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SUMMARY
Parkev Tatevosian, CFA, analyzes SoFi's latest quarterly earnings, focusing on the company's decision to retain a larger share of originated loans on its own balance sheet. The discussion centers on investor concerns about increased risk and the resulting decline in SoFi's stock price.
MAIN POINTS
- SoFi reported a strong quarter in its lending segment with record loan originations and revenue.
- The majority of new loans were kept on SoFi's balance sheet, increasing the company's risk exposure.
- Recent events in the software sector and questions about AI's impact have raised concerns in the private lending industry.
- Investors repriced SoFi as a traditional bank rather than a tech company due to its increased focus on holding loans.
- The intrinsic value estimate for SoFi shares was reduced from $18 to $15 due to higher risk assumptions.
- Skepticism remains about management's explanation for the shift, and further evidence is needed to confirm continued third-party demand.
DETAILED ANALYSIS
SoFi Technologies reported a record quarter for its lending segment, achieving $629 million in revenue and $12.2 billion in loan originations, an increase of $1.7 billion from the previous quarter. However, a significant portion—approximately $9.2 billion—of these loans were retained on SoFi's own balance sheet rather than being sold to third-party lenders through its loan platform business. This strategic shift means SoFi assumes greater long-term risk, as it is now more exposed to potential defaults and must wait for revenue to accrue over the life of the loans, rather than receiving immediate fees from originating loans for others.
Historically, strong third-party demand for these types of loans has allowed fintech companies like SoFi and Upstart to offload risk and generate upfront income. However, recent volatility in software stocks and uncertainty about the effects of artificial intelligence on the industry have made investors more cautious about private credit markets. As a result, SoFi's decision to retain more loans was met with skepticism, prompting a sharp decline in its stock price—over 13% on the day of the earnings announcement.
This change in business mix led investors to revalue SoFi more like a traditional bank, which typically holds loans and faces greater regulatory and credit risk, rather than as a high-growth technology firm. In response, Parkev Tatevosian adjusted his discounted cash flow model by increasing SoFi's beta from 2.25 to 2.45, reflecting higher perceived risk. This adjustment reduced his estimate of SoFi's intrinsic value per share from $18 to $15.
Despite management's assurances that the move was strategic rather than a response to declining third-party demand, market participants remain unconvinced and are seeking further validation from industry peers before regaining confidence.
LINKS
- YouTube channel membership for exclusive perks and access to spreadsheets.
- Special offer for The Motley Fool Stock Advisor.
- Parkev Tatevosian's book on evaluating publicly traded companies.
- Fiscal.ai investment research platform with a discount for viewers.
- Subscription link for Parkev Tatevosian's free monthly newsletter on Substack.