SoFi: Buy Before Federal Student Loan Repayment Pause Is Lifted (NASDAQ:SOFI)

SoFi (NASDAQ:SOFI) is my favorite cheap fintech stock to buy right now as SoFi shares trade just above key $5 support levels.

So much has changed since I posted my previous article on a potential SoFi short squeeze during the Super Bowl.

SoFi shares are down 60% YTD since then and now is a good time to get into the stock just before the Federal Student Loan Repayment Pause is lifted.

In this article, I’ll provide updates on SoFi’s progress and why I believe the stock is too cheap at these current prices.

SoFi Business Update

SoFi hit some important milestones during its most recent Q2 2022 earnings update. The company surpassed the 4 million member mark with 4.3 million active accounts and hit record revenue of $363 million (Up 57% YoY). Products hit 6.6 million and management raised its full year guidance for the rest of 2022.

Net losses improved to $95 million as the company pushes towards profitability. EPS was negative 12 cents per share (down from -48 cents per share in Q2 2021).

SoFi generates revenue from two segments: loan products and financial services. While the financial services segment has done well (Up 100% YoY to 5.4 million), SoFi has struggled with the Federal Student Loan Repayment Pause in terms of revenue.

Personal loans made up the bulk of Q2 2022 revenue while student loan receive took a big hit in contrast.

The company hit a record of $2.5 billion in personal loan origination as Americans borrow money in droves to keep up with rising costs and inflation.

Student loan origination decreased 52% due to the student loan moratorium.

Despite the short time headwinds, SoFi remains a strong fintech company with robust 2.0% APY on checking and savings account (nearly 66x the national average).

Financial services revenue will continue growing alongside member growth but the student loan segment needs to check up next year after losing ground due to the federal student loan repayment pauses.

The Student Loan Repayment Pause Ends Soon

According to the White House, the Student Loan Repayment Pause will officially end on December 31st, 2022.

US President Joe Biden proposed a student loan cancellation program of up to $20,000 for Pell Grant recipients and $10,000 for non-Pell Grant recipients.

This is good news for SoFi because the company will start receiving revenue depending on when the Department of Education starts processing these claims.

The bad news is that the US government must fire up the print press and further dilute the US dollar and place a greater burden on taxpayers to make this plan a success.

Details on the Justin Herbert Deal

SoFi signed NFL QB Justin Herbert of the LA Chargers to a 3-year sponsorship deal and offered him an equity stake in the company.

This is another positive sign for SoFi because the company wants to target younger adults who have been traditionally ignored by legacy banks.

Herbert is entering his 3rd year in the NFL and is one of the league’s best young players.

My Bullish Take

SoFi will likely disrupt the legacy banking industry in good time so this is a simple buy and hold for me.

The company has $707 million in cash on hand and already achieves positive EBITDA. Growth has been slow and steady as more young professionals migrate from Bank of America, Chase, and Wells Fargo to SoFi Money.

SoFi trades at a P/S ratio of 4.23, which is a bit more than its competitors.

Fintech Stocks by Price to Sales Ratio

Company	P/S Ratio
SoFi (SOFI)	4.23
PayPal (PYPL)	4.06
Block (SQ)	2.18
Upstart (UPST)	2.18

Click to enlarge

The entire fintech sector has been crushed and many of these stocks are on sale.

At under $7 per share, I believe much of the risk has been mitigated.

There is clear long term technical support near the $5 mark for SoFi and I believe the business has done well in such a difficult economic period.

Sub $6 was a better entry point but SoFi shares may soar if CPI inflation slows down and investors move funds back into the market.

I wouldn’t worry about SoFi shares being overvalued over $6 because much of the Student Loan Repayment Pause has been priced into the stock.

Risk Factors

I’m bullish on SoFi but there are several risk factors at stake.

• Member growth slows down in the future
• The Federal student loan repayment pause gets extended indefinitely and SoFi struggles to grow its student loan origination volume
• SoFi announces an at-the-market offering to raise cash and dilutes shareholders
• Legacy banks offer a similar product offering with 2%+ APY to lure customers away from SoFi
• SoFi’s short interest is around 15% and continues to grow as short sellers may continue betting against the stock.

As long as SoFi executes then longs can relax for now.

Conclusion

If you’re down big on SoFi stock, my suggestion is to take a long-term view and forget about SoFi stock for the next couple of years.

I cover these cheap growth stocks under $10 because they remind me of Amazon (AMZN) and Netflix (NFLX) in their early days.

Disruption takes time and people will eventually flock towards the best in business product. SoFi offers a superior checking and savings product with attractive yields so investors should just wait for the masses to jump on board.