Source: Beast Finance Author: Beast Finance
Why has SoFi’s stock price been on the rise this year?
In our previous analysis on SOFI Technologies (SoFi), we considered SoFi to be a “buying opportunity” given its below-average P/E ratio. Since then, the company’s shares have risen 64.3% and 80.0% year-to-date.
Previously, Bloomberg reported on May 31, 2023 that there was "a provision" in the Debt Ceiling Act stating that "student loan payments will begin 60 days after the end of the last moratorium extension on August 31, 2023." This latest development has a positive impact on SoFi Technologies' student loan refinancing business as students seek to refinance existing loans after the federal student loan payment moratorium expires.
At the Piper Sandler Global Exchange and FinTech Brokers Conference on June 7, 2023, SoFi highlighted that its "largest and most profitable business," student loan refinancing, had only been operating at a "25% growth rate" for three years due to the suspension of federal student loan payments. So it's easy to see why SoFi Technologies stock has performed exceptionally well so far in 2023, with new developments in the company's student loan refinancing business.
Key Metrics for SoFi Stock
When determining the outlook for SoFi Technologies' student loan refinancing business, Beast Finance believes there are some important metrics for investors to watch.
SoFi Technologies disclosed at Morgan Stanley's (MS) U.S. Finance, Payments, and Commercial Real Estate Conference on June 12, 2023 that it had achieved approximately $1.7 billion in quarterly student loan disbursements prior to the federal student loan payment moratorium. By comparison, SoFi Technologies disclosed in its most recent quarterly earnings report that student loan originations had fallen sharply in the first quarter of this year, to $525 million.
Even in the current environment of rising interest rates, there are likely to be borrowers keen to extend the term of their student loans at higher interest rates in order to reduce the burden of monthly debt payments. Therefore, our view is that SoFi Technologies should easily be able to double its quarterly student loan origination volume from the current $525 million and surpass $1 billion in future quarters.
Additionally, SoFi Technologies has also expanded its presence in the student loan refinancing market in recent years, which puts it in a good position to be an important beneficiary of the expected recovery in student loan refinancing demand. Specifically, SoFi Technologies' market share in the student loan refinancing market has grown from 40% a few years ago to 60% now, according to the company's disclosure at the June 2023 Morgan Stanley U.S. Finance, Payments, and Commercial Real Estate Conference.
What about SoFi's long-term prospects?
Boldbeast Finance believes that in the long run, SoFi Technologies has a pretty good prospect. According to S&P capital IQ, sell-side analysts expect SoFi Technologies' revenue and EBITDA to grow at a CAGR of 21.2% and 36.6%, respectively, during the fiscal years 2024-2027.
As noted above, sell-side analysts' bullish expectations for SoFi Technologies' long-term financial outlook are supported by the growth potential of the company's student loan refinancing business and its banking arm, SoFi Bank.
The total addressable market for its student loan refinancing business is estimated at $200 billion, SoFi Technologies said at the Morgan Stanley U.S. Finance, Payments and Commercial Real Estate Conference. That compares with SoFi Technologies' overall trailing 12-month revenue of $1.7 billion, less than 1% of its total addressable market for student loan refinancing businesses.
Separately, SoFi Technologies revealed at the Piper Sandler Global Exchange and FinTech Brokers Conference in early June that its banking business is already "GAAP profitable" and generates a fairly high ROE (20%), and expects to add "$2 billion" in deposits per quarter. As SoFi Bank's contribution to the company's overall business portfolio continues to grow, Beast Finance expects SoFi Technologies' profitability and return on equity to continue to grow.
Is SoFi stock overvalued or undervalued?
Beast Finance believes that the current valuation of SoFi Technologies stock is reasonable.
A stock's valuation is considered fair if its earnings multiple is at or relatively close to its expected earnings growth rate. According to valuation data from S&P capital IQ, SoFi Technologies' market valuation is 42.2 times EV/EBITDA, and the company's EBITDA compound annual growth rate for fiscal years 2024-2027 is 36.6%. This implies that SoFi Technologies' operating earnings multiple is approximately 15% higher than the EBITDA CAGR, so we think SoFi Technologies stock is fairly valued.
The outlook for SoFi Technologies' student loan refinancing business has improved significantly, with recent developments confirming the expiration of the student loan moratorium period, and SoFi's valuation has largely factored in these positive factors, so we think SoFi Technologies' valuation is reasonable and a stock worth investing in.