Although fintech provider SoFi Technologies (NASDAQ: SOFI) attracted investors for its potential ability to bring money-related functionality into modernity, the pandemic has forced a rude awakening. Specifically, with the higher education sector experiencing immense disruption from the new normal, SoFi temporarily hit its primary student loan revenue channel. Now that the federal government has committed to a new student loan plan, SOFI stock should theoretically rise. However, nothing happens in a vacuum. I am bearish on SOFI.
According to the TipRanks team, on August 24, “US President Joe Biden made a bold move and waived student loans of $10,000 per student earning less than $125,000 per year and $20,000 per student from low-income families enrolled in Pell grants”. Further away, TipRanks journalist Swati Goyal noted that “Biden’s relief package is expected to wipe out outstanding student loan balances for millions of borrowers.”
Yet, as Goyal noted, the issue remains controversial. “While many people are happy with Biden’s student loan forgiveness plan, others have complained that it is unfair. A major argument against the plan is that it would encourage people to borrow from the government and to expect their debts to be forgiven. The President’s student loan waiver does not include private loans. As a result, it may also appear that the action could discourage borrowing from private lenders like Sallie Mae .
However, market analysts generally viewed the framework as positive for SOFI shares. For example, Mizuho (NYSE: MFG) analyst Dan Dolev sees an encouraging picture for the fintech company. “Advancing the end of the moratorium can help improve clarity and can also lead to progress in [refinance] request in 4Q22, similar to what happened at the end of 4Q21,” Dolev wrote.
Additionally, on TipRanks, SOFI has a Smart Score rating of 8 out of 10. This indicates strong potential for the stock to outperform the market as a whole.
Nevertheless, investors should be extremely careful when betting on SOFI shares.
The SOFI share does not benefit from an exclusive advantage
In general, the student debt relief program should be beneficial for SOFI stocks because it forces borrowers to “plan” their financial obligations. Simply put, the Biden administration has cemented what students can expect. By understanding what benefits borrowers may receive and what remains to be repaid, students can now rehire companies like SoFi to clean up the rest of the deck.
In theory, the story bodes well for SOFI stocks. However, the main problem is that the debt relief program does not offer a fintech-exclusive benefit. On the contrary, the circumstances are now even more complex for SoFi Technologies.
To understand why, investors need to understand how this student debt crisis came to a head. When the COVID-19 pandemic first capsized the US economy, various agencies released both monetary and fiscal responses. Ultimately, the money supply – according to data from the Federal Reserve Bank of St. Louis – grew at an unprecedented rate and magnitude.
Today, the Federal Reserve is trying to put the genie back in the bottle, primarily by tackling subsequent inflation with high benchmark interest rates. Effective, this measure should reduce inflation. At the same time, higher interest rates equate to higher borrowing costs. Consequently, student debt will become more and more onerous.
In turn, forward-thinking investors might consider acquiring shares in companies that specialize in working-class industries. As white-collar occupations face both intense competition and layoffs, demand for tradespeople is simply exploding. Therefore, while Biden’s student debt plan initially looks bullish for SOFI stocks, current Fed actions will likely make earning a four-year degree unattainable for many students.
On a net basis, it is therefore too early for analysts to consider SOFI stock as a bullish opportunity.
SoFi is tied to student loans
The other major dilemma for SoFi Technologies is that during the pre-pandemic paradigm, student loans were the company’s primary revenue generator. However, with the current monetary environment making borrowing financially demanding, fewer people are likely to attend universities. This would harm SOFI action in the longer term, clarity or lack of clarity.
For example, in the company’s presentation for its second quarter 2022 earnings report, management noted that in the first quarter of 2020 – just as the COVID-19 crisis was beginning to seep into the United States – United – student loans accounted for 63% of total loans. In the fourth quarter of that year, student loans accounted for 43% of total originations.
Additionally, in fiscal year 2021, student loans accounted for approximately 34% of total loans disbursed. No longer the largest segment, personal loans have taken over, accounting for nearly 43% of all loans.
The point of mentioning this background is that a significant and unforeseen headwind disrupted the student loan revenue channel. This forced SoFi to look to other sectors. Now, the headwind is rising borrowing costs — and if Fed Chairman Jerome Powell’s remarks are to be believed, those elevated borrowing costs will hit multi-decade plateaus.
Frankly, it’s hard to understand how SOFI stock could not suffer from the current paradigm, regardless of the potential economic value of clarity.
What is the target price for the SOFI share?
As far as Wall Street is concerned, SOFI stock has a moderate buy consensus rating based on five buy, five hold and zero sell ratings. The average SOFI stock price target is $8.00, implying an upside potential of 26.4%.
Conclusion: No vacuum for SoFi
If the student debt relief program were offered in a vacuum – all other factors being equal – perhaps SOFI stock would be a bullish opportunity. Indeed, this could be called “no-brainer”. Unfortunately, investors must also consider the paradigm in which debt relief occurs.
Clearly, a major development like student debt relief will ripple throughout the economy. Plus, with the Fed about to raise interest rates, going to four-year college will become that much more financially onerous. Within this larger framework, people should be careful in their approach to SOFI stocks.