Investors were shocked to find out through LinkedIn that the company was laying off employees. Some have speculated that as many as 300 employees out of the total 4,200 at SoFi (NASDAQ: SOFI) were laid off. While SoFi stock has not reacted to the news, the round of layoffs has raised many questions for SoFi investors.
According to the company, this layoff happened because of its commitment to achieving strong GAAP profitability and growing its tangible book value. While this could improve the SOFI stock forecast over the long-term, based on the positions being cut and the positions SoFi is still hiring for, there could be more than meets the eye.
The Layoff
To understand why SoFi laid off some of its employees, we have to understand why these layoffs where never formally announced.
Investors became aware of the layoffs as former SoFi employees began posting about their job search on LinkedIn. SoFI has stated that the headcount reduction was less than 4%, which would be equal to roughly 168 employees based on its headcount of 4,200 employees at the start of 2023.
However these LinkedIn posts reveal that the company reduced its staff across a wide range of roles like product managers, UX design leads, UX researchers, software engineers, and managers in the loan departments.
Why Did the Layoff Happen?
Layoffs occur for a number of reasons and typically are the result of either over hiring or cost reductions. At this point, SoFi does not appear to be struggling financially and in its statement the company shared its plans to continue growing its team in 2024. This definitely seems to be the case since SoFi’s career page has 47 different jobs in 26 locations. Most of these openings are in the risk department which could indicate what areas SoFi intends to expand.
Galileo and Technisys?
SoFi could possibly be doing the same thing, especially when you consider the fact that most of the employees it laid off appear to be from the tech and loan side of the business, which is the reason why SoFi acquired Technisys in the first place.
Technisys was acquired by SoFi in 2022, and the company provides banks with leading cloud-based core banking systems and digital banking software. Its clients included banks and financial services companies such as Crediclub, JIC Bank, and Rellevate.
SoFi itself used Technisys’ services before it saw an opportunity for vertical integration and acquired Technisys for $1.1 billion in order to use its digital banking software services for SoFi Bank technology and also acquire Technisys’ B2B clients. The acquisition also allows SoFi to take the digital banking services it used to pay Technisys for in-house, allowing the company to save on costs.
In line with SoFi’s plans to reduce its costs via this acquisition, this new layoff could be SoFi’s first move to complete the full integration of its operations with those of Technisys, especially since most of Technisys’ original software team stayed after the acquisition and wasn’t laid off.
Since SoFi is planning to become a one-stop-shop for all fintech services, fully integrating with Technisys is extremely important for the company, especially since the bank is currently working with third parties to provide some of its services, such as its brokerage services, credit cards, checking and savings services, and lending services.
Some examples of these third parties are Zillow Mortgages, which helps SoFi issue loans, and Apex Fintech Solutions, which is responsible for SoFi’s brokerage side of the business. Notably, SoFi tried to acquire Apex a few years ago, which indicates the company’s desire to integrate all its operations vertically.
If SoFi fully combines its operations with Technisys, it could take one of the services it goes to third parties for in-house, which would help the company reduce costs and increase profitability. Investors have speculated that it could be the lending service since the layoffs focused on lending department managers as well as software engineers.
AI?
This also could be the case. So far, SoFi only used AI technologies for features like early direct deposit, transaction alerts, and mobile check deposit for its customer checking and savings accounts.
However, it could try to follow the lead of other lending companies like Upstart Holdings, which provides an AI lending platform that allows the company to approve loans almost instantly.
This makes sense when you consider that most of the layoffs were in software and lending. However this is far from certain since the company’s AI operations are mostly focused on Connecta – its AI engine and virtual assistant.
In 2021, SoFi acquired Kona, a company that specialized in creating banking solutions focused on customer experience including AI-powered chatbots. This is how Connecta was developed but since its only a virtual assistant, Connecta can only replace employees in departments like customer service – not software, UX, or lending.
SOFI Stock Forecast
We have to wait until the Q4 earnings call on January 29th to have all our questions about the layoff answered. Still, it seems likely that the sole reason for this layoff is SoFi’s full integration of its operations with Galileo and Technisys.
The company’s plan to achieve and maintain strong profitability seems to be developing its Technology Platform segment, which includes Galileo and Technisys. This was emphasized in the Q3 earnings call, when SoFi’s management promised a better performance for the segment in Q4 and in 2024 as well, especially since the Technology Platform only saw slight growth in 2023. The Technology Platform segment saw revenue in Q3 of $89.9 million, resulting in a slight acceleration of 6% year-over-year growth.
If you consider the full integration of SoFi, Galileo, and Technisys as the cause for the layoff, then management’s comments about expecting the Technology Platform’s revenue to continue to accelerate into Q4 and into 2024 make sense. Also, during the earnings call, management said that SoFi signed new clients, which would help increase the revenue of the Technology Platform Segment.
There are other reasons to not be concerned with SoFi’s layoffs. In the tech sectors, many companies, such as Amazon, Spotify, Duolingo, and Netflix, have laid off employees lately. One reason for these layoffs is the integration of AI to automate jobs, but another explanation could be companies’ cutting back after overhiring during the pandemic. SoFi could have been one of the companies that hired more people than it needed during the pandemic and is now simply trimming the fat, which is far from a bearish sign.
If this is the case, then the timing couldn’t be better since Q4 has already ended, and the layoffs won’t affect the company’s financial performance or profitability in that period. Additionally, the company reportedly offered the laid off employees severance checks for three months, which means the layoffs likely won’t positively impact 2024’s Q1 profitability.
Ultimately, this round of layoffs doesn’t appear to be cause for concern since SoFi laid off less than 4% of its employees. For comparison, the gaming company Unity Technologies laid off 25% of its employees. This resulted in an 8% drop in U stock. On the other hand, SOFI stock saw a 2.82% increase from the prior day’s close following the news – outpacing the S&P 500’s daily gain of 0.57%.
SOFI Stock Price Target
Another reason for the increase in SOFI stock could have been its new price target of $11 from Deutsche Bank which was released on the same day as the layoff was officially announced. Deutsche Bank stated that if SoFi wants to become the ‘Amazon Web Services of banking services,’ it will need to return to strong growth in its Technology Platform segment. Based on its Q3 earnings call and these recent layoffs it certainly appears that the company is making growith in this segment a priority.
Given this analysis, it appears that the layoff is a bullish sign for SOFI stock, as sad and unfortunate as it is for all the employees who lost their jobs. Thanks to this, we think that SOFI stock, which gained 116% in 2023, could offer a great investment opportunity for investors who want to enter the large fintech market.
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