Fintech company SoFi (SOFI) is drawing increased interest from investors as student loan repayments, which have been on hold since 2020, are now set to resume starting in October. The pause was first initiated in March 2020 by then-President Donald Trump, and has since been extended multiple times - first by him, and then by his successor, President Joe Biden.
SoFi operates a student loan refinancing business, and its fortunes nosedived as the student loan moratorium meant that borrowers no longer had any pressing need to refinance their loans. Incidentally, SoFi sued the Biden administration earlier this year over the repayment pause.
Student Loan Repayment Resumption is Positive for SoFi
Wall Street is more or less unanimous that the resumption of student loan repayments is positive for SoFi.
Earlier this week, Bank of America analyst Mihir Bhatia said that, given SoFi's strong position in the student loan refinance market, it should benefit from the resumption of student loans. It's estimated that the company’s market share in the student loan refinance market has risen to 60% in recent quarters, as compared to 40% before the moratorium on repayments was placed.
That said, I believe that the resumption of student loan repayments is only one aspect of the bullish case for SoFi, and the fintech company looks like a good buy anyway.
SoFi Went Public in 2021
SoFi went public in 2021 through a reverse merger with one of Chamath Palihapitiya’s special purpose acquisition companies (SPACs) - and like most other SPACs, it now trades below its debut price of $10.
The company went public at a time when the SPAC mania was at its peak, and Social Capital Hedosophia Corp. V - the “blank check” company that merged with SoFi - soared above $25, or 2.5x its IPO price, even before the merger. However, it hasn’t reached those levels since then.
The SPAC bubble has since burst, and Palihapitiya had to wind down two of his SPACs last year. That said, while a lot of former SPACs – including those that merged with companies backed by Palihapitiya – are struggling for relevance and have become penny stocks, SoFi’s outlook looks promising.
SoFi's performance within this universe stands out because, while a lot of former SPACs have faltered in execution and are nowhere near fulfilling the business forecasts they provided at the time of their “blank check” merger, the fintech company has not only met, but actually exceeded, some of its initial parameters.
SoFi is a Major Fintech Player
Along with its multiple fintech products – which create cross-selling opportunities into its burgeoning user base – SoFi also has a bank that gives it access to low-cost funds. During Q2, half of SoFi's loans were funded by its own deposits, and a continued increase in that number should support the expansion of its net interest margins (NIMs).
SoFi added over 584,000 new members in Q2 2023 – a new record that took its total member count to 6.2 million, and an increase of 44% compared to the corresponding quarter last year. The member count has grown by almost six times since the first quarter of 2020, when the company reported 1.08 million subscribers. The total number of products on its platform has also soared, and reached 9.4 million at the end of Q2, which was 43% higher YoY.
SoFi is posting positive adjusted EBITDA, and in Q2, its adjusted EBITDA was $77 million at a healthy margin of 16%. Analysts expect the company’s revenues to rise 31.3% and 24.4% YoY in 2023 and 2024, respectively. While that would indicate growth slowing down from 52% last year, it's still a strong pace – and more upside could be in the cards as its student loan refinance business starts to gain traction.
SoFi is currently posting GAAP losses, but is quite optimistic that the business will become profitable on a GAAP basis in Q4. Incidentally, SoFi has grown its top line without compromising on credit quality and profitability. During the Q2 earnings call, management stressed that its on-balance delinquency rates are less than what they were before the COVID-19 pandemic.
SoFi Stock Forecast
Wall Street analysts have given SoFi stock a consensus rating of Hold. Of the 16 analysts covering the stock, 5 rate it as a Strong Buy, while 7 call it a Hold. One analyst rates it as a Moderate Sell, while 3 have assigned it a Strong Sell rating. The stock's mean target price of $9.86 implies potential upside of 15% from current levels.
SoFi stock trades at a next-12-month price-to-sales multiple of 3.56x, which looks reasonable given its growth outlook. If the company can deliver on GAAP profitability and subsequently turn profitable on a sustainable basis, I believe it should see a valuation rerating.
Overall, while the entire fintech space has taken a beating - and PayPal’s (PYPL) valuation multiples are sagging near their all-time lows - SoFi offers favorable risk-reward dynamics in the long term, with the resumption of student loans providing a key short-term driver.
On the date of publication, Mohit Oberoi had a position in: SOFI , PYPL . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
