Why SoFi’s Fourth-Quarter Results Weren’t Impressive

SoFi’s (NASDAQ:SOFI) fourth-quarter results were actually not much different from its Q3 results. Once again last quarter, SOFI stock saw strong growth, but its profitability metrics were dismal.

the Social Finance (SoFi stock) logo is displayed on a smartphone.

Source: rafapress / Shutterstock.com

Also important for shareholders to note is the company’s sales and marketing costs soared and are quite elevated. This indicates SoFi is having a tough time contending with its competitors. Primarily because of these issues, I remain bearish on SOFI stock.

Strong Growth and Profitability Issues

In Q4, SoFi’s revenue jumped a very impressive 67% year-over-year (YOY), reaching $285.6 million. Moreover, the company added a record 523,000 new members versus 377,000 additional members in Q3. In all of 2021, the company added 3.5 million new members, up 87% from the 1.9 million consumers who started using the company’s services in 2020.

The strong growth is in accordance with my belief that the company, due to its large student loan business, can effectively entice many millennials to use its services.

However, I’ve also contended that SoFi is facing intense competition from traditional banks and has few, if any, competitive advantages.

SoFi has to spend huge amounts of money on marketing and sales to boost its revenue growth and the company is racking up huge, rapidly-increasing losses. In addition to its big marketing and sales budgets, I believe its large losses are also being caused by a lack of pricing power.

The latter phenomenon, in turn, is caused by its lack of significant advantages over and differentiation from its major competitors.

A Look at the Bearish Numbers for SOFI Stock

In Q4, the company’s sales and marketing spending came in at $129.7 million, up from $72.2 million in Q4 of 2020. Its Q4 loss was $111 million, way up from the $82. 62 million that it lost during the same period a year earlier.

In addition to the big increase in its sales and marketing spending, a large surge in the company’s share-based compensation contributed to the jump in its Q4 loss. Its share-based expense more than doubled YOY at $77 million, up from $30 million during the same period a year earlier.

Last quarter, the combined total of SoFi’s sales and marketing spending and its share-based expense was $206.7 million.  The latter figure worked out to 72% of its Q4 revenue.

SoFi likes to emphasize its positive adjusted EBITDA, which excludes its share-based expense and its interest expenses. As I’ve pointed out in past columns, investors should not disregard high share-based compensation totals because they tend to weigh on the value of shares.

Another InvestorPlace columnist, Ian Bezek, has noted interest expenses are key costs for lenders like SoFi, which tend to make most of their money by charging higher interest rates than they pay. Interestingly, for Q4, if SoFi’s share-based expense and interest expense are subtracted from its adjusted EBITDA,  the total would be a loss of $75 million.

Comparing SoFi With Another Young Tech Company

I’m sure the SOFI stock bulls are very skeptical about my analysis of the company. For example, I’m sure they’re saying young tech firms have to prioritize gaining market share over profits, and they have to give their employees a great deal of compensation. They probably also believe investors have to patiently wait for these companies to become profitable.

Actually, there’s a great deal of truth to all of those arguments. But what’s also true is young tech companies with real, sustainable competitive advantages have a much easier time gaining lucrative market share and becoming profitable than their peers that do not have such advantages.

To illustrate that point, let’s take a look at Upstart Holdings (NASDAQ:UPST). SoFi was launched in 2011, while Upstart was founded in 2012. Unlike SoFi, however, Upstart has built a product — its artificial intelligence-based loan evaluation tool — which has major, sustainable competitive advantages.

In Q4, Upstart generated positive net income of nearly $59 million. Its sales and marketing spending was $115 million, slightly below SoFi’s $129.7 million. But as a percentage of revenue, Upstart’s sales and marketing spending was meaningfully  lower than that of SoFi. It spent 38% of its revenue on sales and marketing, while SoFi shelled out 45.4%.

The Bottom Line on SOFI Stock

According to Marketwatch, SoFi’s price-sales ratio is 7.66x. That’s a much better valuation than four months ago, when the stock was changing hands for more than double its current price.

Still, in light of SoFi’s profitability and competition issues, I continue to believe the shares are tremendously overvalued. Consequently, I continue to recommend investors sell SOFI stock.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been PLUG, XOM and solar stocks. You can reach him on Stocktwits at @larryramer.


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