To The Moon

Summary

• SoFi's shares have more than doubled in value of late, but the rally could still continue.

• Student loan resumption is a big opportunity for SoFi and its deposits growth is further catapulting its growth.

• This is an opportune time for investors to load up on SoFi stock.

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SoFi’s (NASDAQ:SOFI $SoFi Technologies Inc.(SOFI)$ ) shares have more than doubled in value from its 52-week lows alone. Given this wild rally, investors are wondering if this uptrend is sustainable or if the stock is due for a correction. While that’s a legitimate concern, there are reasons to believe that SoFi’s shares have more upside in store. The neo bank has student loan resumption coming up, its deposits growth is outperforming peers and the stock is trading at an attractive valuation. In this article, I’ll attempt to explain why SoFi makes for a good buying opportunity for growth investors with a multi-year time horizon. Let’s take a closer look to gain a better understanding of it all.

Student Loan Opportunity

Let me start by saying that Biden’s student loan forgiveness program has been a major overhang for SoFi and other similarly positioned companies. The student loan moratorium was originally instated in 2020 to provide a relief for students, but it was extended multiple times and the government was proceeding towards extinguishing a major chunk of these loans. This would’ve meant that SoFi’s addressable student loan market would shrink significantly. So, the neo bank sued the government and the Supreme Court eventually intervened to strike down the plan to forgive student loans.

SoFi's number of product sales

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I had covered SoFi in a prior article about 6 months ago, citing its bullish prospects. The stock is up 55% since then but at the time, it wasn't clear when student loan repayments will resume and there was the general consensus that federal student loans will be forgiven till a certain limit. But we have clarity on this matter now, which only reinforces my bull thesis in company and warrants another closer look at the company's growth prospects.

As of this writing, student loans are due to resume from October 1, 2023. Students will now have the option to either resume their loan payments at the federal rate, or refinance their loans with SoFi at a lower rate. Needless to say, SoFi will be offering its lucrative interest rate deals to students that have high credit scores. But the point that I’m trying to make here is that there’s going to be a sudden gush of student loan refinancing applications country-wide and SoFi stands to benefit alongside its peers.

To give some perspective, SoFi’s management noted in their last earnings call that they have refinanced less than 1 million student loans in their entire history. Alongside, they emphasized that the target market has over 40 million Americans that may potentially be looking to refinance their loans.

Now, understandably all of these 40 million American students won’t flock only to SoFi. Many of them will have low credit scores and they won’t qualify for refinancing with SoFi. Then there’ll be another cohort that would have negligible loan balance and won’t be meaningfully accretive to SoFi’s books. Another cohort will go to SoFi’s peers. But there’ll also be a cohort that SoFi is banking on – students with sizable student loan balances, with high credit scores and are choosing to go with SoFi.

The neo-bank has an estimated 40% to 60% share of the student loan market. With a target market of 40 million applicants, that’s an addressable market of roughly 16 million to 24 million refinancing applications. I’ll refrain from giving any dollar-estimates here as we don’t yet know how SoFi’s market share and delinquencies evolve once repayments begin. But the 16 million to 24 million opportunity is 16-times to 24-times what SoFi has done in its entire student loan refinancing history till date, so it’s a sizable growth opportunity for all intents and purposes.

The returns from this student loan refinancing business are likely to remain muted initially. However, as SoFi refinances student loans at fixed rates in coming months, it would eventually profit from them once the Fed cuts rates next year while rates on these student loans remain at elevated levels. So, I expect SoFi to gain meaningfully from student loan refinancing in 2024.

Deposits Boom

Moving on, SoFi acquired Golden Pacific Bancorp for its national banking charter last year and its banking operations have been performing rather well ever since. Per our database at Business Quant, customer deposits with SoFi, between Q1 2022 and Q2 2023, have grown faster than all the 33 other prominent national and regional banks in our study group.

SoFi's deposits growth vs peers

BusinessQuant.com

This growth has broadly 3 implications. Like Upstart, SoFi also had to initially rely on partner banks for its loan originations. But now, with its healthy deposit growth, SoFi has access to cheaper capital and its reliance on partner banks is reduced. As a result, SoFi can pass on these interest rate savings to its customers and undercut its peers to further secure its market share.

Secondly, SoFi’s liquidity was a cause of concern till last year. The neo bank was loading loans onto its own books as partner banks weren’t as interested in SoFi-originated loans in a rising interest rate environment. As a result, SoFi’s liquidity ratios were quickly deteriorating, and it was unclear if it’ll be able to maintain the regulatory minimum levels. But with healthy deposits growth and efficient management of its loan portfolio, SoFi’s liquidity ratios have stabilized and have remained well above the regulatory minimums. This should reassure investors that the company is on the right path, towards sustainable long-term growth.

SoFi's liquidity ratios

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Lastly, the healthy deposits growth is a testament that customers are trusting SoFi with their savings and banking needs every day. This growth, in part, is driven by extensive integrations with SoFi’s own portfolio of products, good app interface, compelling interest rates on customer deposits and an overall stable operation. But overall, its stellar deposit growth validates that SoFi isn’t just another FinTech money app but a full-fledged and successful bank. This should encourage the investment community to treat SoFi more like an established financial business, rather than a FinTech startup that many mistake it to be.

Risk Factors

With that said, there are two risk factors to keep in mind. First, SoFi isn't GAAP profitable yet. If the economy deteriorates, its deposits growth might slow down, the company might find it difficult to growth rapidly and its stock could tumble. So, keep a close eye on SoFi's deposits growth to assess if such as scenario is playing out.

Secondly, although SoFi refinances student loans for applicants who have high credit scores, there's no telling how the delinquencies and defaults will fluctuate once loan repayments actually resume from October 1. A sharp rise in defaults could erode SoFi's book, require diluting shareholders to raise capital, hurt its growth prospects and drag its shares lower. So, keep close tabs on SoFi's liquidity ratios and its management's comments around defaults in its upcoming earnings calls.

Final Thoughts

It’s worth noting that SoFi’s shares are trading at 1.3-times its book value. This may seem high in isolation but its Price-to-Book multiple is significantly lower than its 2-year peaks, and it's also lower than some of the other prominent US-listed banks.

SoFi's relative valuation

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Considering that SoFi is growing rapidly, and disrupting the field of banking with a branch-less model, I see no reason why it wouldn't trade at a premium. At a hypothetical 1.6-times book, I contend that SoFi could be trading at 20-25% higher at $10.6 a share.

This undervaluation is in spite of SoFi’s above-mentioned growth catalysts, that are gradually unfolding with time. So, I believe the Street is not factoring the neo bank’s growth potential and investors with a multi-year time horizon may want to accumulate its shares on potential price corrections, before they inevitably rally further. Good Luck!

Source: seeking alpha