Fintech

SoFi: Rising Longer Is An Advantage, Along With Fintech Diversification (NASDAQ:SOFI)

Published

8 months ago

18 May, 2024

Dilok Klaisataporn/iStock via Getty Images

We have already covered SoFi Technologies (NASDAQ:SOFI) in February 2024, discussing why we maintained our Buy rating, with the online bank likely to continue generating excellent results as management initiated the growth trend for the credit/technology segment.

Combined with the growth in bank deposits, the contribution to lower cost financing, the promising turnaround in its GAAP profitability and the decline in the share price, we had maintained our Buy rating then.

Since then, SOFI has unfortunately retreated another -13.1%, well underperforming the broader market at -2.5%. Nonetheless, we maintain our Buy rating, thanks to promising top-line and bottom-line growth as management implements dual growth as both an online bank and a fintech.

At the same time, investors should also temper their near-term expectations, with the stock likely to move sideways until the company achieves substantial GAAP EPS profitability and the credit/technology segment emerges as the top/bottom line driver .

SOFI’s investment thesis remains strong, although the market likely needs some convincing

For now, SOFI reported a double FQ1’24 earnings forecast, with revenues of $580.64 million (-2.1% QoQ/ +26.3% YoY) and an adjusted EBITDA of $144.38 million (-20.4% QoQ/ +89.4% YoY), implying rich adjusted EBITDA margins of 24, 8% (-5.6 QoQ points/ +8.4 YoY).

Much of the top-line and bottom-line benefits are attributed to the robust growth seen in the online bank’s net interest margin to $402.71 million (+3.3% QoQ/+70.6% YoY) and in net interest margins at 5.91% (-0.11 quarterly points/+ 0.44 on an annual basis).

With interest rates still high, it is no surprise that management has been able to generate excellent spreads from its members’ savings balances with an annual percentage yield of 4.60%, while the deposit base rises to $21.6 billion (+16.3% QoQ / +116% YoY).

SOFI’s growing Fintech segment

SOFI

At the same time, driven by growth in SOFI membership and increased cross-selling/products sold in the financial services and lending segment, it reported accelerating non-interest income of $242.27 million quarter-on-quarter in the first quarter of 2024 (+7.3% on a quarterly basis / +2.5% on an annual basis).

More importantly, the Financial Services/Technology Platforms segment also comprises a growing share of its revenues, accounting for 42% in Q1 2024 (+2 points QoQ/ +9 YoY), naturally diversifying the revenue stream, being “on track to finish 2024.” with a revenue mix close to 50:50.”

SOFI default rates

In search of the Alpha

After eight consecutive quarters of increasing loan delinquencies, it appears that the situation has started to moderate for SOFI as well, with a decline in “cumulative fair value adjustments” of 3.9% (-0.4 quarterly points/+0.6 on an annual basis) to $856.45 million in the first quarter. 24 (-10.9% on a quarterly basis/ +55.3% on an annual basis).

With the US job market still robust, it appears that consumers remain sufficiently liquid, further aided by the borrower complex Weighted average issue FICO of 750 in March 2024.

This also explains why SOFI moderately increased its guidance for fiscal 2024, with financial services net revenue growth of at least +75% y-o-y and technology platform growth of +20% y-o-y in the fiscal year 2024, compared to the original mixed guidance of +50% y-o-y. for the overall technology platforms and financial services segment.

This is in addition to improved financial guidance for fiscal 2024, with higher adj EBITDA of $595 million (+37.8% YoY), adj EBITDA margins of 24.6% (+4.3 points YoY) and GAAP EPS of $0.08 (+122.2% YoY), compared to the original forecast of $585 million (+35.5% YoY), 24.5% (+4.2 points YoY) and $0, 07 (+119.4% YoY), respectively.

SOFI 2Y stock price

TradingView

Despite this, SOFI has already lost much of its 2024 gains, trading below its 50/100/200-day moving averages and vastly underperforming the broader market.

Future consensus estimates

TIKR terminal

With minimal adj EPS profitability, for now we’ll look at SOFI’s adj EBITDA. Based on enterprise value of $6.14 billion at the time of this writing and adjusted EBITDA of $500.41 million generated over the course of LTM (+137.9% sequential) and consensus estimates of above, it appears the stock is trading at a LTM EV/EBITDA of 12.26. x and FWD EV/EBITDA of 8.57x.

Comparing SOFI’s FWD Price/Sales of 3.06x and FWD EV/EBITDA of 8.57x to its fintech/lending/digital wallet competitors, such as Block (m2) at 1.75x/ 15.44x, PayPal (PYPL) at 2.06x/ 10.35x, Upstart (UPST) at 4.14x/ NA and Affirm (AFRM) respectively at 4.32x/NA, it is clear that the former has been discounted here.

This is primarily because SOFI is expected to generate impressive top-line and bottom-line expansion at a CAGR of +16.7%/+39.2% through fiscal 2026, building on historical growth of +43 %/+278% between fiscal 2021 and fiscal 2023, respectively.

SOFI numbers have also accelerated significantly, when compared to the forecast growth of SQ at +11.8%/+35.1%, PYPL at +7.7%/-1.5%, UPST at +19.1 %/NA and AFRM at +26.6%/NA over the same time period respectively.

We believe SOFIs can continue to enjoy robust profit tailwinds from higher interest rates for a longer period as inflation remains sticky, likely to boost the online bank’s net interest income before the Fed changes course and before the macroeconomic context normalizes. in the next years.

Combined with management’s stepped-up efforts in the lending and financial services segment, as noted in the updated fiscal 2024 guidance above, we believe SOFI could very well emerge as a winner in the online banking/fintech market, strengthening its robust growth prospects.

So, SOFI stock is a buySell or Keep?

Thanks to the attractive risk/reward ratio, we maintain our Buy rating for SOFI, albeit without a specific entry point as it depends on the individual investor’s dollar cost average and risk appetite.

With the stock currently retesting its H2’23 and H1’24 support levels of $7, interested readers may want to watch its movement a little longer before adding whether this level holds.

It goes without saying that SOFI is only suitable for those with a higher risk tolerance, attributed to the fintech’s slower GAAP EPS profitability, high short interest of 18.6% at the time of this writing, and the enormous volatility of the title from the beginning of 2021.

At the same time, we believe the stock will likely continue to be discounted until its fintech segment emerges as the driver of earnings and profits, with its long-term outlook now overly skewed towards online banking.

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Fintech

US Agencies Request Information on Bank-Fintech Dealings

Published

6 months ago

30 July, 2024

FinCrypt Staff

Federal banking regulators have issued a statement reminding banks of the potential risks associated with third-party arrangements to provide bank deposit products and services.

The agencies support responsible innovation and banks that engage in these arrangements in a safe and fair manner and in compliance with applicable law. While these arrangements may offer benefits, supervisory experience has identified a number of safety and soundness, compliance, and consumer concerns with the management of these arrangements. The statement details potential risks and provides examples of effective risk management practices for these arrangements. Additionally, the statement reminds banks of existing legal requirements, guidance, and related resources and provides insights that the agencies have gained through their oversight. The statement does not establish new supervisory expectations.

Separately, the agencies requested additional information on a broad range of arrangements between banks and fintechs, including for deposit, payment, and lending products and services. The agencies are seeking input on the nature and implications of arrangements between banks and fintechs and effective risk management practices.

The agencies are considering whether to take additional steps to ensure that banks effectively manage the risks associated with these different types of arrangements.

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Fintech

What changes in financial regulation have impacted the development of financial technology?

Published

6 months ago

30 July, 2024

FinCrypt Staff

Exploring the complex landscape of global financial regulation, we gather insights from leading fintech leaders, including CEOs and finance experts. From the game-changing impact of PSD2 to the significant role of GDPR in data security, explore the four key regulatory changes that have reshaped fintech development, answering the question: “What changes in financial regulation have impacted fintech development?”

PSD2 revolutionizes access to financial technology
GDPR Improves Fintech Data Privacy
Regulatory Sandboxes Drive Fintech Innovation
GDPR Impacts Fintech Data Security

PSD2 revolutionizes access to financial technology

When it comes to regulatory impact on fintech development, nothing comes close to PSD2. This EU regulation has created a new level playing field for market players of all sizes, from fintech startups to established banks. It has had a ripple effect on other markets around the world, inspiring similar regulatory frameworks and driving global innovation in fintech.

The Payment Services Directive (PSD2), the EU law in force since 2018, has revolutionized the fintech industry by requiring banks to provide third-party payment providers (TPPs) with access to payment services and customer account information via open APIs. This has democratized access to financial data, fostering the development of personalized financial instruments and seamless payment solutions. Advanced security measures such as Strong Customer Authentication (SCA) have increased consumer trust, pushing both fintech companies and traditional banks to innovate and collaborate more effectively, resulting in a dynamic and consumer-friendly financial ecosystem.

The impact of PSD2 has extended beyond the EU, inspiring similar regulations around the world. Countries such as the UK, Australia and Canada have launched their own open banking initiatives, spurred by the benefits seen in the EU. PSD2 has highlighted the benefits of open banking, also prompting US financial institutions and fintech companies to explore similar initiatives voluntarily.

This has led to a global wave of fintech innovation, with financial institutions and fintech companies offering more integrated, personalized and secure services. The EU’s leadership in open banking through PSD2 has set a global standard, promoting regulatory harmonization and fostering an interconnected and innovative global financial ecosystem.

Looking ahead, the EU’s PSD3 proposals and Financial Data Access (FIDA) regulations promise to further advance open banking. PSD3 aims to refine and build on PSD2, with a focus on improving transaction security, fraud prevention, and integration between banks and TPPs. FIDA will expand data sharing beyond payment accounts to include areas such as insurance and investments, paving the way for more comprehensive financial products and services.

These developments are set to further enhance connectivity, efficiency and innovation in financial services, cementing open banking as a key component of the global financial infrastructure.

Sebastian Malczyk

General Manager, Technology and Product Consultant Fintech, Insurtech, Miquido

GDPR Improves Fintech Data Privacy

Privacy and data protection have been taken to another level by the General Data Protection Regulation (GDPR), forcing fintech companies to tighten their data management. In compliance with the GDPR, organizations must ensure that personal data is processed fairly, transparently, and securely.

This has led to increased innovation in fintech towards technologies such as encryption and anonymization for data protection. GDPR was described as a top priority in the data protection strategies of 92% of US-based companies surveyed by PwC.

Arid Islam

Financial Expert, Sterlinx Global

Regulatory Sandboxes Drive Fintech Innovation

Since the UK’s Financial Conduct Authority (FCA) pioneered sandbox regulatory frameworks in 2016 to enable fintech startups to explore new products and services, similar frameworks have been introduced in other countries.

This has reduced the “crippling effect on innovation” caused by a “one size fits all” regulatory approach, which would also require machines to be built to complete regulatory compliance before any testing. Successful applications within sandboxes give regulators the confidence to move forward and address gaps in laws, regulations, or supervisory approaches. This has led to widespread adoption of new technologies and business models and helped channel private sector dynamism, while keeping consumers protected and imposing appropriate regulatory requirements.

George Blandford

Co-founder, UK Linkology

GDPR Impacts Fintech Data Security

A big change in financial regulations that has had a real impact on fintech is the 2018 EU General Data Protection Regulation (GDPR). I have seen how GDPR has pushed us to focus more on user privacy and data security.

GDPR means we have to handle personal data much more carefully. At Leverage, we have had to step up our game to meet these new rules. We have improved our data encryption and started doing regular security audits. It was a little tricky at first, but it has made our systems much more secure.

For example, we’ve added features that give users more control over their data, like simple consent tools and clear privacy notices. These changes have helped us comply with GDPR and made our customers feel more confident in how we handle their information.

I believe that GDPR has made fintech companies, including us at Leverage, more transparent and secure. It has helped build trust with our users, showing them that we take data protection seriously.

Dr. Rhett Stubbendeck

CEO & Co-Founder, Leverage Planning

Source

Fintech

M2P Fintech About to Raise $80M

Published

6 months ago

30 July, 2024

FinCrypt Staff

Application Programming Interface (API) Infrastructure Platform M2P Financial Technology has reached the final round to raise $80 million, at a valuation of $900 million.

Specifically, M2P Fintech, formerly known as Yap, is closing a new funding round involving new and existing investors, according to entrackr.com. The India-based company, which last raised funding two and a half years ago, previously secured $56 million in a round led by Insight Partners, earning a post-money valuation of $650 million.

A source indicated that M2P Fintech is ready to raise $80 million in this new funding round, led by a new investor. Existing backers, including Insight Partners, are also expected to participate. The new funding is expected to go toward enhancing the company’s technology infrastructure and driving growth in domestic and international markets.

What does M2P Fintech do?

M2P Fintech’s API platform enables businesses to provide branded financial services through partnerships with fintech companies while maintaining regulatory compliance. In addition to its operations in India, the company is active in Nepal, UAE, Australia, New Zealand, Philippines, Bahrain, Egypt, and many other countries.

Another source revealed that M2P Fintech’s valuation in this funding round is expected to be between USD 880 million and USD 900 million (post-money). The company has reportedly received a term sheet and the deal is expected to be publicly announced soon. The Tiger Global-backed company has acquired six companies to date, including Goals101, Syntizen, and BSG ITSOFT, to enhance its service offerings.

According to TheKredible, Beenext is the company’s largest shareholder with over 13% ownership, while the co-founders collectively own 34% of the company. Although M2P Fintech has yet to release its FY24 financials, it has reported a significant increase in operating revenue. However, this growth has also been accompanied by a substantial increase in losses.

Source

Fintech

Scottish financial technology firm Aveni secures £11m to expand AI offering

Published

6 months ago

30 July, 2024

FinCrypt Staff

Aveni, Investment Management, AI, NLP, UK

By Gloria Methri

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Artificial intelligence Financial Technology Aveni has announced one of the largest Series A investments in a Scottish company this year, amounting to £11 million. The investment is led by Puma Private Equity with participation from Par Equity, Lloyds Banking Group and Nationwide.

Aveni combines AI expertise with extensive financial services experience to create large language models (LLMs) and AI products designed specifically for the financial services industry. It is trusted by some of the UK’s leading financial services firms. It has seen significant business growth over the past two years through its conformity and productivity solutions, Aveni Detect and Aveni Assist.

This investment will enable Aveni to build on the success of its existing products, further consolidate its presence in the sector and introduce advanced technologies through FinLLM, a large-scale language model specifically for financial services.

FinLLM is being developed in partnership with new investors Lloyds Banking Group and Nationwide. It is a large, industry-aligned language model that aims to set the standard for transparent, responsible and ethical adoption of generative AI in UK financial services.

Following the investment, the team developing the FinLLM will be based at the Edinburgh Futures Institute, in a state-of-the-art facility.

Joseph Twigg, CEO of Aveniexplained, “The financial services industry doesn’t need AI models that can quote Shakespeare; it needs AI models that deliver transparency, trust, and most importantly, fairness. The way to achieve this is to develop small, highly tuned language models, trained on financial services data, and reviewed by financial services experts for specific financial services use cases. Generative AI is the most significant technological evolution of our generation, and we are in the early stages of adoption. This represents a significant opportunity for Aveni and our partners. The goal with FinLLM is to set a new standard for the controlled, responsible, and ethical adoption of generative AI, outperforming all other generic models in our select financial services use cases.”