Summary
- SoFi has rallied sharply from lows below $6, but the stock shouldn't have traded this low.
- The fintech specializes in refinancing student loans and the market has misplaced fears over student debt forgiveness.
- The stock only trades at 3x '23 revenue targets with the end to the student debt moratorium providing upside to sales targets.
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As with a lot of fintechs, SoFi Technologies (NASDAQ: SOFI) bounced strongly off the May panic lows. Whether due to recession or credit fears, the stock market no longer views the growth story in the same positive light despite a business model that remains strong. My investment thesis remains very Bullish on this stock as the major prescribed weakness due to student loan forgiveness concerns remains very misplaced.
Student Loan Misperceptions
In the last earnings call, CEO Anthony Noto highlighted a view of how SoFi would happily like to see the Biden Administration approve a $10,000 student loan forgiveness plan and move on with repayment requirements:
The best thing for SoFi and for SoFi shareholders in our business is if he announces... well, the best thing is that he ends the moratorium and we just move on, but that's unlikely. What's more likely is some level of forgiveness. If there is some level of forgiveness, $10,000 and below I think would be great for our business.
Once there actually is forgiveness, there's nothing to wait for anymore. You now know what the plan is, and you have to make a decision. Well, if you had $70,000 in loans, which is our target market, and you get $10,000 in forgiveness, you still have to refinance $60,000. But the number of people that will be refinancing will be magnitudes greater than it was in the past, because there's really no reason to wait any longer, especially with rates going up
The market was surprised to see the CEO of a fintech propose such a move considering the fears of a loan forgiveness plan would impact the business of SoFi focused on gaining customers from refinancing student debt. Such a move would set a horrible precedent, but the fintech is set to get the typical customer refinancing $70,000 via SoFi to now refinance $60,000. The company would see a flood of pent-up demand and any forgiveness restrictions above incomes of $125,000, or even up at $150,000, might not even impact SoFi considering their high-income customers.
The ironic part is that most people, including those in the Biden Administration, don't appear to actually understand the student loan market. A big difference exists between a student taking out massive debt loads for graduate programs like an MBA or doctorate and a low-income person not even attending college due to a lack of funds.
Politico highlighted the issue with a blanket forgiveness of $10,000 in debt would offer $3.60 to the highest-earning 10% of households for every $1 forgiven to the bottom 10% of households. Again, the policy is very regressive considering student debt is mostly held by the higher earning individuals.
Source: Student Loan Forgiveness paper
Even a plan to exclude individuals making over $150,000 from the student debt forgiveness doesn't change the loan forgiveness much due to a limited amounted of people in such income classes holding such debt. Most of the current student debt is held by high-income families with strong earnings potential due to their education.
The student loan forgiveness concept is even more bizarre considering such a program already exists. The Income-Driven Repayment (IDR) plans already offer substantial loan forgiveness options to low-income borrowers and reduce payments by these borrowers.
The government could easily expand this program to better attack any problem with reducing the student loan debt problems in this country. Such a plan would offer a solution to current and future borrowers versus the current concept of a one-time solution.
Big Upside
SoFi got a major bounce off the recent lows to hit $7. The market cap has jumped back up to a $7 billion valuation, even with the headwinds of the lower student loan refinancing levels hitting revenues.
The fintech recently guided up 2022 revenue targets to $1.5 billion for nearly 50% growth on the year. The stock bounced partly due to the realization revenues would still surge with or without student loans due to a strong focus on personal loans now.
The current analyst estimate has 2023 revenues reaching $2.14 billion with an unclear indication of whether analysts are including a student loan moratorium or debt forgiveness amount into these estimates. For its part, SoFi forecast about$100 millionless in revenue by cutting out student loan refinancing due to the federal government moratorium extension from May 1 until August 31.
The fintech assumed the moratorium lasts all year suggesting a roughly $150 million revenue hit for the full year. In addition, the customers not refinanced this year cut down on the additional products sold to customers in future periods.
The market will naturally focus on credit risk in a situation where afinancial "hurricane"is on the way according to respected JPMorgan Chase (JPM) CEO Jamie Dimon. The company refinances student loans to the people the Biden Administration wants to exclude from loan forgiveness programs limiting the risk to credit losses, but SoFi does have a business very reliant on loan demand. Any shrinkage in demand will hurt the growth rates.
Of course, a company with an adjusted EBITDA target of $100 million this year has additional risks facing the stock. SoFi doesn't have a strong profit stream to offset any unexpected financial hits from slowing demand. The market would surely dump the fintech on any revelation where the company ends up further away from profits due to a more challenged business model.
Takeaway
The key investor takeaway is that SoFi's business isn't as impacted by student loan forgiveness as perceived by the market. Due to a focus on higher income borrowers, the business appears a lot less impacted by inflation and recessionary pressures on lower-income consumers.
SoFi once traded above $20 on stock hype, now the stock trades at $7 on irrational investor fears. Investors should use this weakness due to ill-placed fears to pick up a cheap fintech with superior growth rates.
Source: Seeking Alpha
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