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SoFi’s Earnings Shine While PayPal & Boeing’s Earnings Look “Meh”

October 27, 20260 comments♥ 0
00:01 SoFi sores, PayPal, stalls, and Boeing's kind of blah? Motley Fool Hidden Gems Investing starts now. Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crow, and today I'm joined by longtime full contributors, Lou Whiteman and Matt Freichael. And, guys, it is the thick of earnings season. So we are going to do mostly earnings. We're going to talk about SOFi.
00:22 We're going to talk about PayPal. In the next segment, we'll do Boeing and a little bit of what's going in the commercial air industry. But we also got a merger or potential merger coming up with Inciccar, we're going to hit with that last. But like I said, at the top here, we're going to start with SOFI because as we're taping right now, shares are up about 16% on most recent quarterly earnings. And Matt, this is one that you follow. I think we've talked about it a few times, and there's been a little bit of back and forth on what's, maybe if this is working, maybe it's not. But looking at this particular quarter, what is the ignore everything else focus on this
00:59 part of the earnings report, you tell any of our listeners or investors in SoFi. I mean, I'd have to go with the 2027 forecast. And I want to take you back kind of to the second quarter report when the stock tanked, even though they beat and beat expectations handily. And it was because they beat Q2 numbers and didn't raise guidance for the rest of the year, which implies the second half of the year isn't going to be great. In the third quarter, not only did we get a full year guidance raise implying a very nice fourth quarter, but The company gave its first 2027 guidance, and it was far better than the market expected. They're expecting 90 cents in earnings per share.
01:37 That would be 48% year-over-year growth based on their current guidance. 27% revenue growth. Great margins. You know, margins are expected to improve. And I'd say the business is working, and the market seems to agree. It's up about 15% as we're recording. Yeah, still down kind of for the year. The thing I'm looking at is cross-sell.
01:56 And cross-sell is woeful. They average 1.56 products per member. It was at 1.47 a year ago. The company calls that accelerating. Average community bank out there says that's pathetic, okay? The average community bank has 2.3 to 3 products per customer. Look, Glass at full is that's an opportunity. If you start cross-selling these customers, you can grow.
02:20 Glass half empty is they haven't done yet, and they continue to kind of use loss leader rates to bring new people in the door, but they can't really cross-sell yet, which is kind of something they need to work on. I think it's a fair statement to say that so-fi, the market kind of has been like, I don't know what to do with this. I don't really know how to value it.
02:40 In one sense, it's this high, fast-growing fintech and the other. It's doing, it sounds so much like a bank. It, like it quacks like a bank. It flaps its wings like a bank, but it's not a bank, right? It's a fintech. And so it seems to be in this weird place, you know, revenue is growing very fast, but, you know, margins are starting to decrease in certain spots. You have a higher concentration of personal loans and student loans versus mortgages.
03:08 It's kind of pulling in a whole bunch of different directions here. Yeah, well, first of all, I push back a little bit on the margins are decreasing part. Personal loans are generally higher margin products than mortgages. The financial service segment, their contribution margin fell. I'm pretty sure that's what you're referring to, technically. that's mainly due to a mix of cheaper products that are really just designed to engage customers. Think of all their crypto tools that they've been rolling out. Like those don't make a ton of money, but their engagement tools.
03:37 The net margin, meaning just on the bottom line, the gap earnings, their gap net margin rose from 14% to 17% over the past year. Their fee revenue, which is, you know, things like their new membership program, that's a high margin part of the business, and that grew 21% sequential. So the margin story, it's looking a little stronger than you might think on the surface. Yeah, and some of that is product mix. And look, we'll see how that works. You're right, Matt. Personal loans are higher margin, higher interest rates. That's a lot of what the loan original growth is. New customers coming in needing a personal loan. Look, the downside here, and again, I don't want to be glass F empty, but I think we just have to put it out is they are adding aggressively into high risk loans, an iffy credit market. They aren't alone here. It could be fine. But yeah, they are get, what margin they are getting, they are getting by bringing new people in the door that they don't,
04:34 that aren't seasoned and giving them a high risk product. So hopefully the economy holds up. Yeah. And it does get to that push pull of product mix, maybe, maybe like to it slightly more risky versus, you know, bread and butter mortgages and stuff like that. Again, getting back to the market really doesn't know what to do with, uh, so far. stock. And so I do want to turn to both of you guys and we'll do it, kind of do it this way. Again, we started with ignore everything else, focus on this. What is the one metric you would say to look at here and based on that, what is the right or appropriate price, I guess you could say, for investors to buy SOFi using that sort of metric? Well, Lou already mentioned
05:19 the crossby ratio. That's the number of products per customers, which is an opportunity and a challenge. But I would say the return on tangible common equity, that's a banking metric. This is a bank at the end of the day. Right now, their return on tangible common equity is about 10%. That's up from 8% a year ago. Management has a long-term target in the 20 to 30% range. And really, a bank earning 20% or more on tangible capital deserves a higher price to book. So right now, SOFI does not deserve that high price to book like they were trading for a little while ago, if we're being honest. So right now, they trade for about 18 times 2027 earnings. Given the growth rate of the business, I'd say 20 to 25 times earnings sounds reasonable, which would be in the $18 to $22 range. That would be an attractive
06:04 valuation to me right now in this uncertain environment. Yeah, that'd be real attractive for a bank. Look, Tyler, I'm going to try and solve the market's dilemma. The Fin side of this fintech looks a lot better than the tech side. The tech platform revenue was down 24%. It's under $100 million in revenue. It's not even on the radar. It's what, six percent of total revenue? That's okay because it is a bank. And to Matt's point, it should be valued by a bank. It's trading it twice the multiple of a lot of decent bank franchises.
06:33 I will concede that it is growing faster and it might deserve a higher multiple than some. However, again, that growth does come with caveats. The question for investors is, how much are you willing to pay as a premium for what is pretty shallow growth for now? Personally, I'd rather wait and see them actually forming relationships and the cross-sell coming out and some of the growth that I can rely on more than just what they're doing now. I want to shift gears really quickly here and talk about PayPal while we're in this segment here. PayPal, a little bit slower growth recently, and I think that's kind of been the theme here. You see a lot of single-digit growth on the revenue, single-digit growth on the net income and a lot of that.
07:14 If I would ask that same question and just being quick here, what does the ignore everything else focus on this takeaway? And I'll do a quick follow-up, and we'll kind of close out on this, is, you know, does this earnings report sort of increase or decrease the chance that PayPal looks to find a buyer? Because there's been a lot of chatter about whether or not PayPal is going to, you know, remain itself or get acquired by somebody. Tier, what's the ignore everything else focus on this? It has to be branded checkout. The company wants you to focus on Buy Now, Now, Pay Later, Debit Cards, Venmo, which are working well,
07:47 but only make up about 20% of gross profit. Branded checkout, meaning the little button you can choose to pay with online, that makes up 80% roughly of PayPal's gross profit. It's the key part of the business. It's growing at 1 to 2% annually for the past four quarters. It's been stuck there. That's what management's focusing on, and I would expect if they're focusing on it to get a little bit more growth there.
08:10 So that's the thing to pay attention to. As far as an acquisition, I mean, the quarter looks pretty good. know, in terms of earnings growth, in terms of things like that. So I would say that the door is still open. I wouldn't be shocked to see an offer at some point, but the case to keep this is a standalone business isn't a bad one. So PayPal could be selective here. Can Brendan, check out the problem is it's usually one of like six choices at checkout, which I think is why it's growing at one to two percent. I don't know how you grow that without giving money away. Look, the metric I'm looking at is also Tyler the, it's going to be related to my answer. Should they sell? The share count
08:47 is down 26% over the last five years. Keep it coming. They bought back over a billion dollars in stock. The dividend yield probably should be higher. It's only 1%. This is an income story. It's not a growth story, period. Should they sell? Yeah, probably. The deal was the right move. The buyer was wrong. I think the ship has sailed for now, but if the economy worsens since the stocks falls, it still makes a ton of sense for a private equity buyer. Probably makes more sense than being public at this point. Somewhere out there, somebody is going to want that giant cash flow that PayPal is throwing off, even if it's not being used to growth. It can go to somewhere. Maybe somebody will buy it. Coming up after the break, we're going to talk about Boeing and kind of maybe
09:26 broadening out on the implications of Boeing's earnings on the commercial airline industry today. I think it's fair to say over the past couple years or so, Boeing's earnings have not exactly been shining beacons of great businesses for investors. There's been lots of writedowns when it comes to various business models and segments that have not exactly performed as expected. And this quarter was better in that regard, but not great. We still saw earnings didn't come up to expectations from Wall Street. There was some more write downs for various businesses. There was some assets, sales. you know, all over there's just kind of problems. And so I want to play a little bit of a, call it an analyst game here,
10:16 but we're going to use what we'll call Blame Pie. Basically, how much of what is going on right now is problems that Boeing is having specifically internally and how much of it is actually outside of their control. So you guys both read the earnings reports. You've been following Boeing for a while. If you really had to assign the blame of why Boeing has been having all these struggles, much of it is on their problem and how much of it is maybe suppliers or just something wholly out of their control right now?
10:43 So first off, the miss is actually worse than it looks because they got a $250 million benefit from the sale of the old Howard Hughes Laboratories to IBM. So without that, it looks even worse. But here's the bottom line. Where does the blame go? Maybe about a third internal, a third to the supply chain and a third to just investor impatience because really a lot of this is our fault. is going to plan. The triple seven is on track, only six years behind schedule. That's a win that it's on
11:14 track because that's revenue. They are ramping the 737. They're just doing it slow. And look, given the recent history, I think being cautious for a ramp is probably a good idea, even if it frustrates investors. And finally, defense for the first time in like two decades is doing great. The biggest misunderstanding standing here now is that this can be quick or that there's going to be some big flag that says it's done. Their debt is still eight to ten times what it was before the 737 crisis and COVID. That will take the better part of this decade to pay it down. And until then, it's going to be a slug. Tyler, to more directly answer your question, I agree with everything Lou said. I'd say it's about two-thirds internal issues and one-third outside of their control. I'd say it's mostly internal
12:00 issues that they're still working through. Lou, I want to just kind of drill down a little bit deeper because you said defense is getting much, much better. Is this from just execution on existing products like it's actually we're seeing better profitability? Or is it like, hey, we won the Fighter Jet Award away from Lockheed and 10, 15 years from now, things are really going to be looking great because the F-35 is a really important contract for Lockheed Martin and would look awfully good on Boeing's revenue statement right now.
12:28 That's a massive win. both symbolically and, as you say, over time. It's not going to be right now, but over time. But no, they are simply executing better. For all that we, I mean, for good reason, given the casualties, the commercial side and their issues got more attention. But the defense side has been just as much of a clown show when it comes to just getting products out the door. Famously, executives went to jail over their tanker contract. The tanker came in billions of dollars and, yes.
12:59 years late, and when they finally delivered one, they forgot to vacuum out the spare parts. So the maiden flight, they had to send it back because it was too clanky because there was just scrap metal in the tank. This company has moved on from there. Sales are actually up. The book to bill is strong. They have a $100 billion plus backlog. This is where execution is really firing on all cylinders. On the commercial side, again, I think they're actually doing well. It's just going to take longer to get to where they need to go. Yeah, I also noticed too, in like the earnings report, they were talking about some of their suppliers, specifically their engines as being a little bit of a, this is one of the things that's throttling on us back. So, you know, there's certainly a conversation to be had of
13:44 how much air belt or how much GE and how much Pratt and Whitney, which is, I guess, is RTX, how much they're going to be able to keep up because their ability to produce is just as important as, you know, Boeing be able to put together airframes. But that does bring us. up another question too. They're a little bit slow in the supply chain, but there's also the buyers of it in as well. And there's been some cracks in the people who are buying, at least in terms of their profitability in terms of the solvency. I know we've seen like oil prices go up, but it's more than just that. I mean, spirits gone through double secret bankruptcy in the past 24 months. JetBlue's, their senior creditors are hiring outside advisors, which, you know, is not
14:28 necessarily the most normal thing that your creditors do when you're doing awesome. It's normally assigned things are looking pretty rough. So we're talking about like an industry that's getting challenged. Is there going to be any possibility that these order books that have been growing and growing because demand has been so massive, maybe it's, we're going to start to finally see a slowdown in that. JetBlue did earnings last night. They say they're fine, nothing to worry about. but 30x net leverage. Their debt is 30 times their earnings. If fuel doesn't ease up, I'll be honest, a pre-packaged bankruptcy makes a ton of sense to
15:05 kind of get out ahead of things. The thing about that, though, is that's not going to really impact supply and demand. If it's a prepack, they'll keep flying. They may dump a couple of aircrafts, but it's not really going to move the margins. They're only like less than a third of the size of Delta anyway. The order books are long-term creatures. They go into the 2030s. I don't think the current environment really, really affects the order books.
15:32 I think it's on the spare part side that you'll really see the current environment affect businesses. And if anything, that works to Boeing and Airbus's favor because it frees up more capacity to get those engines for the new planes in. I don't really think that's what's holding back now. But we need for all the entire sector to probably kind of ease off on the production rates on the spares and just for the sake of the supply chains. And so it might actually be a good relief valve just to see a little turndown on the volumes. Matt, as we're touching on the ripple
16:08 effects here, and I think it's where we can really pull you in is thinking about, you know, the suppliers, maybe some of the airlines as well, what are you seeing as some of the like ripple effects of Boeing maybe slowing down its rate because maybe they're constrained by engines or some of the moves in terms of the commercial airliners. What do you see are some of the ripple effects that you could, you know, as an investor, are going to be keeping an eye on here? Well, for one thing, just to kind of add to what you just said, the JetBlue's bankruptcy, the CEO says it's not happening.
16:38 Their 2031 bonds trade for 42 cents on the dollar. That makes Corrieve situation look good right now. But as far as some ripple effects, pretty low hurdle. Right. Well, true. Weaker airlines. are freeing up used planes, so that could help ease some of the shortages we're seeing in the industry. Higher fuel prices are making the newer fuel-efficient jets a lot more valuable. It's
17:03 an interesting business. I don't know about Lou. I'm not investing in airlines anytime soon. I know you invest in airports, but there are some ripple effects going on in the industry when it comes to all the struggles that some of these airlines are having. You can't exactly go buy a used mart airport off the assembly line or from air cap or anything like that. So yes, I do happen to like to buy airports sometimes in foreign countries. And it's worked out pretty well so far. Well, coming up after the break, we are going to jump into what is going on exactly with Instacart. This episode is brought to you by Google Pixel.
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18:12 Normally when we hear rumors of companies in merger talks, it's often we hear an acquiring is trying to court a target and, and, you know, make a deal happen here. But it looks like it's been the other way around this time when we're talking about Instacart. Because over the weekend, there were parts that Instacart actually approached Uber and DoorDash about a sale rather than the other way around. Now, Instacart, it's currently listed as Maple Bear,
18:37 and one of those strange things worth, the name of the listing is very different from how it does business. But here's the funny thing. It's up 53% this year. It's been public for just over three years. one would assume it wants to be on the market for a while. So what gives here? Why are they in such a rush to maybe go find a buyer for this business?
18:58 Well, yeah, I'm not surprised Instacart wanted this deal. Its revenue growth has been sluggish. I want to say about 11% year every year compared to DoorDash, which is, you know, growing more than twice that rate. DoorDash has arguably been more successful with groceries lately, like at the expanded partnership with Kroger. Amazon has been pushing very heavily into 30-minute grocery. delivery, so has Uber. Instacart still has leverage for the time being. Its valuation is way below
19:27 where it peaked as a private company. But the stock is near recent highs. It has a really strong ad business. And right now, the regulatory environment, it's probably not going to get any more friendly than it is right now for a deal like this. So I'm not surprised that they're kind of in a bit of a hurry to get a deal done. Yeah. The economics of this business are brutal scale is the only thing that works. There's a lot of competitors that have better scale, and DoorDash has a history of using M&A to acquire scale like they did with Deliveroo in Europe. This is a no-brainer, I think, all the way around.
20:04 Yeah, we've seen a lot of consolidation in this industry recently, and not just the United States either. It's been global, where, as you said, DoorDash bought Deliveroo. Uber has been trying to buy delivery hero, but there's always like, well, we've got to sell our operations in one country. and they're doing a lot of horse trading to get this all done here. So if we were to put a pin on it and we can, you know, I think the most recent report was that Instacart was asking for about $19 billion to get this done.
20:33 So as I was just finishing it on the way out here, if the deal gets done with the next 12 months, is Instacart going to be a $19 billion sale? Take the over or the under? For $19 billion, I'd probably take the under slightly. I think a deal gets done, but I think it's slightly less than that. Yeah, I mean, it seems like they haven't gotten the bidding where they wanted if they're only. It sounds like they're already not talking to Uber anymore. They're at what, 15 or so today?
21:01 I'll take the under. Certainly if they're trying to rush to get it done, as you were saying, Matt, with regulators. Probably the under is the safer bet because nothing gets for premium when you're trying to sell in a hurry. Well, it's all the time we have for today. As always, people in the program may have interests in the stocks they talk. about and the Motley Fool may have formal recommendations for our guest, so don't buy our sell stocks based solely like Pierre. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements or sponsored content
21:29 and provide for informational purposes only. To see our full advertising disclosure, please check out our show notes. Thanks for our producer Dan Boyd and the rest of the Motley Fool team. For Lou, Matt and myself, thanks for listening and we'll chat again soon.