Earlier in the month, SoFi sued the U.S. government for extending the student loan repayment moratorium. The move seems controversial, as the moratorium impacts only federal student loans, and SoFi is essentially suing the government (which is trying to do a good thing) for creating challenges to its loan refinancing business. However, I believe the company’s management decided to stand up to its shareholders. SoFi plans to finally reach GAAP profitability, and this plan assumes that the student loan repayment moratorium finally ends in 2023. SoFi has been in business for more than a decade, it is a public company and even holds a banking charter now…it is time to end the “adjusted” profitability period.

The company’s management guided for an Adjusted EBITDA of $40-45 million in Q1 2023, and $260-280 million for the full year 2023, which would represent an impressive leap compared to 2022 results. SoFi also plans to reach GAAP profitability in Q4 2023. However, I would expect the company’s personal loan business, which was the key growth driver in 2021 and 2022, to face strong headwinds in 2023. Moreover, we should not expect the Technology to contribute meaningfully to growth, while the company repositions from Fintech clients to more established players. Thus, SoFi needs its student lending business to return to growth to deliver on 2023 guidance and that GAAP profitability promise. Let’s see how this plays out!

If you are new to SoFi, I suggest reading my previous reviews:
👉🏻 SoFi Q3 2022 Earnings Review: the last lender standing
👉🏻 SoFi Q2 2022 Earnings Review: SoFi needs the student loan moratorium to end
👉🏻 SoFi Q1 2022 Earnings Review: let's put that bank charter to work!

Customers

In its consumer segment, SoFi onboarded almost 480,000 new “members” during Q4 2022, reaching a total of 5.2 million. The company’s total customer base increased by 51.0% compared to Q4 2021. The reported number of “products”, which can be used to identify drivers behind member growth, suggests that the growth came from SoFi Relay (+321K products in the quarter), SoFi Money (+193K products), SoFi Invest (+91K products), Lending products, incl. referred loans (+64K products) and SoFi Credit Card (+17K products). One member can use multiple products; thus, the total increase in “products” exceeds the increase in “members”.

In its technology segment, SoFi added approximately 6.4 million Galileo accounts during the quarter, bringing the total to 130.7 million accounts. This represents a 31.1% increase compared to Q4 2021. Technisys, the core banking solution provider that SoFi acquired in March 2022, does not charge its clients based on the number of serviced accounts (and instead, uses a more “traditional” enterprise pricing model); thus, the company does not report those separately. In Q4 2022, Galileo signed 11 new clients, and Technisys signed 16 new clients. The company also launched “Pay in 4”, the first product “built on the combined Galileo and Technisys platform.”

In the short term, growth in “members” is important for the company to attract deposits, which are a cheap funding source. SoFi generates most of its revenue from lending products; thus, growth in “members” does not immediately translate into growth of revenue (as mentioned above, only 64K out of 480K new “members” used SoFi’s lending products in Q4 2022). In the longer term, a larger customer base represents a potential to upsell products and services. However, SoFi uses a policy of “once a member, always a member”, and does not disclose what percentage of the 5.2 million “members” that it onboarded over the years is still active.

Loan Originations

SoFi reported $2.98 billion in loan originations in Q4 2022, which represents a 20.9% decline compared to Q4 2021, and a 14.5% decline compared to Q3 2021. Personal loan originations were $2.47 billion, which represents a 49.8% increase compared to Q4 2021, but a 12.2% decline compared to Q3 2022. Student loan originations declined 72.2% compared to Q4 2021 and 11.2% compared to Q3 2021, while home loans declined 83.9% compared to Q4 2021 and 51.2% compared to Q3 2021. Personal loans represented 82.8% of total originations, compared to 43.7% in Q4 2021, and 27.2% in Q4 2020.

In its 2023 guidance, the company’s management assumed that the student loan repayment moratorium will finally expire in June 2023, and then it will take until September 2023 for the repayments to resume. Also, given where the mortgage rates are, we should not expect a material improvement in SoFi’s home loan origination volumes anytime soon. Consequently, in Q1-Q3 2023 the company’s origination volumes will be primarily driven by personal loan volumes, and we should expect meaningful growth in student loan origination volumes in Q4 2023 (if the student loan repayment moratorium is not prolonged again).

In my previous review, I highlighted that SoFi was the last personal lender, which continued to grow origination volumes in Q3 2022. Thus, Upstart’s origination volumes peaked in Q1 2022, and LendingClub’s origination volumes peaked in Q2 2022. It seems now that SoFi’s originations volumes peaked in Q3 2022, especially if you consider personal loan originations only (see the chart below). The downward trend will continue at least into Q1 2023, with LendingClub guiding for a further decline in originations to $1.9-2.2 billion, and Upstart’s revenue guidance implying a decline in originations to approximately $1 billion.

If we use LendingClub and Upstart guidelines as the basis, then it is reasonable to expect SoFi to originate $1.50-1.75 billion in personal loans and $2.00 - 2.25 billion across all loan types (assuming student and home loan originations do not deteriorate further from Q4 2022 levels). The company has accumulated a large enough loan portfolio to meet its Q1 2023 revenue guidance even with these origination volumes. However, a prolonged period of muted loan originations will eventually translate into slower growth in revenue (especially, if the student debt moratorium is extended again beyond June 2023).