Is SoFi Stock A Buy After Student Loan Forgiveness Announcement?

Elevator Pitch

My rating for SoFi Technologies, Inc.’s (NASDAQ:SOFI) stock is a Hold.

I touched on SoFi Technologies’ weak share price performance for the past couple of months in my previous article published on July 7, 2022. The recent announcement on student loan forgiveness has prompted me to write an update on SOFI now.

Taking into account legal issues, one can’t be absolutely certain that the student loan forgiveness plan will come into fruition. Even if it does, the student loan forgiveness plan has a mixed impact on SOFI, considering both the potential loan moratorium extension and the future growth potential of the company’s student loan business. Therefore, I choose to retain my Hold rating for SOFI (rather than upgrade to a Buy) in spite of the recent announcement.

SOFI Stock Key Metrics

Prior to analyzing the impact of student loan forgiveness on SoFi Technologies, it is worth devoting some attention to SOFI’s key metrics for the second quarter of 2022, especially those relating to student loans.

SOFI announced the company’s Q2 2022 financial results with a press release issued on August 2, 2022, after trading hours.

Non-GAAP adjusted EBITDA for the company surged by +81% YoY from $11.2 million in the second quarter of the prior year to $20.3 million in the most recent quarter. Notably, SoFi Technologies’ actual Q2 2022 non-GAAP EBITDA turned out to be double that of the mid-point of the company’s adjusted EBITDA guidance of $10 million. In particular, SOFI’s personal loan originations jumped by +91% YoY from $1,294 million for Q2 2021 to $2,472 million in Q2 2022, and this was a big driver of the company’s better-than-expected EBITDA for the recent quarter.

In contrast, student loans were a weak spot for SoFi Technologies in the second quarter of the current year. The company’s student loan originations contracted by -54% YoY and -59% QoQ to $399 million for Q2 2022.

In its recent quarterly earnings press release, SOFI highlighted that its student loan volume for Q2 2022 only represented a quarter of “the average pre-pandemic volume” because of the drag from the student loan moratorium (to be discussed in greater detail in the next section). SoFi Technologies also admitted at its recent Q2 2022 earnings call on August 2, that its lending business segment as a whole is “not as profitable as it would otherwise be with the student loan business”, even though the segment is “operating at really strong profitability” now.

The importance of the student loan business for SoFi Technologies suggests that it is necessary to understand the effects of the recent student loan forgiveness announcement, which I detail in the subsequent sections.

How Is SoFi Impacted By Student Loan Forgiveness?

Seeking Alpha News reported on August 24, 2022 that President Biden revealed a “plan to forgive $10K of student debt for borrowers who earn less than $125K per year and extended the pause on federally backed student loan repayments by four months to Dec. 31.”

In my opinion, the potential impact of the recent student loan forgiveness announcement on SoFi Technologies is mixed.

On the positive side of things, this might mark the final extension of the student loan moratorium.

As per the August 24, 2022 announcement, the student loan moratorium was extended for the seventh time to December 31, 2022. However, with a firm student loan forgiveness plan in place now, there is a reasonably high probability of the seventh student loan moratorium extension becoming the final one.

At the company’s second-quarter investor briefing, SOFI stressed that if and when the student loan moratorium ends, its student loan originations should return to “normalized levels that we saw in 2019 and Q1 of 2020.” SoFi Technologies also emphasized at the recent call that the resumption of student loan repayments” would “be a huge tailwind” for what is “a really profitable business” boasting “high incremental profit margins.”

As a comparison, SoFi Technologies’ student loan originations of $399 million in Q2 2022 was -81% lower than the company’s student loan originations amounting to $2,135 million for Q1 2020, as indicated in its second-quarter earnings presentation slides. Similarly, SOFI’s student loan originations had contracted by -43% from $6,695 million for FY 2019 to $3,812 million in the trailing twelve months’ period. In other words, a substantial growth in SoFi Technologies’ revenue and operating profit for fiscal 2023 is on the cards, if there isn’t any further extension of the student loan moratorium beyond the end of 2022.

On the negative side of things, there is the risk that the student loan forgiveness plan might not come to fruition due to legal issues, and this plan (if implemented) could be negative for the long-term growth prospects of SOFI’s student loan business.

A September 1, 2022 New York Times commentary mentioned that Biden’s student loan forgiveness plan might possibly encounter “legal challenges” from “loan servicers who are missing out on processing fees or lawmakers who view the policy as an infringement on congressional budgetary authority.” There are precedents for this; an example would be the previously proposed “$4 billion debt relief program for minority farmers” which was subsequently blocked as reported by Reuters.

Even assuming that the student loan forgiveness plan is implemented successfully, it could be a case of “short-term gain, long-term pain” for SoFi Technologies.

According to research published by Oppenheimer’s sell-side analyst that was cited by Seeking Alpha News in a recent August 25, 2022 article, more than two-thirds of people who are receiving student loans are earning less than $120,000 every year, which qualifies them for debt forgiveness. Oppenheimer holds the view that the new student loan forgiveness plan “will shrink the company’s (SoFi Technologies) total addressable market (in the area of student loan originations)” as indicated in the Seeking Alpha News article.

However, it is necessary to note that SOFI appears to be targeting student loan borrowers generating relatively higher earnings. SoFi Technologies indicated at its Q2 2022 earnings briefing that its student loan borrowers’ “weighted average income” is as high as $170,000.

In conclusion, there are both pros and cons associated with the recent student loan forgiveness announcement from SoFi Technologies’ perspective.

Will Student Loan Forgiveness Impact The Economy?

It is important to assess both the direct and indirect impact of student loan forgiveness on SoFi Technologies. I addressed the direct impact in the preceding section, while this section focuses on whether the economy might be affected by the student loan forgiveness plan. In general, strong economic growth will be good for finance companies like SOFI all else equal, so the key question is whether the student loan forgiveness plan will boost the economy in a significant manner.

Based on an August 25, 2022 sell-side research report (not publicly available) published by Goldman Sachs (GS) titled “Student Loan Relief: The Headlines Are Bigger Than The Macroeconomic Impact”, the student loan forgiveness plan shouldn’t have a meaningful impact on the US economy.

The analysis done by economists from GS highlighted that GDP should grow marginally “by about 0.1% in 2023 with smaller effects in subsequent years” as a result of the “income boost” resulting from student loan forgiveness. As such, investors should focus more on the direct effects of student loan forgiveness, and they need not pay much attention to the indirect impact of this initiative on the broader economy.

Is SoFi’s Forecast Positive?

The change in the sell-side’s consensus financial projections offers an indication of market expectations. In the case of SOFI, the company’s consensus financial forecasts haven’t changed significantly, and this suggests that the analysts don’t necessarily have a positive view of its financial outlook following the recent student loan forgiveness announcement.

In the past one month, Wall Street’s consensus fiscal 2023 revenue estimate for SoFi Technologies has been revised downwards by -0.6%, while the consensus EPS projection for SOFI in FY 2023 declined marginally by -0.04%. This implies that the sell-side analysts don’t have a high degree of confidence that the scenario of the student loan moratorium ending by end-2022 will be materialized. The consensus numbers suggest that the base case for analysts is that the student loan moratorium might be extended again to mid- or even late-2023.

In a nutshell, an analysis of the recent changes in SOFI’s consensus forecasts doesn’t provide a positive view of the company’s future prospects in relation to the student loan business.

Is SOFI Stock A Buy, Sell, or Hold?

My Hold rating for SOFI stock remains unchanged. There is too much uncertainty with respect to the successful implementation of the student loan forgiveness plan and its potential impact on SoFi Technologies’ short-term and long-term prospects. As such, I don’t think that the recent student loan forgiveness announcement is sufficient to warrant a rating upgrade for SOFI.