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SoFi Strengthens its Competitive Advantage

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Despite skepticism regarding SoFiโ€™s (NASDAQ:SOFI) investment value due to intense competition and lack of a protective moat, recent 2Q23 results suggest otherwise. In this article, we will revisit the discussion of SoFiโ€™s moat and highlight its expanding market dominance.

Creating a moat for a business takes time and exceptional execution, and SoFi is no exception. SoFiโ€™s continuous focus on consumer-facing and technology moats has given it a strategic advantage over its competitors.

One crucial consideration when evaluating a companyโ€™s moat is whether it is expanding or contracting. Are the companyโ€™s competitive advantages growing relative to its peers? Are they carving out a defensible niche and creating differentiated products? Are they building a strong brand or a network effect? These questions are difficult to answer directly, but the numbers will ultimately reveal the truth.

Outperforming in Financial Services

Deposits

SoFiโ€™s emphasis on attracting new members and encouraging them to switch their direct deposit to SoFi has resulted in significant deposit growth. As of the last quarter, SoFi had nearly $12.7 billion in deposits, with more than 90% of consumer deposits coming from sticky direct deposit members. This growth is not solely attributed to competitive interest rates, as other market players offer similar rates.

While neobanks have seen deposit growth over the past year, SoFiโ€™s growth has continued to accelerate even as others experience a decline. This exceptional performance in deposit growth is a clear indication of SoFiโ€™s expanding moat.

Member Growth at Low Customer Acquisition Cost

SoFi has managed to acquire more members than ever before while reducing its customer acquisition costs (CAC) to levels not seen in over a year. This efficient CAC, coupled with increased brand awareness and continuous product innovation, reflects the effectiveness of SoFiโ€™s growth strategy. This trend is expected to continue into Q3, further solidifying SoFiโ€™s expanding moat.

Outperformance in Lending

In the fintech lending space, SoFiโ€™s differentiation from competitors like LendingClub and Upstart is becoming increasingly evident. SoFiโ€™s business model, which involves holding loans on its own balance sheet before selling them to debt investors, gives it greater flexibility and resilience during market fluctuations. This flexibility has enabled SoFi to sustain its originations momentum while its competitors have seen declines.

Furthermore, SoFiโ€™s focus on higher-quality borrowers has proven to be a winning strategy. The credit outcomes for SoFiโ€™s borrowers are superior, even outperforming pre-pandemic levels. SoFiโ€™s exceptional underwriting ability and commitment to maintaining credit quality contribute to its expanding moat.

Conclusion

SoFiโ€™s consistent outperformance in financial services and lending, coupled with its resilient client base, superior underwriting, and accelerating deposit growth, all contribute to a stronger moat. As the headwinds ease, SoFiโ€™s differentiated results will continue to set it apart from competitors and solidify its dominance in the market. SoFi is building a moat that is deeper and wider with each passing quarter.

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