Does Bank of Internet Make Money?

Bank of Internet, the online financial institution also known as BOFI Holding (NASDAQ: BOFI), is both controversial and popular with some investors because of its fast growth. Among other things, BOFI has a ridiculously inflated share price ($142.36 on October 12, 2015) and a reputation for questionable lending.

The most curious thing about Bank of Internet is its share price in relation to similar institutions. On October 12, 2015, EverBank Financial (NYSE: EVER), a Florida institution with a business model similar to BOFI’s, was trading at just $20.02 a share. Like Bank of Internet, EverBank floods the Internet with advertising and heavily promotes products like high-interest savings accounts and CDs, no-fee checking and mortgages.

Now for what is truly curious—BOFI reported revenues of $229.54 million on June 30, 2015, while EverBank reported revenues of $924.5 million, or more than three times those of BOFI, on the same day. Okay, the Bank of Internet fans out there will say their pet rock’s revenue is growing at an astounding rate, which is true. BOFI reported a revenue growth rate of 45.01% for the second quarter of 2015, but EverBank reported a revenue growth rate of 11.27% for the same period.

Why BOFI Is Nowhere Near the Big Leagues

Those that are blown away by that growth rate need to compare BOFI’s revenue to some of the giant monster banks that Americans love to hate. Bank of America (NYSE: BAC) reported a TTM revenue of $83.25 billion on June 30, 2015. For the same period, Citigroup (NYSE: C) reported a revenue of $76.62 billion, JPMorgan Chase (NYSE: JPM) reported a revenue of $94.64 billion and Wells Fargo (NYSE: WFC) reported a TTM revenue of $85.25 billion.

The sorry truth is that Bank of Internet has a long way to go before it can become a serious competitor to the monster banks. It is not even a niche player; its actual resources are lower than those of many small regional banks. Even at its astounding rate of growth, it would take BOFI decades to reach the big leagues of banking.

If Bank of Internet retains its present rate of revenue growth over the next year, its revenue would only increase by $103.32 million. That would give it a TTM revenue of $332.86 million, or about a third of EverBank’s.

Does Bank of Internet Make Money?

Okay, so the financial numbers and a little basic math demonstrate that the idea of Bank of Internet being the future of banking is little more than a fair story, but does this company make money? The answer provided by YCharts financial data is that it makes a little money.
On June 30, 2015, Bank of Internet reported a net income of $82.68 million, a free cash flow of $19.65 million, cash and short-term investments of $222.77 million, total assets of $5.824 billion, total liabilities of $5.29 billion, $1.32 billion in cash from financing, -$1.374 billion in cash from investing and $116.1 million in cash from operations.

Get the picture, folks, the amount of money BOFI is taking in is nowhere close to justifying the share price. To make matters worse, it has taken on a lot of debt—around $758.16 million in the non-current portion of its long-term debt. Interestingly, however, Bank of Internet’s enterprise value still exceeds its market cap; it reported a market cap of $2.2231 billion and an enterprise value of $2.7247 billion on October 12, 2015.

Something certainly seems to stink here though. EverBank, which reported a net income of $137.34 million and a free cash flow of -$17.09 million on June 30 was trading at $20.05 a share. EverBank reported cash and short term investments of $558.16 million, assets of $24.12 billion, liabilities of $22.3 billion, cash from operations of $175.99 million, -$4.01 billion in cash from investing and $4.229 billion in cash from financing on the same day.

Where’s the Revenue?

The bottom line is that online banks do not seem to be generating the kind of revenue that their boosters claim. One has to wonder what these people are looking at. It is not the earnings per share figure; EverBank reported a diluted EPS of 1.013 on June 30, but BOFI reported an EPS of 5.360 on the same day. It also reported a profit margin of 37.2%. EverBank reported a profit margin of 14.89% on the same day.

The problem here is that the high profit margin is on a very small stream of revenues. At the end of the day, neither of these banks are making that much money. JPMorgan Chase, in contrast, reported a net income of $22.71 billion, a free cash flow of $17.3 billion, cash and short-term investments of $442.9 billion, assets of $2.45 trillion, liabilities of $2.208 trillion, $9.773 billion in cash from investing, $58.47 billion in cash from operations and -70.64 billion in cash from operations on June 30, 2015.

What’s more interesting is that Chase gave investors a dividend yield of 2.72%, a payout ratio of 32.43%, a return on investment of 10.68%, a profit margin of 26.42% and a diluted EPS of 5.542. Yet it was trading at $61.70 a share on October 12, 2015. In contrast, BOFI paid no dividend; it had a payout ratio of .37%, a return on equity of 18.48%, a diluted EPS of 5.36 and a profit margin of 37.2%. EverBank offered investors a dividend yield of .9%, a payout ratio of 21.77%, a return on equity of 8.61%, a diluted EPS of 1.013 and a profit margin of 14.89% on the same day.

The bottom line is that you can find many better stocks than BOFI at a much lower price. The numbers for this stock just do not add up; it is grossly overpriced. The whole valuation seems to be based on hype and nothing else.

If any stock is headed for a fall, it is BOFI; sooner or later this financial institution’s share price will come crashing back to earth. My guess is it’ll fall to the same valuation as EverBank, or around $20 a share when investors realize that there is nothing but hot air holding it up.

So what is the future for BOFI? I imagine that once its stock price falls back to Earth, it’ll be gobbled up, probably by a larger bank out to snag its customers or possibly by a financial services company such as PayPal Holdings Inc. (NASDAQ: PYPL). PayPal is growing fast, but it does not own a bank; owning a bank could be the next logical step for PayPal.

One thing is certain here: Investors should stay far away from Bank of Internet. BOFI’s share price is heading for a crash that could bring down the whole net dotcom bubble. More than a few writers and observers, including some of our friends over at the Motley Fool, are going to have egg all over their faces when Bank of Internet comes crashing down.

Disclosure: your friendly neighborhood blogger owns shares of Bank of America and PayPal.