While SoFi (NASDAQ:SOFI) is growing rapidly and should benefit significantly from the likely end of the student-loan payment moratorium in August, the company has important weaknesses and is facing threats that could potentially be very debilitating.
Its weaknesses are its lack of profitability and the high interest rate that it’s paying on its deposits. Among the threats that it faces are potential student loan forgiveness and radically increased government regulation, along with the possibility that it may lose all of its revenue from crypto trading.
Since I believe that the company’s outlook could be tremendously undermined by its weaknesses and threats, I recommend that all investors sell SOFI stock.
I will go into detail on these strengths, weaknesses, and threats in the paragraphs below.
| SOFI | SoFi | $5.95 |
Rapid Growth and the Likely End of the Student Loan Payment Moratorium
In the fourth quarter of last year, SoFi’s net revenue soared an impressive 60% year-over-year to a record $457 million. This rapid growth is in-line with my prior thesis that the lender would benefit from its strong ties to many millennials whose salaries have greatly increased in recent years. Moreover, SoFi’s marketing efforts appear to be paying off handsomely, as it added almost 480,000 new members in Q4.
Meanwhile, SoFi has been hurt by the Biden administration’s many extensions of the moratorium on student loan payments. That’s because the suspension prevented SoFi from generating revenue from the refinancing of such loans. But after President Joe Biden recently signed a law that has officially ended the coronavirus emergency in the eyes of the U.S. government, the administration probably won’t be able to legally justify extending the moratorium any further. Therefore, I expect the suspension of payments to finally end on schedule in August, giving SoFi and SOFI stock an important, positive catalyst.
Lack of Profitability and High Deposit Rates
The lender reported a net loss of $40 million, excluding some items, for the fourth quarter of 2023. For all of 2022, its bottom line came in at a loss of $320 million. While that’s a significant improvement over its 2021 loss of $484 million, it’s still obviously not a good metric for SOFI stock. And although the company’s profitability is obviously increasing and will be helped further by the resumption of student loan payments, SoFi’s lack of meaningful profits at this stage of its existence is worrisome.
One issue that is hurting its profitability is the 4% interest rate that it pays on the checking and savings accounts of all of its members who use the company’s direct deposit service. That’s a very high interest rate compared with the amounts offered by other American banks and indicates that SoFi’s customer base may not actually be very loyal to it. Further, with many regional banks raising their deposit rates, SoFi may have to follow suit, putting additional pressure on its bottom line.
Potential Student Loan Forgiveness and Increased Regulation
The Supreme Court may very well decide to allow the Biden administration to forgive $10,000 of the debt of millions of Americans with student loans. Since SoFi is one of the largest providers of student loans, such a decision would obviously hurt the company significantly. The court may release its opinions in June.
Meanwhile, SoFi enables its customers to trade and invest in cryptos, and the Biden administration clearly frowns upon lending institutions being involved in any way with cryptos. In fact, the Fed has stated that it intends to stop banks from conducting a wide range of activities involving cryptos.
As a result, SoFi may soon be entangled in regulatory battles with Washington, and the company could have to give up all of its revenue from crypto trading. While SoFi does not break down how much revenue it obtains from crypto trading, such trading is part of its Invest offerings and could generate a majority of Invest’s revenue. In Q4, Invest generated only roughly 0.5% of the company’s revenue but was likely responsible for a significantly larger share of its adjusted EBITDA, which came in at $70 million. That’s because the company’s margins from crypto trading are probably much larger than those from its core loan business.
Increasing the odds of a confrontation with regulators, SoFi last month sued the Biden administration over the student loan moratorium. That lawsuit is not likely to endear SoFi to the administration and could increase the likelihood of it having to face adverse regulations.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
