Morningstar - Q2 2023 - 55

Building a One-Stop Shop
SoFi's digital-banking model drives strong growth, but it's not
enough for a moat just yet.
Michael Miller
BEST IDEAS: EQUITY
This article is adapted from a Morningstar equity research report dated
March 31, 2023.
We think SoFi SOFI has identified an unfilled need in the marketplace that
could allow it to eventually build a defensible competitive advantage.
The company, which operates without physical locations and engages with
customers exclusively through its mobile app and website, targets young,
high-income individuals who may be underserved by traditional full-service
banks. Unlike other digital banks, which generally have a narrow range
of products, SoFi has a broad set of financial services that allows its
customers to build the entirety of their finances around SoFi. SoFi hopes that
by acting as a one-stop shop for its customers' finances, it can create
cross-selling advantages that will reduce its cost of acquisition and make its
relationships stickier through implicit switching costs.
However, while SoFi has made good progress on these goals, it's simply too
early to say it can build a competitive advantage. Most of the company's
revenue comes from its student debt refinancing and personal loan businesses,
neither of which has any sign of a moat. Its lending business provided
more than 70% of its revenue in 2022. While we are encouraged by the
momentum in the company's recent results, it has not made enough progress
for us to believe that SoFi can earn returns above its cost of capital 10 years
from now, so we assign the company a no-moat rating.
While SoFi has offered banking services for some time, the company itself
has only recently become a true bank. Having gained a national banking
charter in early 2022, SoFi is now able to retain deposits into its SoFi Money
accounts and use them to support its lending operations. Before obtaining
a charter, deposits into these accounts were swept out to SoFi's partner banks,
leaving SoFi to finance its lending arms externally. Access to these lower-cost
funds should increase net interest income as the firm leans into its distinct
model for digital banking. Since receiving its charter, SoFi's deposit base and
loan book have grown rapidly, with total deposits reaching over $7 billion
at the end of December 2022 from just over $1 billion at the end of March 2022.
SoFi's success in deposit gathering has supported significant net interest
income growth, helping offset the negative impact of student loan forbearance.
Our fair value estimate for SoFi is $14 per share. Our model assumes that
student loan forbearance lasts through 2023 as the politics surrounding the
morningstar.com/products/magazine
55
SoFi Technologies SOFI
Stats 03/31/2023
Morningstar Rating
QQQQQ
Price
$6.07
Economic Moat
None
Price/Fair Value 03/31/2023
$30K
20
10
06/2021
01/2022
08/2022
03/2023
Fair Value
Estimate
Per Share
14.00
Month-End
Closing Price
6.07
Sector
y Financial Services
Fair Value Estimate
$14.00
Capital Allocation
Standard
Industry
Credit Services
Uncertainty
High
Market Cap
$5.67 Billion
program remains a key point of uncertainty. We also project personal loan
origination volume growth to slow from its breakneck pace in 2022, as SoFi has
benefited from strong consumer loan growth industrywide. That said, SoFi
benefits from rising interest rates and record credit card balances, as credit
card refinancing remains one of the core uses of personal loans. And we expect
SoFi to continue to benefit from accelerating customer and revenue growth
driven by expansions in SoFi's product lineup and consumers' increasing
comfort with digital banking. We see the firm's financial-services segment as
a more material driver of returns as time goes on. K
Michael Miller is an equity analyst at Morningstar Research Services LLC.
https://www.morningstar.com/stocks/xnas/sofi/quote https://www.morningstar.com/authors/2412/michael-miller http://www.morningstar.com/products/magazine
Morningstar - Q2 2023

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