SoFi: The Comparison to Silicon Valley Bank Doesn't Add Up

The company has a robust operation that draws little from SVB's questionable business strategies

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Mar 15, 2023
Summary
  • Unlike SVB, SoFi's deposits are insured and limited within the FDIC guidelines.
  • Deposits and other operating metrics are growing at a rapid pace.
  • Two major catalysts could potentially help the company pivot to the green.
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The investing punditry has been buzzing over the collapse of SVB Financial Group's (SIVB, Financial) Silicon Valley Bank and its economic implications. Bank contagion fears have led to a major sell-off in bank stocks, including SoFi Technologies Inc. (SOFI, Financial). While the company continues to execute brilliantly, growing its business despite the headwinds, the stock has fallen over 20% in the past month.

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It has been a series of unfortunate events for the U.S. economy over the past year or so. Geopolitical issues, the post-pandemic supply chain crisis and the Federal Reserve's hawkish stance have sucked life out of the economy. In another whammy, the SVB debacle is already impacting the stock market.

These events are compelling investors to act irrationally, especially toward high-quality businesses such as SoFi. Structural headwinds weighing down the stock are understandable, but linking Silicon Valley Bank's woes to the personal finance company and online bank is unfair as its collapse has nothing on SoFi's long-term growth trajectory.

How is SoFi different from SVB?

Headlines have been ablaze over the past several days with Silicon Valley's unfortunate collapse. To understand the situation better and how SoFi differs from the bank, a small recap would be appropriate.

Before its collapse, Silicon Valley Bank was the 16th-largest commercial bank in the U.S. and was known for financing venture-backed tech and health care companies. As you could imagine, the company benefited immensely from the tech boom in recent years, fueled by low borrowing costs and the pandemic-induced tailwinds. The bank's assets skyrocketed to $220 billion at the end of March last year, a 67.7% increase from the end of 2019. Consequently, SoFi and other banking stocks have seen their share prices dip by more than double-digit margins.

However, amid the hullabaloo, it is important for investors to remain level-headed and not tar all with the same brush. Unlike Silicon Valley Bank, SoFi drives high-quality long-term deposits from its clients. It does not have high cash-burning clients, such as tech companies that always need immediate cash to fund their operations.

On top of that, despite operating in a high interest rate environment, it maintains a healthy spread between what it charges for loans and its funding costs. This is evidenced by its relatively low weighted average cost of capital of 6.2%, which has fallen from 7.7% according to GuruFocus. The chart below shows a WACC competitor comparison, including SoFi and its peers. It is among the top three businesses in the comparison regarding market cap, while its WACC is at the bottom end of the data range.

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Furthermore, SoFi has no assets with Silicon Valley Bank and its deposits are insured by the Federal Deposit Insurance Corp. up to $250,000 per customer and double that amount per joint account. Around 90% of these deposits are within those limits and insured. This is evidenced by its relatively strong Piotroski F-Score of 4 out of 9, which is indicative of a stable business.

SoFi's fundamentals are a peach

SoFi has done incredibly well in growing its business despite macro pressures limiting its trajectory. In contrast to SVB, the company's deposits have been moving upward, growing 46% sequentially in the fourth quarter of 2022 to surpass $7.3 billion. Interestingly, almost 90% of these deposits were from members, which grew their spending by a massive 240% year over year, pointing to the stickiness of its product offerings. Moreover, it delivered a handy earnings and revenue beat despite 73% and 84% drops in student and home loan originations.

Revenue growth on a year-over-year basis is at a spectacular 55% as it moves to achieve net income profitability by the final quarter of 2023.

At the conclusion of 2022, the bank had a borrowing capacity of a whopping $8.4 billion and close to $3 billion in its equity balance. As such, SoFi sees strong momentum heading into 2023. It has close to $200 million in available capacity to fund its loan and essentially meet its liquidity needs. Based on these aspects, the company remains a well-run and significantly safer bet than Silicon Valley Bank.

Takeaway

SoFi is no Silicon Valley Bank, but it continues to be treated unfairly by the stock market. Based on the recent developments, it is safe to assume more volatility, at least in the short term. However, if we look at the bigger picture, the stock remains in an excellent position to recover from its current predicament.

Two important catalysts could result in upward momentum for the stock. The first was the recently released February inflation report, which aligned with expectations. Therefore, a 25 basis point increase is more likely than a 50 basis point hike, which bodes well for bank stocks such as SoFi.

Furthermore, the company recently sued the Biden administration for extending the student loan moratorium in November. The moratorium was extended until June of this year, which has resulted in massive losses for SoFi. If there is a reversal in the order, the company could start bringing in the big bucks from its student loans business.

Analysts at Tipranks assign an $8 price target for SoFi, representing 43% upside from current price levels. If the above catalysts play out, expect the stock to blow past resistance levels to test the $7 to $10 range.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure