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Is SoFi a Smart Buy After Earnings?

SoFi Technologies (NASDAQ: SOFI) recently reported its third-quarter results, and it continues to grow at an impressive pace. In this Fool Live video clip, recorded on Nov. 11, contributor Jason Hall discusses the results and what investors should keep in mind about this fintech disruptor.

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Jason Hall: This is a business that does banking, investing, lending -- personal financial services. It is absolutely growing at a very high clip. Added 377,000 new members in the quarter, second-highest number of new members in its history, and as you see, sequentially, continually growing, and almost doubled total members year over year. Continues to attract new users, those users continue to use more of its products. Again, just under 3 million members. Those members use almost 4.3 million products. Again, more than doubled.

One of the things I want to point out is you see these percentage gains in new members here. The percentage gains in products generally is growing at a higher rate. That's optimal because that means that not only are people coming to SoFi for something, they're coming to SoFi for something and then they're adding more things. I think that is absolutely fantastic. It bought Galileo I guess about a year or so ago, Galileo continues to grow at a very high rate, 89 million Galileo accounts.

Lending and financial services. Looking at the two different parts of its business, comparing it to more traditional commercial bank, I guess is a good way to think about it. Lending products continue to grow at mid-teens while financial services products growth is growing at triple-digits. Now, you go back and we're talking 600%, almost 500%, 300%, only 180% growth. But the bottom line is that it's getting to so many millions at this point going from hundreds of thousands into the millions now. The rate of growth may be slowing, but the number of products being used, in real numbers is actually larger than it was.

Like I said, second-highest number of new customers added ever in the quarter. Again, mid-teens. You might wonder, mid-teens, come on, what's going on here? Look at Upstart, it's growing at much higher rates. A couple of things. It's not a starting from the low base that a business like Upstart is growing from. I also think that this is indicative of managing risk. They're underwriting risk, managing the risks that comes along with being a lender and effectively lending and managing that risk.

One million different lending products, 1 million loans issued, I guess is the best way to think about that number. I want to hop over here. You guys see this, the operating statement? But I just want to hit a couple of things on this. I'm going to look at the nine months numbers over here. Total interest income for the nine months, $260 million. That's actually down just a little bit from the first nine months of last year. Now, one thing that's changed is that its interest expenses have come down substantially.

That's really important because the other side of being a good lender, beyond managing your credit risk and making sure you're lending appropriately is how much it costs you to get that capital, and their costs of capital have come down substantially from the year-over-year period. Net interest income is actually up, which is right here, which is up absolutely enormously. Now, non-interest income, all their fees that they earn from loan origination, selling loans, other fees that they earn is up substantially. Non-interest income more than doubled, which was a major driver behind the increase in that revenue. That revenue is all of its interest and non-interest income minus its interest expenses.

Then you have non-interest expenses, which is operating expenses. This number is growing at a very high rate. Non-interest expense was over $1 billion in the quarter or the first nine months, that was up from $635 million year over year, it's pouring a ton of money in R&D, it's pouring a ton of money in sales and marketing, about 45% increase there, and its operating expenses are going up, simply because it is a larger and larger business. Those expenses are going up. Hope I'm not making anybody dizzy. Where is it out here? I think it should be the next one here, cash flows? Again, on the left here, you have this nine months period. Operating cash consumption is actually coming down. This is a sign of a business that's becoming more efficient.

All of that scale, all of those new products that the members are using, all of those new loans that it's issuing. Last year for the first nine months, it burned almost $500 million in operating cash. Through the first nine months of this year, about $114 million in operating cash consumption. This is the time that SoFi needs to be investing, spending more on operations, developing its products, making acquisitions that it can bolt on to expand the services that it offers. I'm not concerned that we're seeing cash burn continue because this is the time for the business to get to scale, where the benefits of being at scale mean better operating leverage, higher returns, and this is the kind of business that's at scale. Again, so long as they remain disciplined with their lending quality and really focus on good underwriting can be very profitable.

Jason Hall owns shares of SoFi Technologies, Inc. Matthew Frankel, CFP® owns shares of SoFi Technologies, Inc. The Motley Fool owns shares of and recommends SoFi Technologies, Inc. and Upstart Holdings, Inc. The Motley Fool has a disclosure policy.


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