To The Moon

Over the last few weeks, SoFi Technologies(NASDAQ:SOFI) has been hit with attack after attack to the stock. The fintech faces limited impacts to the long-term business from the crypto business, loan losses and studentloan moratorium, yet the stock has hit all-time lows after reporting 51% growth in the last quarter.Myinvestment thesisremains ultra-Bullish on the business building a financial Super App while the market spreads irrational fear.

Source: FinViz

Crypto Is Immaterial

Only a week after concerns surfaced regarding the proper accounting of loan losses were dismissed, Congress members sent adramatic letterto regulators regarding the crypto assets of SoFi. The company made it clear the regulatory risk is limited, yet the digital bank is accused of having a bunch of cockroaches.

The group of Democratic Senators from the Senate banking committee made a request for the fintech to face extra scrutiny due to a major regulatory risk that isn't the case. The move is similar to how the CECL loss issue was made into a story when fintech peer LendingClub(LC) was documented as financially preferring to hold personal loans on the balance sheet versus selling them despite the large upfront CECL charge. The charge doesn't impact the long-term financial benefits.

Per the latest10-Q fillingby SoFi, the company uses a third-party to transact crypto assets, but the company is on the hook for any lost or theft:

Through our SoFi Invest product (via our wholly-owned subsidiary, SoFi Digital Assets, LLC, a licensed money transmitter), our members can invest in digital assets. We engage third parties to provide custodial services for our digital assets offering, which includes holding the cryptographic key information and working to protect the digital assets from loss or theft. The third-party custodians hold digital assets as custodial assets in an account in SoFi’s name for the benefit of our members. We maintain the internal recordkeeping of our members’ digital assets, including the amount and type of digital assets owned by each of our members in the custodial accounts. We currently utilize two third-party custodians. Therefore, we have concentration risk in the event the custodian is not able to perform in accordance with our agreement.

The company later outlined the digital assets on the balance sheet were only ~$132.5 million and the brokerage fees were just $3.85 million in Q3'22. Congress has no reason to be so concerned about SoFi and single out this crypto business amounting to less than 1% of revenues and a small percentage of regulatory capital with the Tier 1 lever of SoFi at an incredible 31.0%.

Source:SoFi 10-Q Q3'22

Just because FTX collapsed is no reason to make wild assumptions about another financial institution. The correct regulator, whether the FED, FDIC, or OCC, should ensure the crypto assets of any bank are correctly held on the balance sheet and by any third-party exchange controlling the assets.

Either way, SoFi has limited risk and no material impact to the business from just cutting off the crypto business going forward.

Student Debt Delay

The Biden Admin. has again pushed back themoratorium on student debt. The move causes another headwind for SoFi, but it doesn't impact the long-term story.

Education Secretary Miguel Cardona is using the courts blocking the federal student debt as a reason to extend the moratorium by 60 days, or until June 30, 2023, at the latest. While the education leader claims the debt relief plan is legal, several courts have already disagreed with the plan to forgive $10K for borrowers and $20K for Pell Grant recipients below certain income levels.

Again, the move to delay repaying of student debt is illogical in that the majority of student debt is held by high income individuals. The majority of borrowers should move forward with refinancing debt knowing they aren't part of the forgiveness plan and the Biden Admin. should've only extended the plan for those approved into the forgiveness plan.

At the recentCiti FinTech Conference, CEO Anthony Noto was clear the digital bank was ready to move forward with or without the moratorium ending even based on higher interest rates:

Yes, everyday, the environment changes. If the moratorium ends on January 1, which remains a big lift until we get there. We anticipate there will be a lift in December, which is what we saw last year. As I mentioned, we were doing about $2.4 billion in the fourth quarter of 2019. We still think there's a really big TAM with rates up as high as they are now. It's a $200 billion of TAM that people would save in student loan financing in our credit box today. And so, we think we can get back to the high ones low twos on a normalized basis when payments resume.

AfterQ3'22 earnings, SoFi guided up expectations for Q4 due to expectations for the moratorium ending. The company made the following statement.

Throughout the last 12 months, we have demonstrated the benefit of having a diversified set of revenue streams and a keen focus on underwriting high-quality credit. We expect those benefits to persist going forward even in light of the existing macro backdrop. Our outlook also assumes a late Q4 2022 benefit in student loan originations, ahead of the January 2023 federal student loan payment moratorium exploration based on the trend that we experienced in 2021. This benefit is expected to partially offset seasonal Q4 softness we typically see in other lending products.

The company guided up yearly estimates to $1.517 to $1.522 billion, above prior guidance of $1.508 to $1.513 billion. Remember though, SoFi beat Q3 estimates by over $27 million accounting for all of the limited $9 million hike for the year.

Going back to the start of 2022, management guided to revenues of $1.57 billion and adjusted EBITDA of $180 million based on a rebound in the student debt business. Now, the fintech is set to be generally blocked out of those loan refinancings in 2022, yet SoFi won't end the year far from the original target.

Takeaway

The key investor takeaway is that SoFi appears under attack, but the company continues delivering strong results despite the student debt headwinds. The crypto and loan loss issues aren't even problems for the fintech over the long term.

The stock is far too cheap trading at 2x 2023 targets whether lowered or not based on the student loan moratorium extension. Analysts have revenues growing by 34% and SoFi is highly likely to beat those numbers when the student debt headwinds are ultimately removed.