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SoFi Technologies may benefit less from the resumption of student-loan payments than the company and investors expect.
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SoFi Technologies
may benefit from the resumption of federal student-loan payments, but J.P. Morgan believes it will be a smaller boost than investors and management expect.
In its most recent quarter, SoFi (ticker: SOFI) saw student-loan originations slide 47% year over year, illuminating an obvious place for growth when loan payments resume and borrowers refinance. And indeed, the financial-services firm has made notable strides on that news, sending shares 99% higher this year.
But that excitement may need to be notched back. J.P. Morgan analysts led by Reginald Smith wrote that company management values the multiyear addressable refinance opportunity at around $200 billion, while the analysts expect half of that, nearer to $90 billion.
“We believe refinancing with a private lender like SoFi makes economic sense for just a fraction of borrowers—those with relatively high income, credit scores, and [annual percentage rates],” Smith wrote in a Thursday report, adding that most borrowers are better off holding on to their existing federal loan or applying for an income-based repayment plan.
“We found very few people actually refinance their student loan debt with private lenders,” Smith continued. “We note less than 2% of student loans outstanding were refinanced in 2019, despite historically low interest rates.”
“And so while there may be an initial surge in refinancing, we don’t see the tsunami the stock seems to be reflecting,” he added.
He also doesn’t believe having student loans on the company balance sheet is the best use of capital, as they snap up significantly lower returns than personal loans. However, the analyst also acknowledged that student-loan products bring in new customers cost-effectively, which offers more opportunities to sell them other products.
SoFi needs to balance student-loan originations and loan sales, Smith wrote, adding that “it’s in the company’s best interest to originate and sell its student loans as quickly as possible.”
J.P. Morgan has a Neutral rating on SoFi stock, but Smith’s December 2023 price target is $6—significantly lower than the $9.12 shares were trading at Thursday morning after gaining 2.8%.
Write to Emily Dattilo at [email protected]
Source: https://www.barrons.com/articles/student-loan-forgiveness-sofi-stock-4d0c1345?siteid=yhoof2&yptr=yahoo