WHY SOFI’S 2025 GUIDANCE IS ACTUALLY VERY GOOD
The important question to ask about Sofi’s guide - is their growth slowing down. I’m sure someone will ask that question. The answer is NO!
To understand Sofi’s guidance for 2025 however you need to have a greater understanding of financials and accounting and taxes.
These concepts are not taught in a beginning or intermediate accounting class. They are taught across several accounting, auditing and tax classes, and even good accounting students may have trouble understanding them. But I am going to attempt to simplify it to help you understand.
This is for educational purposes and is not financial advice. In the examples and discussion below, I will be using numbers that are directionally accurate for Sofi, but I don’t have all the data to pinpoint the exact numbers.
So here goes.
To understand the issues, you need to understand that a company has accounting records that follow Gaap reporting and it also has tax records that follow the tax rules. Many times the Gaap rules are not the same as the tax rules. These items are reconciled typically in year end work known as income tax provision work.
Public accounting firms have a whole team of auditors and tax personnel that work on these together. I do not have to go through all these rules because the issue we will discuss relates specifically only to tax deferrals.
What are tax deferrals or deferred tax credits or assets?
Deferred tax credits include assets a company has that result from the creation of a tax deferral or tax benefit that can be used in the future. For tax purposes, the benefit has accrued, but you don’t know when you will use it or if you will ever be able to use it, so you carry that tax benefit on your Gaap accounting statements as an asset with an allowance account that is debited and reduces the benefit when it can be used. (More on the timing of this write-off of the allowance account into income later).
A simple example for personal taxes would be that you make a charitable contribution that can’t be used in one year so you can carry it over to the next year and use it when you have more income.
Ok, so how does that relate to Sofi Generally?
Sofi as a start up growth company had significant operating losses in the early years and through the 3rd quarter of 2023 with its first profitable quarter in 4th quarter of 2023, but the entire 2023 year was still a loss. Every quarter of 2024 was profitable.
So for the years 2023 and before, Sofi incurred net operating losses for Gaap purposes. That’s why you saw negative EPS for those periods.
The tax rules allow a company to aggregate those net operating losses and carry them forward to offset 80% of income in later years. These are called NOL carryovers. NOL carryovers are reported and accumulated on your tax return and in subsequent years when you have income, you simply reduce that income by the total NOL carryovers you had in last year’s tax return. If you still have excess NOL carryovers after reducing your income by that 80%, those are totaled and carried over to the next year.
So for tax purposes, NOL carryovers are calculated each year and just used in the future to offset income until they are gone. But that’s the tax reporting.
For Gaap accounting, the rules recognize that these NOL carryovers may have a future tax benefit for the company and you therefore account for the potential tax benefit from them as a deferred tax asset on your balance sheet that may or may not be used in the future. The total NOL loss carryovers are an off balance sheet item for Gaap purposes.
Theoretically, the losses that occur each year create a tax benefit for that year. Under the Gaap concept of matching income and expenses with the proper period, that benefit should simply offset some of the annual loss, resulting in a lower loss each year. However, because the company doesn’t know when or if it will be profitable and use such deferred tax credits, the Gaap concept of conservatism (when faced with an uncertainty, you should choose the least optimistic view) requires you to simply hold those assets until you know you can use them.
When you have a profitable year you will use those NOL Carryovers for tax purposes to offset income and resulting tax.
For Gaap purposes, you allocate the deferred tax credits to income in the year you determine that you have greater than a 50% probability that they will be used.
Ok, so how does that relate to Sofi Specifically?
Because Sofi had 4 quarters of profitability in 2024 and projects profitability in 2025 in combined amounts greater than those tax credits, Sofi must therefore allocate all those accrued tax benefits into income in the 2024 year (which it did-see below).
It is noted and footnoted and increases eps but not fully diluted EPS because its really a one time adjustment reflecting the benefit for prior periods, even though for tax purposes the offset will occur in 2024 and 2025 and possibly future periods.
Gaap will not allow them to only write off the benefits as they incur future tax liabilities in later years because it would misrepresent the financial situation of those independent years (thus not adhering to the matching principle.
So Sofi reported EPS in the 4th quarter of 2024 of .29 while fully diluted earnings were only .05. The difference relates to one time events including the recognition of these tax credits and other items. (That $.29 however does increase Sofi’s tangible book value and capital ratios).
On page 27 of the Earnings presentation, Sofi shows Net Income of $498,665,000 (after tax) and then on page 29 an adjustment of deferred tax benefits of $258,401,000. Based on a 21% federal tax rate, those tax benefits would relate to prior losses of over $1.2 billion, which is consistent with their historical losses. This would translate to about 23 cents of the 29 cents a share.
So you would think that they have about 23 cents of Nol credit offsets based on this number. However, as I discussed above, there are many differences between tax reporting and Gaap and they may have only about $50 million, roughly 5 cents a share to use in 2025.
We will have to wait for the annual report to know for sure. In either case they like will have a reduction in their actual tax for 2025 from about 5 cents to 23 cents.
My best guess is about 5 cents.
SO WHAT DOES THIS MEAN???
Here’s where it gets a bit easier to understand.
In prior years, Sofi had losses per share and therefore never had any significant federal tax liability. In 2024 they probably will offset any tax liability with the NOL Carryovers. In 2025 they may have up to 5 cents per share of offset from the remaining NOL carryovers, but they will have to pay federal tax on an ongoing basis.
So if Sofi projects about .27 at the high end of the range. Since that is an after tax number, they need to earn about .34 per share EPS (.27/.79) to net that .27 guide - the difference relating to taxes. But if they have 5 cents of remaining NOL carryovers for tax purposes, the .27 would really be about $.32.
Therefore, if you are comparing the 2025 guide to past years, you can see they still expect a lot of growth in their business. Then they reiterated their 2026 guide of .55 to .80 , which is also on an after tax basis (so for pretax comparisons to past years is about $.69 to $1.00) if you are measuring growth on a comparable basis.
It is correct however that paying taxes does lower your EPS and thus should be considered in the share price. However, the growth is still pretty dynamic.
THUS MY CONCLUSION THAT THE 2025 GUIDE IS WAY BETTER THAT IT LOOKS
In addition, they stated in the presentation that they had effectively delayed some investments in prior years and would ramp them up in 2025. By doing this, they can deduct many of these investments, especially in brand awareness, and lower there tax liability FOR 2025 now that they are profitable and required to pay significant federal taxes, effectively lowers the cost of those investments.
DOES YOUR HEAD HURT YET?