially.

Well, I mean, you want to keep that in mind if it's too low cost, it's kind of hard to grow. So they've got $20 billion in cash available to lend out. 40% of that, like I said, is from consumer deposits at their SoFi bank. Some of those are kind of mixed. They're not all necessarily high-yield savings account, but the bulk is in that high-yield savings or checkings, which they pay about a 4% annual percentage rate on those. And so that's pretty high. mean anyone that has a bank account knows that you know collecting four percent interest annually on that is is quite good um so that's that's the bulk of it 35 of the available funding is from a credit

warehouse facility whenever i hear the term warehouse facility i think of like a physical warehouse that's not what this is 100 i think of the exact same thing in my head it's just basically i don't know if it's multiple institutions in this case or one but But an institution that's willing to lend SoFi money on kind of a revolving basis, if they want to tap into it, it's $8.5 billion, I think, worth of available funding. I think they're only using about $3.5, if I'm not mistaken. But they have to pay a little bit of a higher interest rate on that relative to what they're paying on consumer deposits. So that's about 6% rate. And those two are the primary funders of any money they're lending out.

And then the last bit or about a quarter of it is equity capital or cash on the balance sheet. This is pretty low cost. I kind of don't even really think about it as part of their lending capacity, but it is. So that's where they get the money to lend. I would say on average, I think the weighted average cost of the money that they are bringing in is about 5%. So just kind of keep that in mind as we talk about the loan book.

So let's talk about the actual lending operation. They officially acquired that bank charter last year. So they were already lending prior to this, but now, and there's a whole bunch of different banking regulations that I'm not completely up to date on, but one, it gave them the opportunity to attract money in the form of lower cost deposits. But I believe this also gives them a greater capacity to hold the loans on their balance sheet, as opposed to securitizing them and selling them to other businesses that are more willing to take the financial risk. So that's helped a little bit, but the lending part, there's three ways that they lend. Well, there's more, but the bulk is personal loans, student loans, and home loans. And the

part i'll mention here is they actually do the servicing side as well so a lot of loan originators aren't actually the servicer um and when i say servicing think of it as the actual distribution and collection of money it's got they they maintain the financial records they they are the central dashboard where whatever yeah it's the dashboard that borrowers are interfacing with not just the originating party i love how sofi describes it sometimes like it's a full stack like this is some tech thing. I'm like, guys, you're just a lot. This is not, it's just lending guys. Yeah. Anyway, on the personal loan side, this is more your higher yield, higher default style loans, high risk, high reward, I guess you could call it. If someone needs to finance a

wedding, they need to finance a family trip, they might apply for a personal loan. On average, these loans bear interest at 13% and they have durations anywhere from two to seven years. um i think given that the rate is so high typically people try to pay these back pretty quick student loans on the other hand are really kind of the opposite they are much lower risk people try to pay these off i mean this is a huge priority for people to pay off i believe if you default on your student loans or if you if you declare personal bankruptcy it does not absolve you of your student loans so it's you know there's certainly an incentive to pay those off. And I could be getting that wrong. Am I, do you know? I think that's correct. But again,

we did not confirm that before the episode, Ryan, just that just seemed to come to your mind. And anyway, it's just like, it's a huge priority for people to pay these for people to pay their student loans back. And I think that's expressed in the default rate. The default rate is really low on these. And really, SoFi is operating in the refinancing space. So it's not necessarily the originations to begin with, but basically if active students or graduates have a certain rate on their loan and they want to try to find a lower cost alternative or maybe extend the duration of that loan, they'll come to SoFi and ask for it. The average interest rate they get on these loans is about 6%. But like I said, much longer duration, much lower delinquency rates. So

it's kind of a more stable operation if you want to call it that. Home loans, pretty standard here. It looks like they just offer mortgages, varying durations. It's really a tiny fraction of their loan book. So it's probably not even worth talking about. But they've been trying to expand into various different kind of lending operations over the last decade. So I suspect that maybe there'll be other lending segments if we ever look back at this kind of five years from now, but those are the big three. They also have credit cards, which is a form of lending, but it's not necessarily, they don't break it down in their lending portfolio. It's more a part of the consumer

finance app. So let's talk about the other two segments. I think they have them named differently. I think they have them like consumer financial services and something else, but really I look at it as the consumer application, the mobile app, I think the website too, and then the enterprise tech. So with the SoFi app, consumers really do get a lot of different products. The big one here is high yield savings accounts, checking accounts. There's an investing platform on there as well. so people can move money around, invest in stocks, ETFs, things like that. They can get a credit card. There's a personal finance management tool.

There's this insurance product, basically directory. The motto they mentioned to consumers here is get your money right. It's meant to be – I guess it competes with the Cash App or Venmo in some ways, but it's more like – It's just a bank. Yeah, it's a bank. It's just a bank. Yeah.

I would say probably competes most with Ally. Yeah. I mean, there's others too. Yeah. I mean, Ally, there's a lot of Chime. It's a neobank. Okay. And then on the enterprise tech side of things, this is comprised really of two businesses.

Galileo is one. And I'll also say that these, they don't really talk that much about Synergies, the management team for SoFi. but these are pretty unrelated to the rest of their operations they're selling well it powers their own stuff so it's basically outsourcing their tech but yeah they were customers to begin with for both of these products um the companies are galileo and technesis if i hope i'm saying that right um but it's like just it's a totally different operation um galileo makes apis that are primarily targeted toward fintech startups so it like and it from what i understand it just helps in in the customer account setup process for robin hood or someone like that galileo is

powering that process with its apis they they have robin hood's a customer wise is a customer chime so far themselves we're customers um actually if you've used any of these apps you might notice some similarity in like the account setup process that's kind of it's cool looking but that's gal leo powering that um now the other segment which they just acquired for 1.1 billion dollars in an all-stock deal is technesis now here's how they describe texas technesis it says technesis's cyberbank platform is strategically critical as a cloud native multi-product extensible modern digital banking core what the hell is that i have just absolutely no idea, honestly, what that means. And I spent not that long, because I don't think

it's that important to the SoFi investment overall, looking at it. And it's really vague. And maybe that's because they offer a lot of different stuff. I think it's similar to Galileo. I think they're consolidating that. But I think the key thing that could help here is it has exposure to Latin America, which there's a lot of fintech startups down there as well that could use these types of services. Yeah, I think it's more for legacy banks. So from what I understand, it's trying to help legacy banks kind of adapt their system to the cloud or their operating systems or different processes that they're running. um sofi says that they use them in some of their tech stack which they keep referring to and they're trying to migrate some of the other workloads to them but like i said it was very vague

not very clear what it does but it's the one thing that's for certain is they are targeting enterprise customers it's business to business so galileo technesis kind of lump them into one there. But like I said, it's not a huge part of the business. History is pretty, I guess, quick. They were founded in 2011 by four Stanford graduates. The goal at the start was to be this platform where students could refinance their loans. And it was originally, I believe, a Stanford pilot program where basically just... So if I built this platform or website and asked a bunch of alumni to extend credit to active Stanford students. It worked. There was like 40 alumni that put up a million dollars in total. And that was kind of the pilot program. It worked.

They raised a whole bunch of money being that they are in Palo Alto. And I imagine those alumni were quite connected. So raised money quickly, expanded into other forms of lending and everything was going pretty well that they were building out the consumer app, building a whole bunch of different functions and products within the app. And then in 2017, the CEO, Mike Cagney, resigned amid sexual assault allegations. And the company brought in Anthony Noto, who I assume Brett's going to talk about here in a little bit. He's kind of, I think, restructured. He's made the operation a little more professional. And shortly after, Anthony Noto had had some, he was the cfo of the nfl for a while so they paid for the naming rights to sofi stadium in

las vegas in 2019 is that are you sure it's las vegas i believe it's los angeles oh is it sorry i was getting mixed up with that uh that roomba looking stadium is it is the la stadium you're right um anyway it's a 20-year deal basically paying 30 million dollars a year for the naming rights so that was kind of a landmark deal i think a lot of people recognize them because of that name i never know typically it's a bad sign but i think for a consumer finance app it's probably not that big of a deal yeah it says total according to this blog post 625 million dollar total deal commitment to the stadium obviously not paying that all at once um and then i guess in 2021 they went public via a d-spack the most important news really here is that after going

the public, first of all, they do spend a lot of money on acquisitions. So kind of keep that in mind. You're going to see a lot of that and often it's stock deals. So you want to keep looking at stuff on a per share basis. But in 2022, last year, they closed on an acquisition of Golden Pacific Bank Corp, which gave them approval for their bank charter. So the real big difference here maybe isn't in the lending operations. I think Golden Pacific Bank Corp might have some regional lending, but they can attract lower cost deposits, which is a huge change in terms of economics for the business if they can really scale that. So that's the basics of the business. It is complicated. It's complex. There's a lot of different operations.

The earnings are even more complex. We'll talk about that too. But basically, they are a neobank. They attract depositors and depositors' money, and they take that money, and they try to earn interest on it. Well, lend it out at a higher rate than they pay out. Yes. They try to earn an interest spread. Yeah. Yep.

All right. Well, I'll hit industry and competition for the three things Ryan mentioned. There's the three categories, acquiring assets. That's what they're competing with. They're competing in convincing people to have them originate their loans. As Ryan mentioned, personal, student loans,

mortgage loans, as they've hinted at, They want to offer all loans over time, and then they compete in powering other fintechs and other banks, Galileo, Technesis, et cetera. So as you can imagine, this is a large industry in acquiring assets, at least I guess right now they're only in the United States. There are $19 trillion in total bank deposits. What do they have, Ryan? Like 10 billion.

So just a small little minnow here in a giant pond. And I could really go more granular here and talk about investing brokerage accounts, crypto, but I think listeners really get the picture. There's a large market opportunity here. I don't think any concerns around the size, it's more of the competition. But in acquiring assets from consumers or having a company manage it for them, there are endless competitors. You have the big legacy banks that everyone's aware of.

have other neobanks like chime we mentioned plenty of others um like personally for us we for our like savings we hold basically i think ryan correct me if this isn't for you we hold all our excess savings in our schwab accounts um outside of the stuff that we have invested in our limited partnership and so that's a competitor because it's stuff that's not at account, a SoFi account. There's direct treasury investment options. The list really goes on and on and on. SoFi's goal through their marketing strategy, through all the different touch points they have with their consumer acquisition costs is to convince people to park their money in a SoFi account. I think the biggest thing is that they can offer higher interest rates than a lot

of the competitors out there. We've talked about them with Ally before. Who did we talk about that with Jacob Franklin about a year ago. And it's similar where no bank branches, pretty good cost of deposits, or excuse me, like you can offer over 4% right now interest to your customers. And that's a pretty big advantage versus something like Bank of America. Making loans, again, same side of the, or a different side of the same coin. It is a ginormous market in the United States, estimated to be $17 trillion of consumer loans outstanding.

You know, SoFi is competing with them against everyone else that makes loans. You have banks, basically every other financial institution. And then if we go to technology solutions, they're competing with a lot of SaaS companies. I think a little less competition here. It's not as saturated, but you have companies like Marketa for card issuing. You have Encino, which is a big one for legacy banks. I don't have any insights on this market, but it's not tiny, but it's definitely not as big as the consumer loan or the consumer financial services industry. Yeah, the thing I'll talk about here, especially with the APIs model, if you're targeting a lot of the fintech startups, there's going to be some cyclicality with markets.

So, you know, the Robinhood account onboarding, for example, we saw what happened to Robinhood accounts over the last kind of year. They're going to have some ties to that. So it's not, it's not like a necessarily, unless I'm wrong, I'm pretty sure it's not a subscription revenue basis. They're getting paid on API usage. Oh yeah, for sure. For sure.

Yeah. And that definitely checked it out. We'll have charts of that in the newsletter for kind of tracking the technology they do give, you know, as we said, it's kind of hard to judge how big that market is or really how important this is going to be to the business over time, but they do give very good KPIs on that segment, which we'll make sure to include in the newsletter. Let me talk about management ownership. As Ryan mentioned, the CEO is Anthony Noto. He's had a very interesting career. He's pretty established across the tech and financial realm, which I guess is pretty good. He was the

CFO of the National Football League for a couple of years. He became a partner at Goldman Sachs, who he's worked at for a long time. And then he worked as the CFO and COO of Twitter for a time. I don't know. It's kind of a mixed bag on the Twitter part. As we all know, we've talked about and everyone really knows the history of the Twitter executive teams. And then he became the CEO of SoFi in 2018, according to his LinkedIn. If you read the proxy, it can be a little bit confusing because of the social capital aspect, which I guess I should mention that this was a social capital, Chamath Palayapatiya SPAC, which can turn off a lot of people, including ourselves. But according to Proxy's statement, which I think is correct, I know sometimes with these SPACs,

they might be like shell companies that own stuff. I didn't see them having a large stake anymore, which is, I think, a highlight for me. If we look at executive compensation, we'll keep it simple. Say it with me. They have base salaries, annual bonuses, and long-term equity awards. The most important thing for us when we look at these, It's not really the size of the bonuses, but it's more of what are they getting incentivized to target. And for them, they are targeting adjusted net revenue, adjusted EBITDA, net promoter scores, new member growth, and new product targets.

What do you think of these incentives? I mean, herein lies the difficulty. it's a software business and a bank those two different operations should have different incentives because

a bank can grow revenue as fast as it wants and well somewhat they can just borrow an unlimited amount and just lend out poorly remember what John Maxwell said about

a uh what was it like they're not their capital's unconstrained so they have to like limit their own growth basically i mean they have to lend rationally if you grow revenue i mean you can you can grow revenue really fast and do it in a stupid way so i just worry that maybe there's that risk and then i just need to i mean that's just i don't know it's not it's not it's not I feel like they should do a book value for the financials business and then separate out some KPIs that matter for the technology side and make them two or seven. I guess you looked at the proxy and I didn't, but maybe they have different incentives for different managers. I think they said that, but I didn't read that.

And they said they can change it, but those are the general ones for executive compensation. I'm sure the head of Galileo or whatever the technology side of thing does get- Isn't getting paid on new loans? I would hope not, but I think in the general sense, we're talking about who's running this whole thing. I don't necessarily like these. I mean, I like new members and new products as a good target, right? But I also worry that when they have those targets, that incentivizes them to spend a

lot of money, burn it, not be profitable. But hey, we hit these new member targets. Congratulations, you're still not making any money. Also, I'll just add that there's a lot of amortization on Galileo and Technesis, which they spent more than $2 billion to acquire. And that just gets adjusted out. So, yeah, I don't like proxies where it incentivizes acquiring, especially if paid on the expenses on the acquisition. don't count. Yeah. Yeah. And then if we look at the ownership stakes, Noto has a, I'll have the list in the newsletter, pretty simple. I mean, Noto owns 1.9% of this thing, but a lot of it

is in the form of options or equivalents. He and others were given extremely, as we might quote unquote say, healthy options packages when SoFi went public. I think we can give them probably a pass for now, but I would maybe look to track whether this continues for these outsized pay packages and stock formats because I would track over time because if you get major share dilution from these insiders, it's going to hurt by definition, long-term growth and per share fundamentals. So yeah, there's not really any outside shareholder except for Vanguard, which doesn't count. All right, Ryan, let's hit earnings. It's a tough one because they're not really profitable yet. But what did you see here? I will say, we'll note, we'll have a good

chart in the newsletter of book value per share kind of tracking as they've gotten public. Yeah. Like I kind of said earlier, it's a really awkward company to look at on an earnings basis because it's basically a bank and a software business put together. And those two industries have very different ways of reporting. They have very different metrics that matter. So it's kind of hard to look at it on a consolidated basis. I wish they would just i mean they do they do break out the segments but i wish they were profitable yeah yeah because it just makes it tough to kind of assume what the margins would look like and you don't know where i guess some of the overhead or the operating costs are focused and stuff like

that so i don't know it's just tough to look at sometimes but they finished the first quarter with 5.7 million members which is up 46 percent year over year they've done a really good job growing members and they've also grown deposits quickly. So $10 billion in deposits this quarter, that's up 37% quarter over quarter. Are you sure? I thought they grew it by 2.7 billion, right? Or would that be 37%? Yeah, it was. Okay. Yeah. Yeah. But 2.7 billion to over 10 billion, right? Yeah. I mean, it's- That's very impressive. It's coming off of, I guess there's two things here. It's maybe coming off of a low base. They be paying they might be paying a lot to kind of acquire customers early but also they offer 4.2

i think annual percentage yield on high their savings accounts right now big banks offer like one percent so and their personal loans are over ten percent in the loss ratios like don't they say that the the loss okay the numbers they talk about the commerce ball but the losses they're They're at 4% to 5% or something. Again, we're not going to go through the numbers in the audio here, but there's a lot of room from that 4% to the interest rate they charge on their personal loans. Yeah, it's a little tighter of a spread on the student loans and just the blended interest rate they're earning. But I guess the point here is that right now it's a very opportune time for them to grow members because there's such a big gap between what the legacy banks can offer on savings rates and what they can. We're seeing it with Ally Financial too.

They saw a record inflow of deposit customers. So if you're kind of one of these neobanks and you don't have to pay for the overhead expenses of a brick and mortar or a traditional like real infrastructure, this should be a great time for attracting new depositors. Manhattan or San Francisco office space, all that stuff. So good growth there. Those are two – I mean, the deposit number is a huge number to track. I'll mention revenue, but like I said, revenue can grow really fast at a bank and that's not always a good sign, but they reported 43% growth in revenue this quarter on a full year basis.

So last year they generated $1.6 billion in revenue. That's kind of just to give some context on the size, but it's really different margin mix between lending revenue, software. Again, revenue on a bank does not really matter. Yeah. If you know for sure that management's lending the best they know how, then yeah. If you know for sure that the loans are good quality, then you're fine, but no one knows that for sure. I guess the other thing I'll say here is they're losing money pretty much any way you slice it. They give an adjusted EBITDA number, but like I said, that doesn't matter. They do issue a lot

stock-based compensation. If you look at it on adjusted EBITDA, but you add back the stock-based comp, they're kind of breakeven, but really that's excluding a lot of important expenses. So I think any way you slice it, they're operating at a loss, but it's moving in the right direction. So they are heading more towards profitability. They claimed last year a 10% adjusted EBITDA margin, I think there's probably a scenario where they can get to maybe like true 10% plus level of profitability. But again, margin isn't really the big deal here for a bank, right? The technology side, sure. But again, yeah, like the spread is what matters and your loan performance. Yeah, but they're also earning like commission revenue on the

consumer app and suffer. Yeah. I guess it's really tough. It's really tough. They do claim though that they're on track to gap profitability by the end of this year. So I think that's a big thing for investors to hold them to. Yeah, I agree. I don't know. It's really kind of tough to evaluate the earnings. So I'll leave it at that. If the bank grows, margins are great because for a neobank, especially like there aren't a whole lot of costs. People give you money and you make more money with it. So margins should be solid. Incremental margins should be strong. Yeah. When I look at the balance sheet, I was going to go through some of it, but I think it's

maybe better to simplify it. Balance sheet for a bank can get complex. So there's really two things that matter. Where do they get their money and what do they do with it? For SoFi, we talked about the funding at the start, their weighted average interest rate for all the money come in is about 5%. More and more of that is coming from deposits. So it's going to, unless interest rates really continue to skyrocket, I think it's going to be probably close to the 4% ballpark. Yeah. You could see if, yeah, it depends on what the Fed does. And then on the lending side of things, which is the asset side of a bank's balance sheet, SoFi holds about $16 billion worth of loans. $10 billion of that is personal loans. $5 billion of

that is student loans, but we should expect probably student loans to kind of rebound here with the moratorium ending. Brett's going to talk about that in a second. And then home loans is just tiny. Keep in mind, demand kind of just shriveled away after the recent spike in interest rates for mortgages, not to mention SoFi is just not really a big player in the mortgage market. But the average rate they earn on their loans is a little over 8%. So you can kind of just, If we just use round numbers here, the deposits or the money coming in is moving towards 4%, generate 8% interest on their loans. Clearly, the economics on that are pretty good.

Right, it's 3%. Yep. And you got to factor in, okay, what are their loan loss ratios? They'll give that out. They have to every quarter. They'll give a lot of KPIs around that as well. How does it scale versus their overhead? And are they growing this loan size?

Because if you have $10 billion in loans earning that 3% spread versus $100 billion, and that's why the deposit growth is big, because as the deposits grow, it gives them that low cost. They only have to pay 4% versus that warehouse facility at 6% to expand this loan base and maybe even get that spread wider over time. If we look at valuation, there's going to be a lot of charts in the newsletter, but I'll keep it simple here. I really struggled to find the right ratios to use here.

That's why I mentioned financials plus software plus whatever it is. I mean, you want to look at book value per share here. And they're not profitable right now, so we can't use really a price to earnings ratio basis, which is also important for a financials company. But I will give you this. Today, if we look at their permanent equity capital, which again, I think I'm going to use that for book value. Again, there's a couple of different ways you can slice it. they have a little bit complicated on the liabilities and equity side of things. They have some preferred stock. We don't need to get into it here. I'll have a chart of their

permanent equity capital per share for the newsletter. But if you look at their share price today, $8.18 versus their permanent equity capital per share at the end of last quarter of $6.59, their price to book is 1.24. So it's a little high, but it's pricing in some growth. And, you know, I think the investors are betting that price book value for sure is going to grow. And there's, you know, still value there in that technology segment, which is not going to be, it's going to be very asset light. All right. And it's 11th, Ryan. What do you think?

I forgot to download the app, but everyone says it's revolutionary. I downloaded the app a year ago. It's probably changed a lot since. Was it easy to use? Yeah. i mean these that's i feel like the thing about these is that's attractive is they're just so intuitive compared to some of the old banks my bank of america app crashes every time i uh open it so yeah um no i think the app is great for consumers especially now with the high yield

savings account like four four and a quarter percent you're not going to get much better or anywhere else. So I think product-wise, everything looks great. Yeah. I'd say so as well. Like, look, funny enough, a friend I was talking with, we're talking about his personal finances basically. And I was like, where do you pay your savings? And he's like, I use SoFi. And I knew we were about to do this episode. And I was like, well, why'd you choose SoFi? He said didn't know why but he chose them and i was like well i guess maybe that marketing worked you know they're spreading the marketing he watches sports there there's the sports ads the ads constantly on these sporting things um but i do worry over the long term that the brand here is really not

differentiated like what do you think of when you hear sofi i i think of student loans i guess but i just think of a finance app there's a lot of those i mean clearly the growth has been strong the growth in depositors and members speaks for itself but that's because they're spending a lot on marketing i think right there yeah they're spending a ton on marketing and they're trying to be aggressive on the interest spreads which is working but we'll see maybe the lifetime value these customers is really high. American Express uses a lot of expenses to acquire members and they have very attractive unit economics over the long-term, but we'll see if SoFi can do something similar. I guess my worry, and I have this with Ally too, is they're attracting a lot more

deposits when they have these really high yield savings rates. If they ever have to pull back on those savings rates to kind of soften the spread, are their customers going to be fickle then too? Are they a higher churn demographic than what the big legacy banks have, or is it very similar? Yeah, it's tough to know. I guess we will find out. Especially with the Apple account, if you've got SoFi on there- Apple, what do you mean?

They've got the Apple savings account now. Apple savings account, yeah. That pays 4%. It's like, I don't know. So it's pretty easy to transfer compared to, say, 40 years ago. It's pretty easy to transfer your savings from your SoFi account to that Apple savings account if you actually wanted to. Yeah, I don't know. I guess, I mean, I haven't switched my money out of my bank, and my bank sucks.

You are at literally the worst bank, maybe, in the country. No, I don't know about that. But maybe it's just so annoying to switch that people don't want to do it. So I think they're probably pretty sticky customers. Let's talk future growth opportunities. I guess you have probably the most important one in the short term. What about, do you want to talk home loans? They bought a home loan business.

I mean, they said, you know, once that market unfreezes, they're going to go after that. I mean, that's definitely future growth, but maybe it's just home market's going to- everyone's going to, I don't know. Everyone's going to benefit. I just think like with, I don't know. Are there lending models that much better than everyone else?

I think their theory is that they're going to have the consumer side of things. But as we've seen when looking at Ally, when we mentioned Ally, because we own it, it's something kind of similar to SoFi is they claim, and they've had a little bit of success moving into credit cards, home loans,

whatever. but their bread and butter is car loans and the majority of their loan book is still car loans and like just because they offer home loans doesn't mean people are going to take it up i know i mean they could offer any sort of lending product and if they offer something that is like low enough they'll attract a lot of customers i would be more concerned i think if home loans started growing really quickly um but i don't know it's just so boring to like all right they might start writing more loans for well i think home loans would be good home loans would be good for them if the market unfreezes and they're able to grow that because it's such a large market

um if they grow their deposit base you know that the spread will be pretty consistent people pay those back obviously excluding the great financial crisis um generally you know pretty good rates on that and they basically if you're paying four percent right now the lending is at what six to seven percent like that's not bad but again it's not sexy yeah it's not sexy and i don't know i mean i guess they're in a better position than a lot of the companies that have loans mortgages already on the balance sheet that are yielding like four percent because they're kind of underwater right now with where interest rates are at so they'd be in a better position but i don't know it's hyper competitive what's gonna like draw them to that just like just because

you're on so i don't know are people just gonna get home loans from sofi because they like have a high yield savings account with them maybe maybe um all right let me move to mine and as the the one that is materially there's less ambiguity here it's definitely going to help them is the the return of student loan refinancing and origination. SoFi is a big refinancer of student loans. That was the original product, as Ryan talked about in the history. However, as everyone probably knows in the United States over the last few years, the government has put the famous moratorium on student loan payments. This has hurt SoFi's ability to grow the segment, as people are probably well aware of, when people don't have to pay back their student loans. Well, the lender of

student loans and the refinancer is not going to do as well. Here's a quote from the Q1 2023 press release. Quote, first quarter student loan volume of over $525 million was down more than 50% from the average pre-pandemic volume as the moratorium on federal student loan payments continues to weigh on the business. The moratorium, I think, I'd say fairly confident this one is going to end on september 1st um they can always extend it they have been extending it but this one seems like maybe it's a boy who cried wolf situation this one seems like it's going to be legit going to finally start up again so that'll be a big boost for them over the next couple years i think yes my thing that i'm thinking about here is like are a lot of students

going to start refinancing now though with given where what what's happened to rates compared to when the moratorium first went into place i listened to their conference uh the cfo did a conference for morgan stanley and he basically said maybe they're not going to be i mean they're obviously not going to be coming for lower rates because they're not going to find them but they might be trying to extend the duration so that's i think i think there will be a market i mean it's a big market i think there'll be a market for them there there's definitely gonna be more more lending activity than when people don't have to pay them back that's for sure so it should grow um all right let's wrap things up with highlights and lowlights ryan what do you think what do you

like about this business what do you don't like got about 10 minutes left yeah um okay they're they're on the right side of the innovators dilemma just i mean they don't have to have the overhead costs of traditional brick and mortar banking which allows them to pass through that cost savings. We already talked about that, but it is, I mean, it's a true advantage and it gives them a lot of room to have kind of attract more members than the traditional bank. And we're seeing that. The product, like the consumer app, it's great. If they continue to scale fast and they're smart about their lending, I mean, the economics are there. I think that's pretty obvious. Yeah, it's a bank gets bigger and the lending spread is fine, then you're going to make

money. Yeah, the lowlights for me though, so they haven't been selling all their, well, they haven't been selling really any of their loans lately. Typically what they'll do for anyone that doesn't know is either they'll choose to keep the loans on the balance sheet themselves if they think they're going to generate a good return, even accounting for the delinquencies, or they'll securitize them and, or they'll just sell them to someone else who wants to take on the risk. Sort of like Block does it. Yeah. Some of those quasi banks do it. Yeah. Yeah. They haven't been selling them. And so there's a

couple of ways to look at this. The CFO says, basically, we're not getting the bids we want. we think they're going to generate better returns than what the buyers do. So we keep them on our balance sheet, but the skeptic, which I'm not necessarily in this camp, I don't really know what to think, would say the buyers aren't picking up SoFi's loans because they don't think they're worth what SoFi says they're worth. Yeah. It's interesting. I would much rather than just to get rid of this third-party stuff. It just gets people all up in a tizzy. And just, if you're going to be a bank,

hold on the balance sheet. Yeah, exactly. I guess the only, some of the other things, one negative about being a bank is that you're regulated like one. This comes with a lot of regulatory capital constraints. If you compare the 10K from this year to the 10K from last year,

there's about 30, 40 additional pages of banking regulation rules. I think that's going to help them, though, keep them out of crypto, keep them out of a lot of stuff that I think it'll keep them from doing dumb stuff. I hope. I agree, but at the same time, it's harder to grow at the rate they might want. You can't, if things get, if there's some precarious financial position for the country, the Fed, or maybe it's not the Fed, whatever the governing body, they can say, you're not

buying back any shares, even if it's the right time to do it. Or you're not issuing cash or you have to hold more money on your balance sheet. You can't return it to shareholders, that kind of thing. It just, I think, puts a cap to maybe some of the growth, but at the same time, kind of a double-edged sword here where it helps you over a lot of the other neobanks by, I think, preventing you from doing dumb stuff. I guess the only other thing, and I mentioned John Maxwell. I met John Maxfield earlier. He mentioned that one of the biggest risks he's identified, and he's looked at a lot of banks in his life, one of the biggest tells that something's going to go wrong is out-of-market lending. If they start to really push volume

on a new lending market, I would be concerned. Now, I'm not really that worried about the home loans because they haven't been... If they were accelerating home loans at a time when everyone else is pulling back, maybe that'd be an issue, but that hasn't been the case. So I haven't seen that yet, but it's, I guess just something to monitor because I don't know, fast growing financials scare me. I mean, personal loans are also a little scary. I will, right? Because they are going to be, it's easier to make a lot of mistakes in personal loans because you're charging higher interest rates. Yeah. And the point is there's going to be higher losses, but the variability on that it's like look these could perform pretty well but these also perform

absolutely horribly so yeah now the good thing is they've been doing it for a while yeah it's true that's true i mean so far that concern hasn't materialized but it is there and i see no reason why it will it's just for a newer financials company you worry about this type of stuff and that's kind of the things you know i'm not saying it's not a reason to not own this thing but it's something you should be tracking if you own this thing My highlights, same sort of thing, like short-term student loan unfreezing, and then I think unfreezing of the housing market will also help them. You know, the goal is to grow the loan book.

I mean, and then the flip side of that coin is that we have growing depositors, really great. They offer the strong interest rates. I mean, if they keep growing deposits, $2 billion a quarter, look, that's just a lot of capacity to expand the loan book. And they're going after markets that hopefully they can reconnect with the refinancing, all that stuff. I mean, it should work really, really well.

Lowlights, we talked about the growth through acquisitions to kind of scare me when people do this or companies do this. Why do they need to move so quickly? Are we buying growth here and not really worrying about creating per share value for shareholders? I wonder why they don't build these things in-house. I think the technology acquisitions are smart. Acquiring the banking license, essentially smart. But I do not get the acquisitions into the financial services and lending side of things.

can't you just start that yourself? It doesn't make sense. It's like buying after pay is square. Just create your own buy now, pay later product. History of unprofitability as a financial stock, don't really get. And then, like I said before, I struggle to get around a competitive advantage. But on the flip side of things, I think if you're bullish here, you could say, look, if you believe that they're going to continue growing and they have a minimal competitive advantage today, it's one where the moat can expand significantly over the next decade. And that could lead to strong fundamental growth plus multiple expansion as people get more and more confident in the market. And you're kind of earlier than everyone else on being confident in this expanded competitive advantage.

Let's wrap things up with bull case, bear case. Brian, I think these are pretty simple. It's like the bull case is loans perform fine and they keep growing depositors or members, really. And then bear cases, they're not profitable because the loans are unprofitable. Yeah, I agree. I'm not going to do the math on it because it's kind of hard to guess any sort of earnings or profitability figure where they're at right now. But yeah, like you said, they are growing really quickly. There's a lot to like here. I mean, the product itself is growing fast. If those

are sticky customers, and SoFi continues to lend well, then you've got a very good business. So, basically, I think if they continue to do what they're doing, they should be all right, and this should be a good investment. Yeah. All right. More or less interested as we wrap up. I don't know. I don't own a lot of financials, and those that I do have been doing what they're doing for a long time, or at least on the lending side. So SoFi's fast-growing financials kind of scare me, and that's what it feels like SoFi is. There's certainly upside here if the execution continues and there's no big risk on the loans, but I don't know. Doesn't it feel like they could miss something, especially if they enter a new market, or there could be some time bomb in their loans that they don't see? 100%. I'm in the same boat. Very interesting growth here.

it's something I want to keep track of. I want to keep track, put it on the watch list, but this is one that's going to pop up time and time again, because so many people like it. I'm not interested though, until they have a longer track record of profitability, I'd maybe say that's five years. I have a higher bar for financials companies. At this point, we do own Ally. So we've mentioned that before. So we're a little biased, obviously, because we do like that company. But I asked myself at this price, why would I own SoFi over Ally Financial and American Express, two companies with longer track records of succeeding through market cycles? The other thing that's maybe worth talking about here is they are one of those companies that sit

between industries where it's like, okay, do the consumer, do the FinTech analysts pick this up? Do the banking analysts pick this up? It's really hard to analyze the earnings because it's a bank and a software company. And so I think if you're willing to do the digging and you can actually get a good grasp on what you think they could earn on a normalized basis, there's a lot of opportunity here. Yep. All right. That's a good way to wrap things up. Next week, we're going to be talking about Pinterest as we continue, as I forgot to mention, our Fallen Angels theme for the month. Remember, you can subscribe to the newsletter. We'll have all the info for the show notes, charts, blah, blah, blah.

give us a review on apple podcasts or spotify best way to help the show thank you everyone for listening we are not financial advisors anything we say on the show is not formal advice or recommendation we are general partners at arch capital and clients may hold securities discussed in this podcast thank you everyone again we'll see you next week for covering pinterest uh i forgot i don't know how to lead out here goodbye everyone Thank you for watching!