Stocks to sell

Brace Yourself for Another SOFI Stock Selloff in 2023

SoFi Technologies (NASDAQ:SOFI) stock continues to inch higher. Investors are slowly getting back into speculative growth stocks as recent economic data suggests macro ease may be on the verge of improving.

The economy may experience a soft landing rather than a hard landing. A recovery could happen far faster than once expected. However, I wouldn’t assume all of this points to a big recovery for SOFI between now and the end of 2023.

In fact, rather than poised to experience another big liftoff in price, shares could be at risk of selling off once again later this year. Even as the “student loan saga” is likely to resolve by late summer, this may fail to spark re-accelerated growth for this fintech firm.

Let’s dive in, and see why the latest news regarding student loan repayments could have a negative impact on the stock.

SOFI SoFi Technologies $5.87

SOFI Stock and Its Student Loan Catalyst

If you’ve been following SoFi Technologies, you undoubtedly know that its fortunes are heavily tied to the situation with federally-backed student loans. This company has since become a diversified digital-first financial institution, but SOFI started off as a third-party provider of student loan refinancing.

However, with the student loan repayment pause, in place since the onset of Covid-19 in 2020, this line of business has been largely on pause as well. Student borrowers haven’t had to make payments for nearly three years. Hence, little incentive to refinance these loans.

Of course, this “pause,” after several delays, will end later this year. If an upcoming Supreme Court case regarding the Biden Administration’s authority to implement partial student loan forgiveness is resolved quickly, student loan repayments will resume 60 days later. If the case remains unresolved on June 30, repayments will begin on Aug 29.

But while this implies student loan refinancing will pick up starting in September, this much-awaited catalyst for SOFI stock may fail to deliver because there’s a new student loan repayment proposal in the works.

Why a New Proposal Could Damage the Bull Case

On Jan. 9, the U.S. Department of Education announced a proposal to “transform” the current income-driven repayment programs offered on federally-backed student loans. These reforms would reduce minimum payments from 10% to 5% of discretionary income on undergraduate loans, tweak the definition of “discretionary income,” and eliminate the capitalization of unpaid accrued interest onto the principal amount of student loans.

If implemented, this repayment plan may give borrowers even less incentive to refinance loans in the private market.

More importantly, it may have an impact on the company’s aforementioned cross-selling plans. Granted, this proposal, which, after being subject to public comment, is expected to be implemented later this year, would not be a crushing blow to SoFi Technology, and would at worst have a modest effect.

Still, with so much riding on SoFi’s growth reaccelerating starting in late 2023, a modest negative impact may still result in the company falling short of future expectations. It could be just well enough to push SOFI back down to penny stock levels (under $5 per share).

The Bottom Line

Alongside this possibly-emerging headwind, other issues with SoFi shares remain at hand. Soft landing or hard landing, the current downturn could also still be a negative for results in the coming quarters.

Looking on a longer time horizon, SOFI continues to (in my view) have questionable upside potential. Today’s valuation seems to account for future growth, and then some.

As I have argued previously, there is a strong chance SoFi Technologies ultimately is valued by the stock market more like a bank stock than as a fintech stock. With this, the company may have to handily beat current long-term earnings forecasts in order to justify a material move higher.

Already an unfavorable opportunity, with a recent development that could make it even less appealing, skipping out on SOFI stock 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.

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