BLI Premium Update, Jan 29 2024

Just as expected, SoFi Technologies (NASDAQ: SOFI) announced its first-ever quarterly consolidated GAAP profit on Monday.

Actually, scratch that. It was better than expected. Shares of the banking and fintech leader rallied more than 20% in response today.

SoFi’s headline numbers

Let’s quantify SoFi’s fourth-quarter beat: Quarterly revenue grew 34% year over year, to $594 million, easily beating consensus estimates for $571 million. Adjusted (non-GAAP) net income swung to positive $24.6 million, or $0.04 per share (from a $0.05-per-share loss a year earlier), also trouncing estimates for a breakeven quarter.

But those ever-elusive GAAP profits are particularly exciting considering many analysts on Wall Street simply refused to believe it could happen this quarter — despite numerous reiterations of GAAP net income positivity from SoFi management in recent quarters.

SoFi added 585,000 new members this quarter, bringing its total to over 7.5 million (up 44% year over year). Deposits at SoFi bank grew by $2.9 billion sequentially from last quarter, bringing its total $18.6 billion at year-end.

Remember, that swelling deposit base gives SoFi a lower-cost funding source for its thriving loans segment.

About That 1 Big Risk

Speaking of which, recall I highlighted one 1 big milestone (GAAP profitability) and 1 key risk (clarity surrounding mark-to-market adjustments on the fair value of SoFi’s held-for-sale loan portfolio) in my earnings preview for SoFi over the weekend.

More specifically, recall one Wall Street analyst expressed concerns earlier this month over the impact on SoFi’s revenue and earnings as the U.S. Federal Reserve is widely expected to reduce its federal funds rate multiple times in 2024. And though I’ve previously gone out on a limb to argue that analyst’s downgrade was off-base, I still hoped for elaboration from management this quarter.

Sure enough, SoFi management addressed thatconcern during the Q&A portion of this quarter’s earnings conference call. First, according to SoFi CFO Chris LaPointe, SoFi is modeling four rate cuts by the Fed in 2024. And while falling rates would normally have an outsized impact on the fair value marks of SoFi’s held loans, LaPointe…uh…pointed out that SoFi hedges interest rate exposure on its loans for this very reason. So when the value of loans rise or fall in response to changes in underlying interest rates, SoFi effectively mutes the impact of these swings with hedge losses or gains in the process.

Meanwhile, SoFi CEO Anthony Noto…uh…noted that SoFi has also reduced its underwriting efforts by eliminating underwriting to certain tiers of consumers within its acceptable FICO credit score bands.

“As we progressed through the year, we have reduced our credit box and we continue to do so,” Noto elaborated. “And in December, [we made] a relatively big change […] so that our loans are durable through the cycle, whether we hold them on the balance sheet or we sell them.”

🏆 iRobot and Amazon Call It Quits

Meanwhile, also as expected, Amazon (NASDAQ: AMZN) and iRobot (NASDAQ: AMZN) have officially called off their impending merger.

In a press release this morning, the two companies said they see no feasible path to regulatory approval in the European Union, preventing Amazon and iRobot from joining forces. The two companies called it “a loss for consumers, competition, and innovation.”

The good, the bad, and the ugly for iRobot

A little over a week ago I mused what might happen if this exact scenario unfolded, predicting that 1.) iRobot would receive a juicy breakup fee, 2.) iRobot may re-ramp sales & marketing and R&D expenses, and 3.) that iRobot could seek another suitor.

First, iRobot is indeed receiving that $94 million termination fee, which should help the company right its balance sheet as it resumes its journey as a standalone business. Most of that fee will go toward paying down its three-year $200 million credit agreement with Carlyle Group, which it took out to pay down debt and fund operations while it awaited completion of the acquisition)

But the company won’t be re-ramping its R&D or sales & marketing expenditures in the near future. To the contrary, iRobot has brought in highly regarded “turnaround expert” Jeff Engel to oversee an operational restructuring to support its return to profitability.

That restructuring will include a reduction of 31% of iRobot’s workforce (impacting about 350 employees), further reducing R&D expenses by $20 million per year by increasing offshoring of non-core engineering functions, and further reducing sales & marketing expenses by $30 million while seeking efficiencies to drive sales more cost-effectively.

To make matters worse, iRobot simultaneously announced that company founder, Chairman, and CEO Colin Angle has stepped down as chairman and CEO. Angle will continue to serve on the board until his current term expires in mid-2024, and will remain with iRobot as a “senior advisor” for up to a year after that “to ensure a smooth transition.”

Why I might sell iRobot from the BLI Premium Portfolio

You might recall I’ve singled out Angle’s leadership as a key reason I previously owned iRobot stock for over a decade before finally selling at around $60 per share after its initial acquisition announcement in 2022.

I stepped back into iRobot with a small position in the BLI Premium portfolio a few weeks ago — after it plunged to new lows on news that the acquisition would likely be blocked. Mr. Angle’s presence was a key part of that decision, as were the assumptions that it may be poised to re-ramp its R&D and sales & marketing expenses over the medium-term.

It seems I underestimated the extent to which iRobot had let its business lapse as it awaited Amazon’s takeover, and as a result it’s been left scrambling to make deep, painful cuts that I now fear will leave lasting scars — that is, unless iRobot is quietly pursuing additional suitors as it now implements its turnaround.

I’m going to dig a little deeper before making a final decision — and it’s worth noting the position I opened in iRobot for the BLI Premium portfolio is a small one. But if I ultimately determine that capital would be better-served in another promising stock (or stocks), you’ll be the first to know as my earliest Premium subscribers.