It’s utterly frustrating – SoFi Technologies (NASDAQ:SOFI) persistently reports robust growth, yet its stock languishes near all-time lows since going public at $10 via a SPAC. The disconnect between the impressive growth and stock performance is as glaring as a neon sign in the dead of night. Every time SoFi beats quarterly expectations, the stock gets dumped in a mood as sour as a lemon.

Even More Profitable

Contrary to the big bearish thesis that SoFi isn’t GAAP profitable, the reality is that the company’s aggressive non-cash stock-back compensation expense and amortization costs from acquisitions have led to misconceptions. SoFi’s guidance for a substantial boost in adjusted profits for 2023 has failed to resonate with the market since the numbers were revised upwards on October 30.

SoFi once again trounced analyst estimates, delivering an impressive 27% growth in revenue, which hit $21.6 million. However, the pivotal moment was the substantial surge in adjusted EBITDA (profits) forecast for 2023, going up by over $50 million. Management now anticipates a mid-point adjusted EBITDA of $391 million, up from a mere $338 million.

Ordinarily, a stock would soar on news of such bullish adjusted profit targets, especially when they exceed the previous estimate by 16%. SoFi’s 48% incremental adjusted EBITDA margins on new revenue should have sparked a buying frenzy. Nevertheless, the market fixates on the concept of SoFi needing GAAP profits, causing the stock to slump below $7, overshadowing the doubling of revenues from $1 billion in 2021 to $2+ billion in 2023.

The market’s confusion about SoFi’s profits can perhaps be attributed to the company’s use of the adjusted EBITDA metric versus adjusted profits. All the costs excluded from the GAAP losses are non-cash, except for the interest expenses.

SoFi’s market cap of only $6.5 billion, juxtaposed against the 2023 adjusted EBITDA targets of nearly $400 million, paints a staggering picture. With the stock trading at just 16.6x 2023 EBITDA targets and a mere 11.0x 2024 estimates of $586 million, the market is willfully ignoring a golden opportunity.

Despite SoFi’s last quarter posting 18% adjusted EBITDA margins, the goal remains to double the margins while aiming for a revenue doubling in the next 3 years, reaching a staggering $4 billion on 25% growth. The ultimate adjusted EBITDA target would be $1.4 billion in 2026, aligning with the goal set at the time of the SPAC deal to surpass this EBITDA level in 2025.

Major Catalysts

Although the growth has slowed due to macroeconomic weaknesses dampening general loan demand, SoFi is poised to maintain over 20% growth. The Financial Services products, particularly in the re-start of student debt payments, are emerging as the primary growth driver.

With a 50% year-over-year growth to 8.9 million in Financial Services products, compared to just 1.6 million in the Lending products category, the spotlight is on the Financial Services segment. This segment witnessed a record $118.2 million in revenue, marking a monumental 142% growth in the quarter, along with turning a profit at long last.

The products in this segment now contribute a considerable $53 per product, up 61% year-over-year, indicating not just rising product adoption but also escalating monetization.

In spite of SoFi’s acquisition of a new home lending business, the company still originated student and home loans below the 2021 peak. The peak loan origination combination for student/home in Q4’21 exceeded $2.1 billion, but the figure trailed to below $1.3 billion in the last quarter.

Takeaway

SoFi’s ongoing failure to rally, exacerbated by the misinterpretation of the distinction between GAAP losses and adjusted EBITDA profits, presents an unparalleled opportunity for investors with the sagacity to perceive the company’s true potential. A growth stock of this caliber, helmed by a proven management team, is a rarity at such a bargain. The market’s lack of insight won’t endure forever.