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The Ratings Game: SoFi stock rockets toward best day since early 2021 despite ‘dismal’ student-loan numbers

SoFi Technologies Inc. has come a long way since its founding as a student-lending platform, and that expansion into new business areas has been paying off nicely for the company even amid a student-loan moratorium.

Shares of SoFi
SOFI,
+26.83%

were up 25% in Wednesday morning trading and on track for their largest single-day percentage gain since Jan. 7, 2021 after the company showed investors the benefits of its diversification strategy despite a weaker landscape for some of its business areas.

Read: ‘The bank charter could not have come at a better time,’ SoFi CEO says

“With the student loan moratorium still ongoing and the housing market having its struggles, SOFI’s personal loan business has been the crutch holding up the Lending segment,” wrote Mizuho analyst Dan Dolev.

He noted that the company’s 91% year-over-year growth rate in personal lending was admittedly less than the 151% rate SoFi sported in the first quarter, but nonetheless, the company delivered upwards of 20% sequential growth on the metric for the second straight quarter.

MoffettNathanson analyst Eugene Simuni also highlighted the yields from diversification.

“Despite the dismal performance of the Student Loan business (originationswere down 54% YoY and down 60% sequentially), SoFi comfortably beat overall revenue and profit expectations as its other business segments (especially the Personal Loan franchise) continued to grow rapidly,” he wrote in a note titled: “No Student Loans, No Problem.”

Wedbush analyst David Chiaverini cheered SoFi’s deposit momentum, as the company saw more than $100 million in weekly deposit inflows throughout the quarter and finished the period with over $2.7 billion in total deposits.

This trend let SoFi “reduce its reliance on higher-cost wholesale borrowings,” he wrote, while maintaining an outperform rating and $8 target price on the shares.

Jefferies’ John Hecht was similarly upbeat on the deposit numbers. “Incremental deposit funding has benefited NIM [net interest margin] & provided security given macro uncertainty and rising rates,” he wrote, while keeping his buy rating and $10 target.

That’s not to say analysts weren’t left with some questions coming out of the report. For one, Dolev highlighted that the company only raised its full-year forecast for adjusted earnings before interest, taxes, depreciation, and amortization (Ebitda) by $4 million, despite beating the metric by $10 million in the latest quarter. Was that a case of conservatism?

“Either way, the challenge in 2H remains that for the back-half SOFI would have to achieve $39mn in 3Q and 4Q,” he wrote. “Investors should remember that the bank charter should drive much better profitability in the second half of the year due to higher NIM / longer holding periods.”

He rates the stock a buy and boosted his price target by a buck to $8.

Keefe, Bruyette, & Woods analyst Michael Perito said that the latest changes to SoFi’s full-year guidance seemed to mostly reflect second-quarter performance rather than new expectations for the balance of the year, and he indicated that he was still taking a more cautious stance.

“Our outlook continues to be a bit conservative relative to consensus, largely around our assumption that earnings leverage/scale in the financial services and technology segment could take a little longer to build out,” he wrote. “Although, we’d note that SOFI’s momentum in the bank should presumably be sustainable near-term.”

Perito has a market-perform rating and a $7 price target on SoFi shares.

See also: SoFi gains approval for bank charter — ‘a major step forward’

And Simuni noted that the fate of student-loan relief is still an overhang, even as SoFi has been able to manage good overall performance by leaning on other areas of the business.

“[T]here is no doubt that uncertainty surrounding federal government’s actions on student-loan relief remains a very significant risk factor for SoFi,” he wrote, though he thinks the risk of the federal government taking more permanent moves to lessen student debt is less than what might be “generally perceived.”

“In the most likely scenario, the loan forgiveness scheme would focus on providing relief to the lower income borrowers (e.g., those making less than $150 K),” Simuni said, but SoFi is aimed at higher-income customers with a weighted-average income of $170,000.

He said that the company is also in the midst of broadening its student-lending business beyond refinancing, with in-school loans.

“We will be closely watching for the resolution of the student loan controversy over the next six months and looking for this resolution to serve as a positive catalyst for the stock,” Simuni wrote, while keeping an outperform rating and $10 target price on the shares.

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