The banking landscape is governed by personalities such as Citigroup, Bank of America, Wells Fargo, JPMorgan Chase, and others. Small players like SoFi (NASDAQ: SOFI) made their mark against the big guys by identifying fragmentation and inefficiencies in the retail banking industry. Many of the services offered by older incumbents are archaic in nature and do not match the growing popularity of mobile-first services.
SoFi’s latest acquisition signals that the company is doubling down on its technology services that cater to this new class of customers. It also offers some clues as to how it plans to become the one-stop-shop for consumer-focused personal finance.
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Encourage underlying trends
SoFi originally started out as a lending business, and the majority of its revenue still comes from loan obligations. However, management has made a conscious effort to diversify its revenue sources and expand beyond lending in recent years.
About two years ago, SoFi acquired banking services company Galileo. This was a wise move by SoFi’s management, as Galileo’s technology platform paved the way for SoFi to expand its digital offerings. At the heart of the deal, SoFi combines Galileo’s APIs (application programming interfaces) with its own mobile platform, making it attractive to both Galileo’s business customers and Galileo’s consumer base. SoFi.
SoFi management compared its combination with Galileo as analogous to Amazon and its Amazon Web Services (AWS) cloud computing service. One side of the business features growing consumer activity, while the other side facilitates these consumers with a robust technology infrastructure.
The company’s financial statements for the year 2021 show that the company’s thesis is starting to take shape. For the year ended December 31, 2021, SoFi reported reaching 100 million Galileo accounts, up 67% from 2020 totals.
And investors can see the direct impact of the increase in the number of Galileo members on the income statement. In 2021, SoFi generated $194.9 million in revenue from its technology segment, a 102% increase over 2020. In comparison, the company’s flagship lending business generated $763.8 million. revenue, up 59%. Even though the lending segment is almost four times larger than the technology business, SoFi is adding new Galileo members at a staggering rate, which is helping to change the revenue mix.
Given the robust growth it’s generating through its tech business, it’s no surprise that SoFi recently announced another billion-dollar acquisition.
Another aggressive acquisition
In February, SoFi announced that it was acquiring Technisys SA for approximately $1.1 billion in an all-stock deal. Technisys adds a unique layer to SoFi’s already impressive technology stack, as the combination of its platform and Galileo will be able to support a variety of products such as checking and savings accounts, deposits, loans and credit cards, all made available via API option.
Management expects the acquisition to serve as a catalyst for SoFi’s revenue growth. According to the company’s press release, management estimates that incremental revenue from the acquisition will be between approximately $500 million and $800 million per year through the end of 2025.
Although mergers and acquisitions (M&A) can present operational challenges, SoFi has already laid out its roadmap for achieving seamless integration. The company explained that as it migrates from its current multiple third-party cores to the Technisys core it now owns, SoFi should be able to offer its members greater customization.
In a press release following the acquisition, management said “the vertical integration with Galileo will create approximately $75-85 million in cumulative cost savings from 2023-2025 and approximately $60-70 million per year thereafter.
Investors should feel encouraged by this acquisition. Not only does SoFi expect even greater revenue growth from the technology side of its business, but the company also expects to generate even greater margin expansion given the overlapping infrastructure and synergy opportunities with Galileo.
Keep an eye on the valuation
SoFi’s market capitalization is around $7 billion. While there are plenty of reasons to be excited about this transaction, investors should keep the acquisition price in mind. The $1.1 billion cost represents about 15% of SoFi’s current market capitalization. In addition, since the company is financing the entire operation in shares, the shareholders will see their share diluted.
SoFi presents a unique opportunity to invest in an industry ripe for innovation and disruption. Yet as the stock hovers near its 52-week low – despite growing its revenue at an impressive pace across its various verticals – it remains unprofitable. And since the full potential for Galileo and Technisys’ earnings is likely years away, some investors may be looking for safer and more stable investment opportunities. It may be more prudent for investors to assess future earnings, the progress of the Technisys integration and the company’s path to profitability before initiating a position.
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