With SoFi (NASDAQ:SOFI) likely to continue to be hurt by the Biden administration’s policies on student loans and the company still facing many other tough challenges, I am still recommending that investors sell SOFI stock.
As Seeking Alpha columnist Business Quant explained in a recent column on SOFI stock, the moratoriums on student loan payments have hurt SoFi because they “leave little incentive for students to refinance their loans with SoFi.”
Indeed, the company recently, significantly lowered its 2022 guidance due to the extension of the moratorium by the Biden administration through August. The company also believes that the moratorium will be extended until the end of this year. I think that assumption will be correct because, politically, President Joe Biden’s Democrats are trailing badly in the polls and need all the help that they can get in the November Congressional elections.
For the same reason, I believe that the administration will probably forgive much more of each students’ debt than the $10,000 that some expect and that SoFi CEO Anthony Noto has advocated. According to Business Quant, “loan forgiveness … would reduce the student loan amounts due for repayments which would further exacerbate the problem for SoFi.”
Therefore, if significantly more than $10,000 are forgiven for each borrower, as is likely to occur, SOFI stock will probably take a big hit.
SoFi’s Old Problems Haven’t Been Solved or Eased
In previous columns, I’ve explained in detail why SoFi lacks meaningful competitive advantages over other apps that also offer multiple types of financial services. That certainly hasn’t changed, as the company’s net loss in Q4 of 2021 came in at $111 million, up from $82 million during the same period a year earlier. Additionally, the company reported a robust stock-based compensation total of $97 million in Q4. As I’ve pointed out previously, high stock-based compensation tends to put down ward pressure on equities.
Finally, on the valuation front, despite its sharp plunge in recent months, SOFI stock is now trading at a trailing price-sales ratio of 5.7x. That’s still a high valuation for a company that does not have any strong competitive advantages, faces a great deal of competition from other financial services companies and is generating high losses.
Given the current political realities, SoFi could very well take a big hit from a much higher-than-expected student loan forgiveness total. Meanwhile, the company remains deeply unprofitable at a time when most investors want to buy the shares of companies that are profitable or close to entering the black. And SoFi also continues to trade at a high valuation.
As a result of all of these points, I continue to recommend that investors unload SOFI stock.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.