Steer Clear of SOFI Stock After Latest Student Loan News

Investing in SoFi Technologies (NASDAQ:SOFI) stock has been akin to riding a rollercoaster.

Time and time again, SOFI stock has surged on increased hopes, only to sink on yet another round of disappointment.

That’s what has played out this month, with this fintech stock reversing course in a big way, after briefly jumping back above $6 per share in mid-November. At writing, shares have fallen into penny stock territory (under $5 per share) and not due to any overreaction on Wall Street’s part.

The latest developments in the student loan drama are a negative for the company, which got its start in the student loan business and has been counting on a rebound for this segment to turn around its fortunes in the coming year. However, even as SOFI has coughed back its recent gains, don’t assume it’s wise to “buy the dip.”

SOFI Stock and the Latest with Student Loans

As you’ve likely read in the news, the Biden Administration is facing challenges with its student loan forgiveness plan. A few weeks ago, a federal appeals court blocked the White House’s ability to move forward with forgiving up to $20,000 in federal student loans.

At first, this was perceived to be a positive for SOFI stock. With the student loan moratorium set to expire Dec. 31, 2022, borrowers would be forced to start making payments in 2023. This would lead many of them to seek out refinancing options, such as those offered by SoFi.

However, this is no longer the case. Currently fighting against the block in the courts, the Biden Administration has decided in the meantime to further extend the student loan moratorium. Per the new timeline, payments will resume either sixty days after the legal battle is resolved, or sixty days after June 30, whichever comes first.

With payments (and in turn, demand for refinancing) pushed back yet again, sentiment for SOFI has swung back in the wrong direction. Admittedly, after this latest pullback, more downside from here may be fairly minimal. Still, that’s not a good reason for making this stock a buy.

Why Shares Could Stay in a Slump

The market has not only re-priced SOFI stock in light of the latest student loan news. Another re-pricing may be in the cards.

As extending the moratorium pushes back the potential rebound of SoFi’s student lending business by at least six months, it’s questionable whether this fintech will deliver revenue growth, and improvements to profitability, that meet current estimates.

Again, this may not necessarily mean that another massive pullback is in store. As I’ve argued in past coverage of SoFi Technologies, this stock’s tangible book value ($3.34 per share) could serve as a floor. In other words, additional downside may at worst be somewhere around 27%.

By comparison, other busted growth plays, despite being down heavily from past highs, continue to have more substantial downside risk. So then, what makes SOFI still a “no-go” situation? While the downside risk from here isn’t exactly high, the upside potential isn’t high, either.

At least, that’s the takeaway from the latest long-term earnings forecasts for SoFi, which call for the company to remain unprofitable until at least 2024, and for earnings in 2025 to come in at just 35 cents per share. This may be barely enough to sustain the current stock price.

The Verdict on SOFI

Before the aforementioned news, SoFi did not appear favorable from a risk-return standpoint. More like a bank compared to its peers, there’s the risk that Wall Street could in the end give shares only a bank stock earnings multiple (10-15 times earnings). Hence, the stock 3 years out could be trading for between $3.50 and $5.25 per share.

Even if SoFi manages to attain a fintech-like valuation once it hits profitability (20 times earnings), upside may be limited to a return to high single-digit prices (around $7 per share). Sure, that may sound satisfactory on the surface, with the stock’s plunge to around $4.60 per share.

But with the student loan moratorium now extended further, it may take more time for SOFI stock to make, at best, a moderate leap higher. Steering clear remains the best move.

SOFI stock earns a D rating in Portfolio Grader.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.