2023-06-01 11:18:04 ET
Summary
- SoFi shares experience positive momentum as the Federal Student Loan Payment Moratorium nears its expiration date, potentially rebooting the company's student loan refinancing business.
- The resumption of student loan payments could lead to an upward revision of SoFi's EBITDA guidance, with GAAP profitability also nearing.
- Risks for SoFi include yet another student loan repayment freeze, which would result in continued headwinds for the company's refinancing business and FY 2023 EBITDA outlook.
Positive momentum has returned to shares of SoFi Technologies (SOFI) after the personal finance company submitted its first-quarter earnings sheet and submitted a raised outlook for FY 2023. The firm's raised guidance and consistent acquisition momentum were the reasons why I called SoFi a gift below $5 and although shares have seen a 40% upward surge since I last covered the FinTech, I am still accumulating.
I also believe -- because SoFi is a heavily shorted stock -- that strong financial results and a progression towards GAAP profitability in FY 2023 could lead to a significant reduction in the company's short interest ratio. If the personal finance FinTech executes on its growth plan and achieves GAAP profitability this year, shares could be set for a major valuation upswing!
Reboot of SoFi's student loan refinancing business is a catalyst for growth
At the beginning of the COVID-19 pandemic, the U.S. government allowed borrowers to stop student loan repayments as a temporary relief measure. Since the initial student loan repayment halt in 2020, the Federal Student Loan Payment Moratorium has been extended multiple times and with the latest moratorium ending on June 30, 2023, SoFi's student loan refinancing business is set for a major reboot in the short term.
The freeze of student loan repayments has resulted in a serious contraction in SoFi's student loan refinancing business, which declined to a quarterly volume of $525.4M in Q1'23. In the first quarter of FY 2021, SoFi originated $1.0B in student loans. A year before that, SoFi originated more than $2.1B in student loans. Although SoFi has been able to offset declines in its student loan origination business with growth in the personal loan segment, the moratorium has essentially led to no significant growth in SoFi's origination business. The extension of the moratorium to June 2022 was responsible for a major downgrade in SoFi's EBITDA outlook, from which the firm's shares suffer to this day.
The resumption of student loan payments in the near future could kickstart SoFi's student loan refinancing business and lead, potentially, to an upward revision of the firm's EBITDA guidance for FY 2023.
The lending business is by far the largest for SoFi and a resumption of student loan payments in the second half of FY 2023 could be a strong catalyst for growth for the personal finance company: 71% of all revenues came from the lending business, which is key to the firm's overall growth. Technology products and Financial Services also contribute to SoFi's growth, especially the latter, but the company's performance ultimately depends on the large size of its lending business.
Move towards GAAP profitability in FY 2023 creates short squeeze potential
SoFi is a heavily shorted stock with a short interest ratio of approximately 11% and more than 103M of the company's shares shorted by investors that have a negative view on the company's operational execution and valuation. However, the short interest ratio peaked last year. SoFi has had some positive news to report in the interim including consistent momentum in its customer base, strong revenue growth even after the pandemic (although moderating) and the personal finance company raised its outlook for adjusted revenue and EBITDA. Additionally, SoFi has guided for GAAP profitability in FY 2023 which I believe could lead to a potential short squeeze.
SoFi's valuation
SoFi's shares went into a new up-leg after the company presented results for its first-quarter and raised its outlook for FY 2023 adjusted revenues and EBITDA. Now, shares of SoFi are selling at a P/S ratio of 2.7X, which is higher (but not that much higher) than the price-to-revenue ratios of PayPal ( PYPL ) or Block ( SQ ).
PayPal is trading at a P/S ratio of 2.1X, while Block has a price-to-revenue ratio of 1.55X. However, no company has as fast-growing a customer base as SoFi which I believe is deserving of a higher valuation.
Neither PayPal nor Block are expected to grow as quickly as SoFi in the next few years. SoFi is projected to generate top line growth of 29% in FY 2023 and 22% in FY 2024. PayPal and Block are expected to see annual top line growth rates of 7% and 18% (FY 2023), and 9% and 14% (FY 2024). SoFi has grown 5.0x times faster than PayPal in Q1'23 and 1.7x faster than Block.
Risks with SoFi
There are a couple of risk factors for SoFi including yet another extension (possible, but not probable) of the Federal Student Loan Payment Moratorium which is set to expire on June 30, 2023. Another extension would likely result in continual headwinds for SoFi's student loan refinancing business, as well as the company's EBITDA outlook.
Final thoughts
SoFi is now my second-largest portfolio holding, as the personal finance company is on the very brink of achieving GAAP profitability. Just as importantly, SoFi is nearing a potential catalyst which relates to the restart of its student loan refinancing business… which could result in a potentially raised guidance (net revenues and EBITDA) for FY 2023. Additionally, SoFi is growing much faster than other FinTechs and SoFi also has short squeeze potential as the company's shares remain heavily shorted!
For further details see:
SoFi: Short Squeeze Candidate