Introduction and Thesis
In my previous article, I was bullish on SoFi (NASDAQ: SOFI). I saw huge opportunities being created for the company in the financial sector, which led me to believe that SoFi was a buy. At the time, I believed that SoFi had the potential to disrupt the banking industry by creating a financial super app, a single platform that satisfies all users’ financial demands. SoFi offers everything from multiple loan products to financial services products, including credit card and brokerage services. SoFi even had Galileo, a business-to-business product that builds financial infrastructure. The cross-selling of its products and the execution of the management team to conquer the market seemed to create a powerful trend, especially after the approval of its new bank charter. However, while I believe all of these long-term trends are continuing, I am revising my rating on SoFi to an expectation of a purchase. I think investors should keep SoFi instead of buying the dip. The company is in great shape, but the political risks beyond SoFi control is too big. I think it’s extremely likely that the Biden administration will extend the student loan moratorium which is set to resume on May 1. Because SoFi is exposed to these student loan products and has issued guidance assuming student loan will resume on May 1st, I see this possibility as a negative catalyst for the business in the coming months. The effect of suspending student loans throughout 2022 will be detrimental, and for that reason, I believe SoFi is an expectation. I believe investors can initiate a position or average down on SoFi at a better price in the future.
Extension of the moratorium on student loans
When the pandemic started, the pandemic affected many Americans under the Trump administration, leading to the start of the student loan moratorium. Then, because the pandemic continued to challenge Americans, the Biden administration extended the student loan moratorium until May 2022. However, I think it is extremely likely that the Biden administration will extend the moratorium again. student loan payment.
In March, the Department of Education instructed the companies that federal student loans department not send notices to borrowers that their payments would resume in May. I believe this is a precursor to the announcement of an extended moratorium on student loans. Here’s why:
Later in 2022, midterm elections will take place. Unfortunately for Democrats and the Biden administration, the president’s approval rating is all time low. If the President cannot reverse this current trend, it is extremely likely that the Democrats will lose the majority in the Senate and possibly the House, and the Republican-controlled Congress or Senate will roll back key President Biden programs that the Republicans disagree. with. Therefore, for Democrats and President Biden, maintaining a majority in the Senate is paramount.
Unfortunately for SoFi, the student loan moratorium is extremely popular among voters, especially Democratic voters. According to Forbes, about 50% of Americans support extending the student loan moratorium, compared to only about 33% of Americans (27% were unsure). Therefore, ending the student loan moratorium will be extremely unpopular among voters, further reducing President Biden’s approval rating, which will put additional pressure on the upcoming midterm elections. Knowing this, on April 2, Democrats in the House and Senate sent a letter to President Biden asking for an extension of the student loan moratorium. Given these facts and President Biden’s political situation, I think it is likely that the student loan moratorium will be extended at least until the midterm elections.
Perform on SoFi
SoFi has a diversified business, so the extension of the student loan moratorium will not cripple business. However, this will hurt the margins and growth rate of the business.
In the Q4 2021 earnings report, SoFi guided revenue growth of around 55% in 2022 along with an adjusted EBITDA margin of 11%. This guidance was given pending a student loan moratorium ending in May.
[SoFi’s] Management assumes that the moratorium on federal student loan repayments expires as currently contemplated on May 1, 2022 and that student loan refinance volume normalizes to pre-Covid levels
Therefore, if the break is prolonged, SoFi will have to adjust its forecast downwards, which could put pressure on the share price.
For the whole year 2021, student loans accounted for about 34% of total loans granted. This level is significantly lower than in 2020, when approximately 50.8% of total loans disbursed came from student loans. SoFi today is more diverse; however, in 2021 loans still accounted for approximately 75.6% of total revenue. Additionally, Lending Products had a contribution margin of approximately 52.3% compared to the Technology Platforms segment which had a contribution margin of 33% and the Financials segment with a negative contribution margin. Therefore, the lack of growth in the student loan segment will not only put pressure on the company’s growth rate, but will also put pressure on its overall margins. These negative catalysts are outside of SoFi is in control, but I think it’s wise for investors to be cautious going forward.
Risks for the thesis
Political actions can often be unpredictable. There are many moving parts involved in every act. It may be unwise to delay buying and wait for certain political actions as opportunities may disappear. In addition, the expectation of an extension of the student loan moratorium may already be built into The low SoFi stock price. As shown in the graph below, SoFi’s share price has seen a dramatic drop over the past few months. Therefore, the announcement of an extension of the student loan moratorium may not have a detrimental effect on the stock price.
[Chart created by author using YCharts from Seeking Alpha]
Despite these risks for the thesis, I will continue to hold SoFi stock with no average drop in my stocks. I think it’s best to be careful.
SoFi is a company with solid fundamentals. SoFi aims to create a super financial application where a single The SoFi platform can meet all the financial needs of consumers. With a banking charter and a financial infrastructure platform, Galileo, SoFi’s long-term future looks bright. However, I expect trouble in the short term. For political reasons, I think it is highly likely that the student loan moratorium will be extended. This will negatively affect SoFi’s growth rate and operating margins led the management team to cut the company’s 2022 guidance. Therefore, I think it is best for investors to keep their SoFi positions instead of buying more.