Special purpose acquisition companies (SPACs) dominated market news for much of the past 18 months. A recent count shows that since the beginning of last year, 593 SPACs have been listed, versus 225 total from 2010 to 2019. There are plenty of examples of overpromising and underdelivering within the post-merger SPAC world, and the pace of new SPAC activity has dropped off lately. But still, there are a few proving their legitimacy via superb execution rather than hope.
SoFi Technologies (NASDAQ:SOFI) — a consumer- and business-facing financial technology (fintech) disruptor — is one of those rare examples. Here’s why it’s a great investment today.
1. SoFi’s business-to-consumer offering
SoFi (short for Social Finance) is attempting to be the first complete one-stop shop for all things digital banking through its app. On the SoFi platform, consumers can “borrow, save, spend, invest, and protect” all in one place. With half of consumers using more than one bank and 80% of those consumers doing so because of inadequate service, it’s clear to see how this could be a lucrative endeavor if done correctly.
This convenience can be valuable: Cross-selling greatly enhances unit economics for SoFi. For example, SoFi’s money product yields a 34% profit margin, which skyrockets to 80% when combined with a personal loan product. The company spends zero incremental dollars on selling a second or third product to a user, yet enjoys an enhanced consumer lifetime value (LTV).
Thanks partially to the pandemic, demand for these services is quickly on the rise — digital banking penetration rose from 54% to 62%, with the vast majority of those consumers unwilling to go back. There is clearly a long pathway of growth for this company to pursue, and so far, it’s delivering. In the company’s first public quarterly report, it posted 110% membership growth to reach 2.28 million. What’s even more encouraging about this is that the rate of growth has actually accelerated for seven consecutive quarters. This points to real durability to expansion.
SoFi’s financial products specifically saw product growth soar by 273% year over year to eclipse the company’s more mature lending segment in size. Total consumer-facing product sales more than doubled as well.
To deepen the appeal, SoFi recently debuted social investing products as well as a service allowing retail investors to access companies pre-IPO. There are undoubtedly more product innovations in the works for SoFi’s consumers.
2. Galileo, SoFi’s business-to-business offering
SoFi is not just finding business-to-consumer success, but business-to-business as well. SoFi’s Galileo offers fintech companies application programming interfaces (APIs) for core digital banking functionality. Galileo was originally just a partner for SoFi’s consumer-facing products, but the technology was so effective that SoFi decided to buy it outright. That says a lot. Galileo enables companies to build out payment, card, and digital banking products, and this segment is also finding meaningful success.
Last quarter, total Galileo members skyrocketed 130% year over year to reach 70 million. This growth rate compares to 75% in the year-ago period, showing there is real, positive momentum here as well.
Impressively, Galileo serves fintech titans such as Chime and Robinhood. While it’s nice to see fabulous consumer-based success, this business-facing segment ensures SoFi succeeds when fintech as a whole succeeds, not just when its own app does. With fintech somewhat crowded but also poised for continued growth, that’s a strong position to be in.
Importantly, management plans to operate Galileo entirely independently from SoFi, to ensure Galileo can be seen as a pure partner to these companies rather than a partial adversary. Recently, SoFi hired Derek White — a former Google cloud executive — to run Galileo with this in mind.
To get an idea of the appetite for Galileo’s services, in a recent interview SoFi CEO Anthony Noto gave Piper Sandler, he said Galileo’s biggest challenge was saying no to opportunity. Clearly, there is a lot of demand here for the combined entity to enjoy.
3. SoFi is thriving
When combining SoFi’s two primary business segments, revenue and profitability continue to be remarkable. Last quarter, sales rose 151% year over year to $216 million and beat the guidance SoFi offered in its investor presentation by a hefty 12.2%. The organization reiterated its 2021 guidance despite not having $12 million in previously anticipated revenues to recognize from its purchase of Apex clearing.
Impressively, its EBITDA margin turned positive, improving from -48% to 2% year over year. This 2% figure also exceeded the high end of the company’s previous guidance; SoFi is thriving, and doing so profitably.
The company trades for 18.3 times 2021 sales and 67 times 2021 contribution profit based on its most recent guidance — not crazy, based on the success shareholders have enjoyed.
SoFi is a winner
There are plenty of examples of low-quality companies that went public via SPAC, but SoFi is not one of them. The company is clicking on all cylinders with no slowdown in sight. I own SoFi and think investors of all kinds should consider taking a position as well.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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