SoFi Stock Outlook: Despite Biden, Student Loans Resuming, Growth Accelerating

The Supreme Court has ruled, and the Biden Administration is largely abandoning its fight to permanently cancel student loan debt for millions of Americans (until 2024, an election year, when this plan will be touted). So what does this mean for SoFi (NASDAQ:SOFI), an already fast-growing fintech that expects its revenue to accelerate as federal student loan payments are now set to resume? In this report, we review how SoFi has been growing its business during the student loan pause (through the acquisition of technology platforms and a bank charter), how it will benefit going forward (from the student loan pause ending, higher interest rates and lower ecosystem customer acquisition costs), the company's recent financial performance, current valuation and risks. We conclude with our strong opinion on investing in SoFi.

About SoFi:

SoFi got its start in 2011 facilitating alumni-funded student loans to students at Stanford University, but has since grown into an online personal finance company and online bank. Based in San Francisco, SoFi provides financial products including student and auto loan refinancing, mortgages, personal loans, credit card, investing, and banking through both mobile app and desktop interfaces.

The company's growth has been fueled by impressive innovation and acquisitions in recent years, including the acquisition of multiple technology platforms (notably, the successful acquisition of Galileo, a leading API-based fintech platform) and a bank charter.

And with regards to customer acquisition, SoFi's marketing efforts (such as the "Changing the Face of Finance" campaign, which garnered over 72 million impressions in just five weeks) have helped attract new investment members and increased assets under management. Plus such efforts help enhance brand awareness and promotes member growth across the entire platform.

Moreover, SoFi's focus on product differentiation is evident in the continuous expansion of offerings and improved product uptake. For example, the company's recent partnership with Expedia to launch "SoFi Travel" (offering member discounts and cashback rewards) showcases SoFi's ability to diversify its services and attract customers seeking more than just traditional financial products.

For reference, SoFi divides its business into three operating segments (as you can see in the table below), including Lending, Technology Platform and Financial Services.

You'll note in the table above that student loan revenue (in the Lending segment) has slowed in recent years (this is consistent with the freeze on Federal student loan payments because it meant there was little reason for borrowers to refinance to a SoFi private student loans during this time). And you'll also notice that personal loans have accelerated dramatically as the company has been focused on other areas of the businesses for growth.

The Student Loan Situation:

As you have likely heard, federal student loan payments and interest charges were suspended during the pandemic. And the Biden Administration just recently lost a Supreme Court case to forgive federal student loans for millions of Americans. Furthermore, the pause on student loan payments and interest charges ended on September 1st, whereby payments will be due again on October 1st (thereby creating resumed economic challenges for millions of Americans).

The Biden Administration is already touting a new plan to forgive student loans (which will likely pick up steam and media intention just in time for the 2024 election cycle) under the Federal Higher Education Act of 1965. However, this plan will not take affect for a least one year, or longer, if ever. In the meantime, the pause to Federal student loan payments is now over (with payment due again beginning October 1st).

How will the end of the student loan pause impact SoFi?

The end of the pandemic-era pause on federal student loan interest and payments is a good thing for SoFi because it means there will again be incentive to refinance federal student loans through SoFi. Per CEO, Anthony Noto, during the most recent quarterly earnings call:

We're really happy for the American people in that our administration has made a decision on the outlook for student loans, so families can plan accordingly. It is going to be a huge burden for many of them. And the more they know, the better they can plan for the future and we're here to help them in any way that we can.

And just to give you an idea of how large the student loan refinancing opportunity is for SoFi, Noto went on to explain:

There's over 40 million Americans that still have federal student loans. Think about that number, 40 million Americans. We haven't even refinanced 1 million student loans in our history. In SoFi's entire history, we have not refinanced more than 1 million student loan -- federal loans including private student loans. And so the opportunity in front of us starts with 40 million, and then you can break it down from there based on demographics, based on interest rate, based on term to kind of understand the addressable market.

Further, according to SoFi CFO Chris Lapointe, the company expects student loan refinancing activity to accelerate through the end of this year:

Yes. So specifically related to our H2 guidance, our outlook currently assumes that we're going to be operating at our current run-rate origination levels in the student loan refinancing business until September. After September, we do believe there will be a recovery to higher levels of student loan refinancing revenue than the current trend. But we do not expect to return to pre-COVID levels in 2023.

In a nutshell, the end of the pause is a good thing for SoFi, but the company also has many other attractive revenue drivers too, as demonstrated in its most recent earnings release.

Review of SoFi's Q2 earnings: record-breaking performance

To give you some idea on how SoFi has been performing during the federal student loan pause, the company announced record performance in its newly released second quarter earnings report. Specifically, SoFi achieved its ninth consecutive quarter of record revenue and fourth consecutive quarter of record adjusted EBITDA.

Additionally, SoFi's lending segment displayed solid growth with adjusted net revenue of $322 million, a 29% year-over-year increase. And importantly, SoFi maintained strict credit standards, resulting in lower delinquency rates and charge-offs than industry averages (a testament to its commitment to quality).

Also important, SoFi's focus on customer acquisition efficiency and improved unit economics drove an impressive $20 million improvement in the contribution loss of its Financial Services segment, which is now well on its way to achieving a positive contribution profit.

These Q2 achievements show SoFi's ability to adapt and thrive in a rapidly evolving financial services industry.

And looking ahead, SoFi raised forward guidance, and expects to officially achieve GAAP profitability in Q4 of this year (an important metric for some investors).

SoFi has been doing extremely well during the student loan pause (thanks to its diverse revenue streams), and growth will now accelerate further with the student loan pause finally ending.

Valuation:

SoFi is not yet GAAP profitable, but (as mentioned) the company expects to be GAAP profitable in Q4. Therefore, instead of valuing SoFi with traditional valuation metrics, such as Price-to-Earnings ratio (which has little value at this point because SoFi does not yet have any earnings, and the company is focused on long-term growth), a better approach is to consider the company's total addressable market opportunity (or "TAM") which is truly enormous considering financial technology has the potential to disrupt the entire financial services sector (such as personal loans, student loans, home loans and SoFi's payment processing application, Galileo). For example, the student loans market alone has nearly 40 million untapped customer opportunities (so far, SoFi has tapped around only 1 million, as mentioned earlier).

And as SoFi grows it gains competitive advantages (versus other Fin Techs) in terms of economies of scale, but especially lowering its customer acquisition costs (because once they have a customer for one product, it's easier to get them to use another product). Lowering customer acquisition costs by expanding product offerings is a major component of SoFi's business strategy, and it will help improve profitability down the road.

As such, SoFi has been rapidly growing revenues (as shown earlier), and the company's price-to-sales valuation multiple has come down significantly (versus the pandemic bubble time period). SoFi trades at a reasonable 4.4x sales multiple, which is compelling considering the company's high revenue growth rate and large total addressable market.

Also noteworthy, rising interest rates are a benefit to SoFi because it increases the net interest margin on loans (i.e. the difference between the rate SoFi pays to borrow and the rate it earns on lending). For example, per CFO Chris Lapointe:

Growth in net interest income was driven by a 17% year-over-year increase in average interest earning assets and a 289 basis point year-over-year increase in average yields, resulting in a net interest margin of 5.74% for the quarter, which is a 50 basis point expansion year-over-year and importantly a 26 basis point expansion versus Q1, 2023.

Also, it helps that SoFi's total deposits continue to grow as well, as you can see in the table below.

Risks:

Investors should also be careful to consider the significant risk factors that SoFi currently faces. For example:

• Competition: SoFi has built a niche for itself among high-earning young people (for example, SoFi's student loan borrowers' weighted average income is $163,000 with a weighted average FICO of 768). However, it faces growing competition across multiple loan types. For instance, LendingClub (LC) is having success with personal lending, but does not do student loans. And Nelnet (NNI), another name that gets thrown around, is focused on federal loan servicing. And of course, SoFi competes with big banks for personal loans (such as JP Morgan (JPM), Wells Fargo (WFC) US Bank (USB) Bank of America (BAC) and others). SoFi has a great head start in its niche, and is expanding rapidly, but competition in the space remains a constant threat, and SoFi must constantly innovate and continue to grow in order to build and maintain a sustainable competitive advantage. Also worth mentioning, SoFi arguably has one of the best investment apps available today.

• Interest Rate Risk: Interest rate volatility impacts net interest margins and earnings (as mentioned earlier), but as Chris Lapointe ("CFO") mentioned on the quarterly call, SoFi's non-interest income declined sequentially during the most recent quarter due to fair market value write-downs caused by increases in interest rates. This risk could impact the company's earnings going forward, and interest rate volatility remains an important consideration for the business.

• Share Price Volatility: SoFi shares are volatile (as you can see in the earlier price chart), as is often the case for young disruptive growth companies. Investors should be aware of the price volatility and focused on the long-term (instead of day-to-day, or even quarter-to-quarter, price moves). Long-term, these shares have tremendous upside potential for patient investors.

Conclusion: Is SoFi Stock a Buy, Sell or Hold?

We currently "hold" shares of SoFi, and (despite all the student loan drama) we like it enough to rank it #9 in our new top 10 growth stock report. In particular, SoFi is benefiting from a solid fintech growth trajectory (thanks in large part to its strong innovation and growing TAM), a healthy financial position, an improved net interest margin (and on a higher bank deposit base), and an attractive valuation. Further, the end of the student loan pause is an incremental positive for the company. If you are a long-term growth investor (that can handle a healthy dose of volatility) SoFi shares are absolutely worth considering for investment.

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