SoFi Technologies Stock: We Have A Problem (NASDAQ: SOFI)

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SoFi Technologies Acquires Technisys SA For $ 1.1 Billion

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SoFi Technologies Inc.’s (NASDAQ: SOFI) shares are down 40% year to date and investors are wondering if this is a good time to buy. The company secured a national bank charter recently and has been reporting rapid customer adds consistently, so investors are tempted to go long on the name at its discounted prices. However, SoFi also has some headwinds that could dent its near-term growth prospects and subdue its stock even more. Let’s take a closer look at it all.

The Growth Catalysts

Let’s start off with some of SoFi’s prominent growth catalysts at play. The company continues to add customers at a rapid rate, without exhibiting any signs of plateauing, which is indicative of a compelling product positioning. This also positions SoFi favorably for more cross-selling and upselling opportunities, since it now has a diverse bouquet of offerings. For example, a customer might have joined SoFi to refinance their home loan but they eventually also sign up for its credit card and a personal loan. So, in essence, the company’s rapid customer adds points to rapid revenue growth in the future as well.

SoFi Technologies Members Count

Secondly, SoFi, historically, was not permitted by law to offer interest rates to its customers that were higher than the interest rates it received from partner banks. This meant that SoFi had to rely on the utility of its app ecosystem, ease of use, product integrations and heightened marketing spend to attract customers. From its 10Q filing from September:

Because we are not a bank holding company, however, we are not permitted to offer members an interest rate on their SoFi Money account balance that is higher than the interest rate we receive from our partner banks. Certain of our competitors are not subject to the same restriction and we may lose current SoFi Money account holders to those competitors or fail to sign-up new SoFi Money account holders due to our competitors offering a lower interest rate.

But that’s a problem of the past. SoFi secured its national bank charter license earlier this year in January. This should essentially reduce its reliance on partner banks, increase its net interest margin, lower its cost of funds and allow it to offer more competitive interest rates to attract customers. Altogether, SoFi’s management projects that bank operations will increase their adjusted EBITDA by up to 75% in FY22 and 48% in FY23. These are massive gains.

I also contend that with competitive interest rates, SoFi will not have to advertise as much to drive user growth which essentially stands to lower its cost of customer acquisition. But that’s just speculation as of now. It remains to be seen how competitive SoFi’s interest rates really are, once it fully integrates banking operations in coming weeks.

The Risk Factors

The largest overhang surrounding SoFi’s growth prospects, in my opinion, is the federal student loan moratorium extension. The government has already extended the deadline twice, and the moratorium is supposed to expire on May 1, 2022, but we are likely looking at an yet another extension. Banks have reportedly received letters from the Education Department asking them not to reach out to borrowers about the upcoming May 1 deadline. Analysts are now expecting the moratorium deadline to be deferred to 2023.

Now, SoFi offers a number of products to its end-customers. These include credit cards, investing and money management accounts, home loans, personal loans and student loans. Our database at Business Quant actually reveals that SoFi’s student loans business was quite sizable and accounted for 63% of its total loan originations in Q1 FY20. However, with the loan moratorium introduced in 2020, students did not find any immediate need to refinance their loans with SoFi of late. This has been hampering SoFi’s loan originations growth in recent quarters.

SoFi loan originations by product type

SoFi’s management disclosed on their last earnings call that the moratorium extension from January to May, stands to reduce their revenue by up to $ 35 million in Q1 alone. They issued their FY22 revenue guidance of $ 1.57 billion with the expectation that the moratorium will be lifted in May 2022. However, if the moratorium deadline is now pushed to mid-2023, SoFi could be looking at up to $ 140 million in lost revenue and it might as well miss its FY22 guidance.

Our Q1 guidance incorporates the negative impact of the unexpected extension of the federal student loan payment moratorium to May of 2022. We estimate that negative impact to be approximately $ 30 million to $ 35 million of revenue and $ 20 million to $ 25 million of contribution profit in Q1, with loan origination levels for the entire quarter to be consistent with those of the first three quarters of 2021.

It’s important to note that SoFi is unprofitable on a GAAP basis and its management was counting on rapid revenue growth to become profitable. But with significantly reduced revenue and contribution profit potential, from the student loan business, at least for the foreseeable future, the company may have to raise more debt or dilute its shareholders in order to fund operations.

Besides, if the federal government cancels or forgives student loans by a significant amount, the market for student loan refinance could shrink as well. This would further weigh on SoFi’s growth prospects and worsen the investors sentiment pertaining to the company. From its 10K filing:

If student loans were forgiven or canceled on any meaningful scale, or if federal loan borrowers were permitted to refinance at lower interest rates, our profitability, results of operations, financial condition, cash flows or future business prospects could be materially and adversely affected as a result. In particular, our student loan refinancing business within our Lending segment, which is our largest segment, would be materially and adversely affected.

What further exacerbates the problem is the fact that SoFi’s shares are trading at lofty trading multiples in spite of the moratorium overhang. Let’s look at the chart below to better understand the issue.

SoFi stock trading multiples

The Y-axis highlights the revenue growth for 40 US-listed stocks operating in the credit services industry. Note how SoFi is vertically positioned at par with many of its peers. Now let’s shift attention to the X-axis, which plots the price-to-sales (or P / S) multiples for the same set of companies. Note how SoFi is horizontally isolated towards the right. This plot, collectively, suggests that SoFi is growing at par with many of its peers but trading at significantly higher P / S multiples.

On the other hand, there are at least 8 other stocks that are growing revenue at more or less the same pace as SoFi’s, but still they’re trading at significantly lower P / S multiples. This should encourage investors to rethink their thesis for SoFi Technologies.

The Investors Takeaway

There’s no denying that SoFi has grown at a rapid pace in the past and the banking charter stands to boost its EBITDA. However, government policies could significantly weigh on SoFi’s near-term growth prospects. Besides, its shares are trading at relatively higher P / S multiples compared to many of its industry peers, which does not help. So, for these reasons, risk averse investors may want to avoid the stock entirely for the time being. Investors who understand the risks associated with investing in SoFi, and wish to bet on its long-term growth prospects nonetheless, may want to wait for potential price corrections before initiating long positions. Good Luck!

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