Sallie Mae SLM stock touched its all-time high of $28.74 during Friday’s trading session before closing at $28.17.
Shares of SLM have risen 51.9% over the past year, surpassing both its industry and close peers — Ally Financial Inc. ALLY and Capital One Financial Corporation COF.
1-Year Price Performance
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Factors Driving SLM Stock
Fed’s Rate Cut to Aid NII: The Fed started cutting interest rates in September 2024 and lowered interest rates by 100 basis points, with the latest cut on Dec. 18, 2024.
These cuts are expected to stabilize funding costs, setting the stage for future net interest income (NII) growth. As funding starts to improve, companies like SLM, COF and ALLY will be well-positioned to benefit from the favorable environment. With rising loan balances, these companies are expected to experience sustained NII growth in the upcoming period.
SLM’s NII witnessed a compound annual growth rate (CAGR) of 5.6% over the last six years (ended 2023). The trend reversed in the first nine months of 2024. The Fed rate cuts are expected to gradually stabilize funding costs, providing a favorable outlook for loan providers. Companies like SLM, COF and ALLY are expected to benefit as improved funding conditions will support NII expansion. Additionally, Sallie Mae's efforts to increase the amount of cash and cash equivalents held to gain from yields on cash and other short-term investments will further bolster NII growth.
Improving Student Loan Business: Sallie Mae’s growth initiatives are impressive. The company has been trying to enhance its private student loan business by maintaining a strong capital position and introducing multiple complementary products.
Private education loan originations witnessed a five-year CAGR of 1.8% (2018-2023), with the trend continuing in the first nine months of 2024. The company completed the sale of private education loans worth $2.8 billion during the third quarter of 2024. To recycle resources in its core business strategies in May 2023, the company sold its credit card business.
Business Expansion Efforts: The company is also focusing on expanding its business operations on the back of investments in varied product offerings and inorganic activities. In 2023, the company acquired several vital assets, technology, intellectual property and experienced staff of Scholly, a scholarship publishing and servicing platform.
In 2022, the company strengthened its position by acquiring Nitro College, a digital marketing and education solutions company, through a deal with Epic Research LLC. This strategic acquisition enhances Sallie Mae’s outreach and brand presence, improves its digital marketing capabilities and reduces customer acquisition costs.
Such initiatives support the company's goal of evolving into a comprehensive education solutions provider, ultimately driving increased loan originations.
Few Concerns Prevail for SLM Stock
Rising Expenses: Elevated expenses are a concern for Sallie Mae. The company’s non-interest expenses witnessed a CAGR of 4.2% over the last five years (2018-2023), with an uptrend continuing in the first nine months of 2024.
Though the company focuses on lowering both servicing and acquisition costs and continues to gain efficiencies from operations, we believe that an increasing expense trend will hinder bottom-line growth in the upcoming quarters.
Expense Growth Trend
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High Debt Level: As of Sept. 30, 2024, the company had long-term borrowings worth $6.03 billion and cash and cash equivalents of $4.49 billion. The company carries a greater debt level than its liquidity position. Hence, SLM has a higher possibility of defaulting on interest and debt repayments if the economic situation worsens.
Analyst Estimates for SLM
Over the past month, the Zacks Consensus Estimate for 2024 earnings has moved downward, while that for 2025 earnings has remained unchanged, reflecting that analysts are gloomy about SLM’s near-term outlook but neutral about future growth prospects.
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Should You Buy SLM Stock Now?
The company’s investments in varied product offerings and inorganic activities to expand business operations and a focus on improving private student loan business are likely to support its financials over the long term.
However, an elevated expense base and high debt levels are near-term concerns for Sallie Mae.
Hence, we advise investors not to rush to buy SLM stock right now, instead, keep this stock on their radar and analyze how the company navigates through increasing expense and interest rate cuts to optimize its financial performance in the upcoming period.
SLM currently carries a Zacks Rank of 3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
