SoFi: A New Low Emerged

Summary

• SOFI crumbled nearly 30% from its post-earnings highs, as the market likely saw more risks through FY23. Biden delivered another slap to SoFi by extending the student loan moratorium.
• We discuss why investors could have been spooked by the steepest yield curve inversion in decades. That could put SoFi's originations growth at significant risk.
• Therefore, investors need to question whether SoFi's growth drivers in the personal loan segment are sufficient to drive growth in H1'23 if a severe recession ensues.
• We highlight why the market pummeling dip buyers from its May lows may not necessarily be an adverse event.
• Maintain Buy with a reduced PT of $5.50.
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Justin Sullivan

Thesis

SoFi Technologies, Inc. (NASDAQ:SOFI) stock suffered another hammering over the past two weeks, as it crumbled below critical support levels that have bolstered SOFI's consolidation zone since May.

There's little doubt that the recent crypto trading review and Biden's student loan moratorium extension proffered ammunition to the bears to take SOFI down further.

However, we also gleaned that the market had refused to reprice SOFI positively after its Q3 release as it digested its momentum spike.

The company has clarified that it didn't expect any material risk to emanate from its crypto activities. We also didn't assess anything sinister from the company's filings that suggests otherwise.

Hence, we believe Biden's "gut punch" after numerous extensions on the student loan moratorium could have caused the market to reconsider SoFi's refinancing opportunities in 2023. As such, the market suggests that the forward consensus estimates could be at risk.

Coupled with the malaise going on in the housing market (Bank of America (BAC) CEO sees trouble going on for two more years), that leaves SoFi with just its personal loans segment to drive growth through H1'23.

With SOFI still nursing an unprofitable P&L (on adjusted EPS terms), we believe the market likely de-risked its growth potential, seeing significant risks in FY23.

Furthermore, the steepest yield curve inversion in decades has also brought to the fore an increased likelihood of a credit crunch if the Fed turns increasingly hawkish through 2023/24.

Hence, we believe the de-rating is justified, given SOFI's valuation premium. With SOFI attempting to regain its recently broken support level, we postulate that its buying momentum has weakened considerably,

Notwithstanding, we believe the steep selloff is also constructive for a speculative mean-reversion opportunity, as seen in its price action.

Maintain Speculative Buy, but we cut our price target (PT) to $5.50 (implying a potential upside of 22%).

SOFI: Student Loan Disappointment

SoFi Student loans originations (Company filings)

SoFi's Student loan originations have dwindled to just $457M in FQ3'22, down significantly from FQ3'20's $1.04B. Relative to its pre-pandemic FQ3'19's origination of $1.72B, its recent originations have fallen nearly 75%.

Therefore, we postulate that the market had already reflected significant origination risk in student loans in its valuation. Hence, we are perplexed why the market still decided to push SOFI down further, even though management has likely factored in the uncertainties from the moratorium in its guidance.

Investors Likely Spooked By The Yield Curve Inversion

US10Y-US2Y trend % (koyfin)

As seen above, the yield curve inversion has reached historic levels, not seen for more than thirty years. As such, some market strategists have suggested that a severe recession is looking increasingly likely as the significant inversion could forebode a liquidity crisis. BofA articulated:

Unprecedented leverage risk currently lies with governments and central banks more so than consumers and businesses. And that could lead to liquidity risks popping up in odd places. - Insider

Despite that, the S&P 500 (SPX) (SP500) has yet to re-test its recent October lows but remains well-primed for a pullback.

Therefore, we believe the market could have selectively de-risked the valuations of unprofitable stocks like SOFI, which is highly susceptible to a severe recession, given its underlying business model. CEO Anthony Noto also highlighted the risks in a recent November conference:

If we get into a really tough recession next year, we're forecasting about a 1% to 3% decline in GDP, which in this environment, we think we can still operate in pretty well. [If] we're going to get much [dourer] than that, and unemployment gets into the 5%-plus range, and we have GDP contraction in the mid-single to high single digits. [Then,] we'll likely have to underwrite less and reallocate to other businesses to make up for it. (Citi 2022 FinTech Conference)

Is SOFI Stock A Buy, Sell, Or Hold?

SOFI price chart (weekly) (TradingView)

SOFI has collapsed nearly 30% from its November highs, despite a solid Q3 earnings card with raised guidance.

Hence, we postulate that the market positioning in SOFI remains defensive. But, there are reasons to be optimistic, given the sharp selloff over the past two weeks.

Dip buyers from May to September were taken out completely last week. We also gleaned that SOFI is attempting to consolidate at the current levels. As such, selling pressure has likely subsided, offering buyers another opportunity to strike.

But, we must highlight that SOFI still needs to regain control of its near-term support. Therefore, the longer it stays under it, the harder it is for SOFI bulls to retake the initiative of our mean-reversion thesis.

Maintain Speculative Buy but cut our PT to $5.50.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.