Wishing you all a happy, healthy New Year and a very merry Christmas to those celebrating.
1. SoFi Technologies (SOFI) — Federal Student Loan Pause Extension
The Biden Administration extended the pause on student loan payments to May 1, 2022. It had been set to expire next month but the spread of the Omicron variant led to the pivot.
This same pause cost SoFi $40 million in 2021 revenue (4% of sales) yet the company was still able to raise its original 2021 guidance thanks to strength from other products. Based on the moratorium now expected to last 4 months into next year, this piece of news will cost the company at least $13.3 million in 2022 sales — and likely more as it was poised to benefit from the payment backlog unwinding.
This is the kind of headwind that I get excited about and embrace with share accumulation. Why?
- It’s temporary.
- It has nothing to do with the utility of SoFi’s product suite.
- It’s a payment pause, not payment forgiveness meaning this is a revenue delay more than anything.
The company has been able to weather the storm admirably to date — and this too shall pass.
Click here for my broad overview of SoFi’s business.
2. Ayr Wellness (AYRWF) — Ayr Head of Strategy & M&A Jamie Mendola Interviews with Mindset Capital
“American Cannabis is the opportunity of a lifetime. I’m betting on it with my career and capital. Nobody on the management team has sold a share of stock since we became a public company. No senior people have left.” — Mendola
On the EBITDA Guidance Reduction:
“The reality is that there are a couple markets with some regulatory delays. In states like Massachusetts we have an amazing retail portfolio that’s currently all medical or under construction. Those will all come online in 2022 as recreational stores but we’re just not going to get a full year contribution which we originally anticipated. We also have big cultivation expansions in Massachusetts, Arizona and Florida. A combination of Covid-19, construction and other delays has pushed those projects 2-4 months behind schedule. That’s about two-thirds of the softness.”
“The other third is industry maturation. There is some pricing compression in wholesale and retail that is not unique to Ayr. I think we are holding our own and taking market share to cushion this because of our quality of product. In almost every market, per-pound wholesale prices are 10-15% lower and I think that will continue a bit.”
Mendola talked about the well-capitalized Multi-State Operators (MSOs) building production capacity ahead of expected recreational roll-outs in key states. As this reform is still yet to come, the front-loaded expansion and coinciding supply are creating some mild pricing pressure on wholesale. This is especially happening in high-margin states like Pennsylvania where MSOs can afford lower margin sales today to prepare for recreational market share tomorrow. As recreational programs go live (he thinks in the next 18-36 months), this issue will resolve itself.
“Margins across the industry are quite attractive but I think the days of 40-50% EBITDA margins are going to get tougher and the industry will settle in the low-to-mid 30% range for good operators.”
Mendola sees margin compression in the future (I agree) as competition stiffens. Considering these are CPG companies at heart operating at 50%-60% gross profit margins vs. 40% for a firm like Mondelez — there is plenty of room for margin compression with these still being remarkably successful enterprises. Mondelez also features an EBITDA margin of 20% which makes run-rate expectations of a 30%-35% EBITDA margin for Ayr quite impressive to me.
We also have to remember that while gross and EBITDA margins will likely continue to compress, cash flow and profit margins would be boosted by SAFE Banking legislation, 280E reform or up-listing. There are margin tailwinds too.