Chit Chat Stocks - Nelnet Stock: An Update On Our Baby Berkshire Investment (Ticker: NNI)

Episode Date: March 5, 2025

On this episode of Chit Chat Stocks, Brett and Ryan give a comprehensive update on Nelnet after reading its 2024 annual report and shareholder letter. We discuss: (03:31) Overview of Nelnet's Business Model (08:43) Financial Services Segment Analysis (24:01) Nelnet Business Services: A High-Quality Business (39:40) Investments and Future Prospects (40:10) Understanding Hudl's Market Position (48:27) Allo Communications: Growth and Challenges (56:04) Solar Energy Ventures: Risks and Opportunities (01:01:30) What is the stock worth today? ***************************************************** JOIN OUR NEWSLETTER AND FREE CHAT COMMUNITY: https://chitchatstocks.substack.com/  ********************************************************************* Sign-up for a bond account at Public.com/chitchatstocks  A Bond Account is a self-directed brokerage account with Public Investing, member FINRA/SIPC. Deposits into this account are used to purchase 10 investment-grade and high-yield bonds. As of 9/26/24, the average, annualized yield to worst (YTW) across the Bond Account is greater than 6%. A bond’s yield is a function of its market price, which can fluctuate; therefore, a bond’s YTW is not “locked in” until the bond is purchased, and your yield at time of purchase may be different from the yield shown here. The “locked in” YTW is not guaranteed; you may receive less than the YTW of the bonds in the Bond Account if you sell any of the bonds before maturity or if the issuer defaults on the bond. Public Investing charges a markup on each bond trade. See our Fee Schedule. Bond Accounts are not recommendations of individual bonds or default allocations. The bonds in the Bond Account have not been selected based on your needs or risk profile. See https://public.com/disclosures/bond-account to learn more. ********************************************************************* FinChat.io is The Complete Stock Research Platform for fundamental investors. With its beautiful design and institutional-quality data, FinChat is incredibly powerful and easy to use. Use our LINK and get 15% off any premium plan: ⁠finchat.io/chitchat  ********************************************************************* Bluechippers Club is a tight-knit community of stock focused investors. Members share ideas, participate in weekly calls, and compete in portfolio competitions. To join, go to ⁠Blue Chippers and apply! Link: ⁠https://bluechippersclub.com/ ********************************************************************* Disclosure: Chit Chat Stocks hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Stocks. Before we get to this episode, we want to talk about our friends at Public. If you're serious about investing, you need to know about Public.com. That's where you can invest in everything, stocks, options, bonds, crypto. They even offer some of the highest yields in the industry, like the bond accounts, 6% or higher yield that remains locked in, even if the Fed cuts rates. What sets Public apart is how they give you the tools you need to make informed investment decisions. Their built-in AI tool called Alpha doesn't just tell you if an asset is moving, it tells you why the asset is moving so you can actually understand what's driving your portfolio's performance. Public is a FINRA registered SIPC insured

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not formal advice or recommendation. Now please enjoy this episode. Welcome in to another edition of the Chit Chat Stocks podcast. My name is Brett, and as always, joined by my co-host, Ryan Henderson. Today we have our annual Nelnet update, our baby Berkshire. Well, it's not ours. We're just one of the shareholders. We've been shareholders for quite a long time now.

This will be year five going on once we hit the December time period. So it's been a long time owning Nelnet. They just filed their annual report. The stock is hitting close to an all-time high. And as we went through the numbers here, we still think it can be cheap and provide attractive returns for investors going forward. We've read the annual report. We've read the shareholder letter that was released last week, and we're ready to analyze

the company and its future prospects and what their businesses look like in 2025. We're going to get right into it. But first, two housekeeping items. If you like this episode, if you like any of the podcasts that we do, please give us a review on Apple podcast or Spotify, preferably five stars. And if you want a written research report to go along with this episode, subscribe to our sub stack. The link is in the show notes where you can also chat in our free chat community. All right, Ryan, we're revisiting Nelnet here. Providing our 2025 update, and I will say we probably plan on doing these once a year, along with the shareholder letter release.

For anyone that has not heard of this company before, what's the story here, and why do we like this small cap, well, maybe mid cap now, conglomerate? Yeah, I'll give a brief overview of the entire operation for anyone who has never heard of the company. Then we can get into the various actual subsidiaries and the performance as of late. So if you're very familiar with Nelnet, you can go ahead and feel free to skip around and find us once we start talking about the actual subsidiaries. But Nelnet really got started in the student loan origination business. This was quite a lucrative place for some time. But in 2008, the federal government took the lending process in-house or the lending business. And correct me if I'm getting any of this wrong, Brett.

It's been a while since I've brushed up on their history. 2010, but that's not really relevant. So at that point, Nelnet had this massive pile of student loans that they had written over time and that they were going to spit off cash for more than two decades into the future. But they couldn't really write new ones. So over the last roughly two decades, they've been reallocating that cash flow into new businesses. Part of that has been acquiring ancillary businesses to the education sector. Part has been developing a loan servicing business. And part has been finding sort of new ways to lend money, which we're going to talk about, has become even more so relevant really this year or so.

Brett's going to dig into that a bit. But they've now really passed their peak runoff from that student loan portfolio. And the other parts of the business are becoming more and more important. And here are some of the thoughts we put together the last time we spoke about them to kind of encapsulate what our vision and our goal for maybe sort of our thesis and thoughts on the company were. So, Brett, on March 7th, 2023, you said, I like the management team. The quantitative track record speaks for itself, which we have covered in the above sections, but the qualitative is just as important. Nelnet thinks long-term, has long-term tenured management, doesn't mess around with bullshit earnings, quote unquote bullshit earnings. and could care less about Wall Street.

Plus, when they do communicate with investors, they do so clearly each year with the annual letter and annual report. I don't think that's changed. I think that all pretty much still holds true today. And then on that same day, I wrote, it gives me some confidence to know that Michael Dunlap owns 42% of the shares outstanding. Jeff Nordic, who's really kind of the day-to-day president, Michael Dunlap is the chairman.

Nordic owns basically $50 million worth of stock, which I assume is a big chunk of its net worth. And then on the deploying capital part, I thought – well, I said I like the fact that there are now a number of greenfield investment opportunities under their umbrella. Solar, fiber, now that bank are places where they can really put as much capital to work as they want. I think on some of those, I maybe wish they put a little less capital to work, specifically talking about a certain construction business, which they've been forthright about and quite honest about some of the issues there. So we're going to dig into that. But I think a lot of this still holds true. The financial services portion of things has gotten a little more diverse, I would say, but also probably a little more confusing. So for anyone that's followed the story, doesn't quite follow what all is going on, Brett's going to break down some of that. And then just to put some numbers on it, I guess I should pull up the actual year. But Nelnet has compounded book value per share, I believe, at just around 15% for two plus decades.

Do you know? 15.7. 15.7. Do you know what year that started? Since 2004. And that is including dividends getting reinvested. And as we'll get through when we do some of this valuation work and go through each segment, there are plenty of these investments or business subsidiaries where book value is severely understating the true intrinsic value of these businesses. So we think that their actual intrinsic value has compounded at a much higher rate. But we'll get into it.

Ryan, we have this table that you included here that they include in every shareholder letter. It is perhaps surprising to see. And this can either be taken in a glass half full or a glass half empty mentality. Since 2015 through 2024, so I think that's 10 years, they have deployed or reinvested a total of $8 billion. Only, let's see, dividends and stock repurchases are only less than a billion of that. So most of that is capital redeployed into new investments, new business subsidiaries, reinvesting for growth in some of their subsidiaries. and they've done about $1 billion. Well, it was 2023, 500 million or 900 million. It's a little

blurry on that screenshot. But either way, last year they did $1.1 billion with only a tiny bit being stock repurchases and dividends. So if they're getting good returns on this, perhaps the stock is undervalued with a market cap of just $4.4 billion today. Yeah, and we're going to dig into all the operations and we're going to value each segment individually and we'll kind of give more of a holistic valuation towards the end and everyone can kind of do their own valuation work. I know some people are super against some of the parts. I tend to think in this case, if we're holding for a long time, eventually the sum of the parts will be worth something because the earnings will show up eventually. So that's kind of the goal here is it's long-term earnings, short-term sum of the parts valuation. So let's kick things off with maybe the most

confusing division, the Nelnet Financial Services. And for anyone that's not familiar with Nelnet, their naming of each division sucks. It's horrible. Yeah, it's confusing. We'll call this NFS. Just think of any of this as lending or any fee-based things or investments, kind of financials like their bank. We have the loan book runoff. We have their other third-party securitizations and non-student loans. There's real estates, all this stuff. we're going to get into it here and how i'd like to envision this episode is we just introduced the company said how much capital they deployed you know given their long-term track record we're going to unfold all these business segments and then we're hopefully by the end

going to repackage it together and show or at least explain our thesis in much more succinct with uh you know you'll be able to understand our thesis at the end because when you look at all these companies and these subsidiaries within the conglomerate it can get confusing if you kind of don't go in at first and then fold it back up all right nelnet financial services nfs is the most research demanding part of this company within this we the shareholders own a melting ice cube of student loans that ryan talked about at the start we have a startup bank real estate investments, loans held on the Nelnet balance sheet outside of the bank and outside of the existing loan portfolio. We have shares of loan securitizations and hey, a new startup

insurance operation. Now, for time's sake, we're not going to look at real estate insurance and the other smaller NFS segments because they're not meaningful to the business in 2025. Now, they become larger, we will cover them in more detail. On this episode, in this segment here, we're going to talk about three things, the loan book runoff, Nelnet Bank, and the non-student loans plus beneficial interest. Those are three segments. So first, let's talk about the loan book runoff. As we've discussed before, they have these legacy student loans that they originated years ago on the company's balance sheet, and they are referred to as FFELP loans. So if they refer to any of that in the shareholder letter or annual report, these are the loans they're

talking about. In the last few years, there has been an acceleration in repayments on these loans due to the U.S. government's forgiveness policies or the accelerated repayment stuff that's gone on. It's been quite confusing and volatile. The rules have changed. There's been court cases and all that stuff. Here's what they had to say about it in the 2024 annual letter. Quote, 2024 saw dramatic volatility in prepayments on our FFELP portfolio. And although prepayments have slowed, there always remains political uncertainty in what we can expect going forward. Regardless, we continue to seek out and find strong holdings to be funded in and outside of our bank. So that's what they're taking with the cash flow from these existing loans. The gist of it is that if borrowers repay

student loans faster, Nelnet gets less cash flow in total, but it arrives quicker. And based on its current forecast, it should get around $1 billion in future cash flow from these loans with the largest amount coming in 2025 at $290 million. And after that year, we essentially get less than or around $100 million a year, and then it disappears. I would note that, Ryan, even though this segment is essentially going away, it is still a significant value compared to the $4.4 billion market cap we have sitting here today. And that pretty much sums up that segment. I like that we're getting $290 million in 2025, but after this, each year, it's not nothing, but it's not going to matter much anymore after this year. And what will matter

is these next segments, now in that bank and the other securitizations and loans held on the balance sheet. Yeah. It's kind of nice that as we looked at this a couple of years back, the focus has always kind of been on what's left what's left after the loan portfolio and we almost kind of forget that this thing just churns out a hundred million dollars in cash every year and 300 million dollars in cash this year um so yeah it's it's some nice cash flow and they've done a pretty good job i would say redeploying it and giving themselves areas to redeploy it as well one of those being the Nelnet Bank. You want to get into this and how, I guess, maybe give a little bit of context on how this was started. I believe they bought a license for

it a couple of years back. And then what are they doing with it now? Yeah, so they didn't buy it. I think you're thinking of SoFi. SoFi bought the license by acquiring a bank, but Nelnet was one of the only companies to receive a new license from the federal government. And I think it was late 2020 or maybe 2021. So this is an FDIC insured, fully licensed bank in the United States. It began its first full year of self-funding in 2024. So that was last year. Now, the first three years of operations, they were essentially in a de novo period, as they call it, which doesn't, it's not anything confusing. It just means Nelnet, the parent company, was helping them fund their operations as they get to more scale.

You don't want a bank to start off with $10 million of deposits and then, oops, okay, they're out the door. We need a little bit of scale here to get working. And if you read the shareholder letter, you look at this FFELP loan runoff, in order to grow the entire NFS lending operation, management is aiming to grow now that bank. And they have four lending categories, private student loans, parent loans, which is like loans to help parents pay for college, student loan refinancing, and home improvement loans. Unsurprisingly, most of Nelnet Bank's lending products are in the company's circle of competence,

which is education. And it has a loan portfolio as of the end of the year of about $645 million. Deposits are a tad complicated. It has a small amount of intercompany deposits from the Nelnet balance sheet. Then there are CDs, Education 529 plans, health saving plans, and sweep deposits to maintain FDIC insurance thresholds at other banks. So essentially, you have the rule where you only have FDIC insurance for one account up to $250,000. But if a bank, say like Bank of America, takes some of your deposits and deposits them at another bank, well, then you can actually get more insurance if they do these sweep deposits around and maybe they can promise you up to a million dollars insured or something

like that. So that's how Nelnet gets some of its deposits and it takes on commercial deposits from other institutions and brokers as well as retail deposits. There is plenty of details in the annual report on this one, but they have essentially because it's really hard to start a consumer bank from the ground up. They're having to be a little bit innovative and creative to attract deposits at first. And at the end of 2024, Nelnet Bank had $1.25 billion in deposits. I would look for this figure to grow in the coming years. I think this is an important metric for investors to follow. Net interest margin in 2024 was 3.39% compared to

2.33% in 2023. The interest rate hikes didn't help in 2023. But I think as the business scales, as this matures, if they get more and more deposits on the balance sheet, we should see this solid net interest margin translate into the building of equity, very solid ROEs here and helping build capital for the Nelnet corporate balance sheet, which for the NFS segment, building equity, generating good ROE is how we get value created for us as shareholders. Okay. Now there's some other stuff going on in the financial services segment as well. What are these? And I believe they're categorized as other loans. So can you maybe as much as you can give us some information on what these are? Yeah. This is the one part I worry I'm not

fully understanding things. But for anyone looking at this company, these are going to be a bit of a black box. And I know a bank, any sort of lending institution has some black box qualities where you just have to trust the management is being smart and making good loans, similar to an insurance operation. I think this is the hardest part to analyze. And this is the quote unquote other loans they hold on the balance sheet. These are loans that are not FFLP loans or a part of now that bank. And they are becoming a larger part of the portfolio. Now, some of these loans are securitization, which management went into detail about on its annual letter. I don't know if I'll read the full quote here, but they talked about how in 2020, or excuse me, 2017, they made

their first consumer loan purchases via a partnership with private credit. And they try to build their expertise ever since. So they have currently a stake in over 30 consumer deals representing about $1.2 billion of loans. They have funded $363 million of them and forecast an overall pre-tax IRR in the mid-teens. I think that last part's important if you trust management here and their track record over the last few decades, where if they have that mid-teens IRR, that's good with me. And again, all we can do here is trust that Nelmet is making smart underwriting decisions when investing in these securitizations or taking on fully owned loans on the balance sheet. They are also, as I mentioned here, having wholly owned loans

on the balance sheet. They purchased $600 million of consumer and other non-FFELP loans just in 2024. So that is a huge portion of Nelnet's capital getting deployed in these loans. So a ton of the reinvestment are going into these. So if we look at the balance sheet, this reinvestment will be included in the assets part of the balance sheet. And they're going to be in the quote of the line item that says private and consumer loan originations and quote other investments. Now, not all of the other investments are NFS loans. They could be, you have venture capital investments, you have the stake in huddle, you have some of the solar stuff that could be mixed in their real estate, but some of those are within NFS. But I'm saying

with these consumer loans and the private credit loans, a large portion are. And then Nelnet has poured almost $4 billion into both of these line items since 2015, some of that including solar and real estate and stuff like that. And it's at an accelerating pace. And if these loans achieve the teens annual returns that management is forecasting, I think it could create a lot of value for shareholders, but you are just trusting them at the end of the day. Combined, we're not even including the real estate. We're not even including the reinsurance operations. I didn't even mention the financial advisory service that generates some earnings as well. I think NFS as a whole, if we talk about FFVLP, now that bank and all this stuff can generate, I think hundreds of

millions in owner earnings to Nelna in 2025 and beyond. Once this FFVLP book runs out, essentially, what we're saying, it goes into a much smaller period in 2026. The earnings might drop a little bit for that year. But I think after that, they should begin to grow again. And how much is this segment worth? that's tough all right ryan uh maybe we have a book value of would you say three billion of with this does that make sense to you yeah maybe yeah i think that's probably fine i mean okay you're getting at least a billion in guaranteed cash flow from fflp over the next decade whatever that's worth value of that is

yeah yeah yeah and then you have this nfs stuff that's the the other is gonna have even more i think of a book value there yeah i think three is reasonable if it's a little less if it's somewhere in the two range it's not a deal breaker so i don't think it's the end of the world there Uh, part of this is that I, I get a little concerned when I see all the different sprawling initiatives within this category. So the VC arm, the real estate arm, it's my worry is that like, is the management team so good they can see a deal in any industry? Is that what it feels like? But ultimately, the bulk here is loans around the education sector, which they have a phenomenal pedigree in and phenomenal history in writing and originating those. So I think they're great at it, and I wouldn't get too worried about this feeling like a black box. And part of the reason for that is because they have other divisions now that account for a good chunk of the valuation. Yeah, and the balance sheet is pretty conservative.

They have a lot of capital built up, and the historical track record has been quite good. Now, if we have this $3 billion in book value, I think quite conservatively, if it's earning a IRR or ROE or however you want to say it, a 15%, I think valuing it at book value is well conservative enough, especially when you consider some of these other startups, uh, subsidiaries within this, like the insurance, the real estate that goes on top of that. Again, it's very hard to parse through the true size of everything, but let's say napkin math, it's worth $3 billion to Nelnet, if not more with hopefully a good reinvestment runway over the next five to 10 years. Yeah. All right. Let's shift gears a bit and talk about some of the other divisions here.

I'm going to be speaking for a while because I'm going to take some of these divisions, but hopefully we can, there'll be plenty of questions to ask about all these. And I'm going to kick things off with the Nelnet Diversified Services. This is basically just their loan servicing division. For anyone that doesn't know what that means, it's the layer between the lender and the borrower. So the work that's being done under the hood, that includes the actual distribution and collection of money, maintenance of financial records, and sort of being a central dashboard for the borrowers to interface with during the payback period. This is really, if you borrowed a student loan to go through college, there's a good chance you

probably know now that's a name. And part of that might be the servicing. So the last two years in this division have been really difficult. Really, you could say the last five years have been pretty difficult in this division. The COVID response put loans into a forbearance period. And then the Biden administration continuously renewed the forbearance period on the hopes that they were going to be able to get broad loan forgiveness. And it really hasn't amounted too much so far uh and there's been a as brett said a lot of court dates a lot of uh lengthy legal trials uh going basically appealing this so here's what the management team has said about the situation they said during the biden administration's final year they threw every

ounce of remaining caution to the wind and went full force to discharge as many categories of loans as possible using their interpretation of existing authorities including income income contingent repayment authority, borrower defense to repayment, and even another attempt at broad forgiveness. Unsurprisingly, Republican-led states challenged the legality of many of the administration's forgiveness actions with court rulings leading to repayment starts and stops that will likely continue into next year. So you can see they've been kind of whipped around by the federal government on these loan programs. And they have to staff people based on the number of borrowers and the people repaying.

And so they've had a number of firings. They've had just costs kind of going all over the place, revenue going all over the place. And then on top of that, they had a new contract start, which is really kind of I think what matters the most probably when you're forecasting out long-term earnings for this division. So their old deal with the US government expired last year and they entered into a new one starting in april as a part of the deal they had

or as a part of this new deal they had to make some big technology investments they had to make what they put in quotes as personnel restructuring i honestly don't know what that means typically you see that layoffs layoffs they the federal government made them do layoffs no they're saying that they can't be profitable at the current rate unless they have fewer employees okay all right that's what i thought i just never it sounded like it was like a part of the agreement but okay that makes sense um and then they were given a lower revenue per borrower rate which is kind of a bummer to see um yeah and that's what caused the restructuring in the layoffs yeah right so this led to a pretty big drop in earnings for this year

for the segment to put some numbers on it. Last year, they did $78 million in earnings. They were doing around $60 to $70 million before that. And then this year, they did $40 million. It might even be lower since the new contract started four months into this year moving forward. But in general, it was a bad year for loan servicing. I'm not sure it's going to get much better anytime soon. And here's what Michael Dunlap had to say about it. He said, I get asked a lot why we like this highly erratic business. We have been in this business for 46 years and have been able to navigate through many different political ideologies, which makes us most experienced and largest servicer of

student loans in the world. We leverage our expertise in FFLP, government, private student loans, and consumer loans to grow our servicing and financing of assets. Here's the part that I didn't really jive with. It said, there are thousands of new companies being started in AI. We don't have that competitive problem, but we do have the opportunity to apply AI to our businesses and to provide a higher level of quality, convenience, and efficiency. He also basically said it's going to take some time to get the earnings back in this division. I don't love the – it kind of feels like a cop-out to be like, why do I like this business?

Well, we've been in it for a long time, but at least we don't have the competitive stuff that AI has. It's like, yeah, but you're getting toyed with by the government. Maybe it's better to sell this to someone if you can. Maybe, but they're not doing that. They're taking on Discover and SoFi's servicing. They always say this with their servicing, and the earnings are always positive. It's not like it's a drag like this solar construction acquisition is. that if earnings go negative that's when i would be concerned but they always have this

very very pessimistic tone and then earnings are positive uh well if they make these improvements and things kind of normalize and there isn't this rapid change and roller coaster ride with negotiating with the government which i hope i don't think it can get worse than it has been over the last three years maybe earnings will start to grow again but who knows if they've been positive. What's your chart here? 10 year chart. They've been positive since or even longer since 2012, positive, positive earnings in this division, whatever the size is, I'm okay. I'm okay with it. Yeah. And it's not critical. It's not going to be as critical as sort of the education software segment, but it's just, it's not a wonderful business. There is something to be

said for if everyone else hates this business as much as uh or if it's been as tough of an experience for other servicers as it has been for now that although no one really has that same contract with the government maybe there's some consolidation here um and they could be kind of the the last player and maybe pricing looks a little bit different next time there's the contract renewal um but yeah i think i would probably value this at less than 10 times earnings before taxes you can maybe even say five times um hopefully they are earning more in five years than they earned last year but i have yeah i would say maybe five times your estimate of what like five times maybe the 60 to 70 million you think they can get to

which is i guess what you came up with yeah i'd say it's around anywhere from 200 to 400 million dollars is what i think this whole segment is worth hopefully it's in the 300 to 400 range But yeah, I'd like to see a full year under this new contract and have them kind of – maybe – I don't know if we're going to see it this year, but one where they're not whipped around as much by the US government and there's a little more easy going – like you know that people are going to repay and you're not worried about that. So we'll see if that happens anytime within the next year, but I'd be surprised if it did. Yeah, this might be the one part of the government or government contractors where there's less whiplash in 2025 compared to 2023 and 2024. But we shall see. Not an important part of the business. What is important is Nelnet Business Services, which is education, software, and payments technology. If the NFS financial services division was maybe a case study in a good business that takes strong execution to really elevate yourself to strong ROEs, and if this loan servicing one is a bad business because of the volatility and uncertainty over the government contracts, well, NBS or Nelnet business services might be a case study in a high quality business. So, Ryan, why don't you give an update on how perhaps both of our favorite parts of the Nelnet story did in 2024? All right, listeners, we've got a new sponsor here at Chit Chat Stocks, and their name is Blue Chippers Club.

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Full disclosures in the podcast description. this company, but yeah, this is the education software business. It includes a number of different software and payment systems for all grade levels of school. So this includes like tuition management, payment processing, other software tools focused on the administration departments at schools, mainly in the United States. And if you just break out the revenue and earnings of this business, it looks phenomenal. So in 2012, now keep in mind, there's been some acquisitions along the way. I'll share this chart for the video watchers. Okay. In 2012, they were doing $74 million in revenue and $15 million in earnings before taxes.

This year, they technically did more than half a billion dollars in revenue and $118 million in earnings before taxes. So they have compounded both revenue and earnings at high teens percentage rate annual percentage rate for the last 12 years this is it's a very sticky business as well um so 97 retention yeah were you about to say that yeah customer retention's 97 i mean you think about being kind of in the in the workflows for administrative offices at elementary schools or colleges or the payments processing for colleges that's probably not something you want to be switching around on a regular basis. So yes, retention is high. I imagine there's probably some pricing power at some of these software divisions as well. And then the only thing

that's probably worth noting is that Dunlap said there was a number of one-time earnings opportunities that they don't anticipate will be there in 2025. I looked through the 10K. I couldn't find how much that amounted to um but i suspect they will even if they don't grow revenue this year it seems like a business that can very naturally grow uh if you work in the front office at a school and you switch schools and you know that you really like to know that's payment processing service when you go in there you can say oh let's you know i imagine there's sort of some virality in that sense where switch schools, maybe you try the different payments processing, they have a phenomenal net promoter score, even though I kind of hate when companies call that

out. It's better to have a good one than a bad one. So yeah, high retention, high net promoter score, great earnings power. They also had $30 million in interest income. So I imagine there's cash being held in some of these software businesses, probably the payments processing, stuff like that, where they can earn interest. They processed, I believe it was more than $50 billion in payments volume this year. So not surprising to see some interest earned there. I think this business, one that is very sticky, one that has natural growth, probably some pricing power and is quite profitable. I think this business is worth 20 times trailing earnings before taxes uh which is kind of a premium but if this were split out on its own i would be very

surprised if this was trading for less than 20 times yeah and that's not the best way we like to do things where it's oh relative valuation oh what are peers trading at but i think if you look at this business the attractive cash flow the asset light nature over the next 10 years you probably get close to the entire market cap in cash back. If that market cap was $2.3 billion, maybe a tad less, but for a high quality business with very low churn and solid growth potential going forward, probably not as good as it has been historically, but still very solid. Yeah, it's not the end of the world to have something spitting out over $100 million in cash flow a year especially when combined with the volatile nature of the lending and banking

operations and how that can unfold yeah it's so nice to see like a software business in here because the rest of it's very unpredictable and this one feels extremely predictable so So yeah, that in my opinion is the biggest chunk of the price you pay today for Nelnut or the price I would – or what I think the business is worth. I would say it's right up there with the financial services and because it's so much easier to analyze, it makes me way more confident in our valuation process and what we value the business at. Yeah, the NFS could earn hundreds of millions of dollars a year in earnings, but it's a bit messy right now. So maybe that'll clear up within a few years as we get this FFELP stuff pretty much wound down. But as of now, it's much more cleaner to look at. NBS, hey, over $100 million in earnings, very strong track record of consistent growth,

and a very low-churn business with a fantastic unit economics and cash flow characteristics. That's all we're looking for, Ryan. Let's move on to two investments. Now, what I think is funny is that I said, oh, these ones will be short for you, but I think you like both of these investments, so you had no problem going in a little bit of detail of what they are worth. First one we have is Huddle, which is a third-party investment they have, but a strong relationship with the company that's also headquartered in Lincoln, Nebraska. So Ryan, talk us through what you think this is worth, because they gave some pretty good clarity or not clarity, some good color on the business today. And they actually disclosed the true number of what they own.

They used to say, well, we own about 20% of this business, but at least this year, they gave us a true number of 22% where we can do some hopefully good valuation work on it. Yeah. Yeah. So just as a reminder on what Huddle is, they are a software and somewhat becoming a hardware provider as well to the entire world of sports. And the reason I say they're becoming hardware is they're like planting these cameras at various fields so that they can provide film, video. There's a whole bunch of games for high schoolers. You know, that's a huge problem. Honestly, like I remember we both had that problem.

Do you remember the problem of – because we were both kickers and when the freshman would be doing the film and they would just have it on the kick and they wouldn't even show if it went in. So when talking to college recruiters, that can be quite the problem. No, no, trust me. I made that one. Just look. Just trust me. It is – yeah. It's a problem to be solved.

They have really a monopoly in the U.S., especially high school football type market. But analytics, video, all that stuff, Huddle is becoming the premier player. Here's a quote from what Nelmets management team had to say. They said, the company serves the entire sports ecosystem, coaches, administrators, analysts, athletes, recruiters, fans, parents, and brands at every level of play. huddle is the industry standard solution like pro core is for construction management appfolio is for property management or shopify is for e-commerce i think that's dead on honestly within the sports analytics and and film category for the coach for the athletic directors this is your workplace management software well mainly the coaches maybe not the athletic directors

for the coaches in more and more is coming into huddles sort of umbrella like ticketing live streaming you know if you're an administrator you got to make the make sure that the live stream is available for various you know parents whatever that's in your wheelhouse if you're an administrator it's also you worry about it as a coach and for college coaches they're looking at huddle film too all this stuff um anyway so they added yet again to their investment in huddle this year. They invested $3 million, which I believe had to be just them buying some other investor's stake because this was, quote, not considered an observable market transaction. Shame. Shame.

Big shame. So they're able to hold their stake in Huddle basically at cost. So right now they've got a 22% stake in the company, which they say the carrying value is $169 million. I think it absolutely has to be worth more than that especially if the company ever went public they serve 300 000 teams around the globe and i saw an estimate i don't know how that it was one of the aggregators but i think it was right and i've never seen this figure yet but it said as of january 2025 huddle had annual revenues of 750 million dollars that seems reasonable wouldn't you say i agree now i'm going to confirm it right now but if we look at huddles pricing i believe and think about the pricing power they could have here for a high school football team

now i believe their base price for high school is a thousand bucks a year um let's see i think you might be way maybe it's a little higher because 10 grand well it depends because they have like multi-sport bundles they've got you can't go onto the website and see the pricing i think you have to talk to a sales consultant but let's change because i used to be able to find it the administrator like if you're an administrator you can get huddles film capabilities for your whole school or sorry for all the athletic departments at your school that's great um and i've seen i found a number ryan yeah packages start yeah you can't get the they have to quote you but it says packages start from two thousand dollars a year okay so i'm not sure

what that adds up to in revenue but i think the 750 million in annual revenue is reasonable especially because they're also serving like pro sports teams there's a couple of different software analytics providers that they've bought that serve like the international soccer or football market uh y scout i think one of them is the basketball one as well for for pro teams or college teams yeah they have quite a few i believe it's called crossover i think they've kind of gone on a what do they call it roll-up strategy within this software where huddle was the premier one for high school football and a little bit of college but now they're going to hey there's plenty of other sports out there especially globally this if this got an average

sass multiple in the public markets let's call it seven times revenue which i would guess with their growth rate is maybe even conservative for what some software businesses could get or what this business could get in the public markets today huddle at seven times revenue huddle would have a five billion dollar market cap that would make nelnet stake worth a billion dollars only issue is i have seen zero indication that the huddle is going to go public and the fact that investors are selling to nelnet tells me that huddle continues to push off an ipo because those vcs got to return capital to their lps so the only way they can get a liquid liquidity event is to sell their stake to nelnet uh what about an lbo what huddles they could well founders on

the board of Nelnet they potentially could get the financing if they got some fixed cost debt to acquire this whole thing what do you think would you would you like that or no I would love that but I don't think it's gonna happen yeah and it probably would be too expensive I think honestly the better opportunity is to have them go public because what Nelnet would pay for this business is not what the market would pay Exactly. Finchat.io is the complete stock research terminal for fundamental investors. They have robust financial data on more than 100,000 stocks globally.

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No card required. Again, that's finchat.io slash chitchat. The link will be in the show notes. So it's obviously worth more than their cost, but Nelnet won't see the cash flows from it, I imagine, for a long time. So I'm going to give it a market value of two times their cost. So that puts it at just over $300 million, not huge part of the enterprise value or the sum of the parts valuation, but it could be. I mean, this could be a $1 billion, $2 billion stake in a successful IPO.

So, yeah, and I really love that business as well. Brett and I both have – it's been around for a long time, and it's been the premier provider for probably a decade plus now. That is correct. Yeah, I remember. Hey, sending the film, watching other people's films. But it is hard to, again, the film aspect and being kind of vertically integrated within that market. We both know that there is a huge opportunity there. And that is a big problem to solve for these high school teams and huddles in the driver's seat to solve that. All right, next one is Allo. This is another one where management might be trying as hard as possible to make it confusing to shareholders and what this is valued at, Ryan. But this is a fiber communications

business. It seems to be growing quite quickly, but they only own a 45% voting stake in the business or I think economic value as well. Not exactly sure, but take us through the details here. How is this business progressing in 2025 and what do you think it's worth? Yeah, so Allo is their fiber internet business. As you mentioned, they own a 45% voting stake in Allo Communications. It's primarily around Nebraska and some neighboring states as well, Colorado, stuff like that. And they also have preferred stock with a carrying value of $225 million. And for context, the carrying value on the preferred stock was $155 million two years ago. Not bad. The carrying value continues to go up. But before I expand on what I think the 45% equity stake, the non-preferred could be worth, let's go through the business.

This is something I am growing more and more optimistic about. So they grew customers 25% year over year. They now serve just over 200,000 customers in total. So that includes residential plus commercial. And their total home passings grew 43% standing now at 626,000 passings. For reference, home passings is exactly what it sounds like. It's just the number of homes Allo's Fiber passes. So basically, it's the number of homes that they could serve right now if the homes became customers.

The run rate revenue for Allo stood at $200 million at the end of this year. Here's a quote that stood out to me. As total passings are now more than 626,000, we expect the opportunity to increase revenues through market share and wallet share is meaningful. The cash flows from these mature markets have enabled Allo to complete two asset-backed securitizations, making meaningful progress to a self-funded state. As the attractive non-fiber markets are decreasing rapidly, Allo expects construction and CapEx will trend downward over the next few years i'm not a fiber expert but i have to imagine that

these investments are it's not like you're buying chips which depreciate really quickly the fiber assets depreciate very very slowly their irs useful life is 24 years and i think it's way better than traditional internet just from a customer perspective so it's faster for anyone that doesn't know it's much faster yeah it's not like they're potentially throwing money into the ground both figuratively and literally because even if the customers don't sign on in the first year even if they don't sign on in the second year the like the fiber itself is still a valuable asset and you've still got 22 years on the useful life there for the customer to pay you and there's probably some pricing power there as well if you got faster than that

hey, I'll take a $5 upcharge if I've never had an issue with my internet. And there's operating leverage. And one thing I liked from the shareholder letter is that they are gaining market share within existing markets. Sorry, that was a bit redundant. They are gaining market share, which will really help them leverage these fixed costs and hopefully lead to positive free cash flow.

Value in stake is pretty difficult though because they carry more than a billion dollars of debt outstanding 1.14 which is an increase from approximately 715 million last year so they're using leverage and frankly a lot of leverage now uh to grow we don't know the terms on the debt but well they if this was an individual company, and that's all you're investing in, I would be concerned with this debt level, obviously, over a billion dollars in debt, $200 million in revenue. What are margins going to be like? What is operating cash flow look like? I'm not so sure. But we have two big backstops for this business that can provide more capital if need be. Nelnet with its balance sheet that could

definitely provide some more funding here if need be, and their capital partner, what is it, sdc so they have two large partners here that make this a little less wobbly than you you would think yeah the other part here is look someone is continuing to provide them leverage and i don't think they're doing so on the hopes that they don't pay it back like something's telling me that they're seeing clarity or they're seeing that they can clearly pay this back over time, maybe having those capital partners helps. But the other part is Nelnet currently carries the value of this position at $0. So even if, at least the non-preferred part. So even if this went to zero from zero, it's not a make or break once again for Nelnet's thesis.

They value these things conservatively all the time. And this isn't the type of business – Nelma has never shown a lack of conservativeness. They've always been erring on the side of caution. So something tells me that them, A, controlling – they're not on the hook for the debt. They're a minority owner. That helps. But I think they're supportive of this debt – or this leveraged growth strategy because they think the returns are there would be my suspicion. So the growth is – the growth is good. To sum it up, the growth is good. and depending on

the preferred and the voting stakes remember they have 45% of I think the common stake again you might be getting some of this wrong but if this business continues to scale and it's doing down the line $100 million, $200 million in earnings a year

now that stake could be worth a billion dollars perhaps more say it's worth less you just have it pegged at the preferred stock here but a lot of upside and regardless of whether this is important to the valuation today things are going well for aloe yeah they're now or they're the way they value the equity stake

on the balance sheet is using the hypothetical liquidation at book value method of accounting which seems conservative to say the least it seems uh also like i don't know why this is allowed because they're doing it for tax purposes. But yeah, it's not accurate. Like this shouldn't be how you do things, but hey, they're able to do it. So I'm just valuing it at the, what they carry their preferred stock at,

which is 225 million. So once again, we're going to get into the overall sum of the parts. It won't be a huge piece of it, but it's additive overall to the valuation. Yeah. And it could help over the longterm, especially if things work out

and they keep scaling this business. Again, it could be worth a billion dollars if they own about half this thing. let's move on to the last segment yes there is one more and that is solar energy it's another complicated segment for now that it's also the one that's doing bad and is actually probably hurting the intrinsic value of this business at the moment they have two divisions in solar energy tax equity investments and renewable energy construction now that originates and syndicates solar tax equity investments which gives them tax credits to offset taxable income and they get

cash flow once the projects come online. At the end of 2024, Nelnet had cumulatively invested $315 million in solar projects and managed $271.4 million in solar investments for third parties. Here is a quote to explain the economics of these deals. These investments provide a federal income tax credit under the Internal Revenue Code, currently equaling 30% to 70% of the eligible project costs with the tax credit available when the project is placed in service. The company is then allowed to reduce its tax estimates paid to the U.S. Treasury based on the credits earned. In addition to the credits, the company structures the investments to receive quarterly distributions of cash from the operating earnings of the solar project for a period of at least five years after

the project is placed in service. That sounds like an attractive business to me. You offset the taxes from your other operations and you get cashflow coming in, you're not the one building the project. However, they made an acquisition to try to start building these projects with renewable energy construction. They made this one, I think in early 20, was it 2022? I think it was mid 2022. It's a very poorly performing acquisition. Luckily not that large, but still drag on the earnings last year. They posted a $34 million net loss for the renewable and solar energy construction in 2023 and $26 million in 2024. Now it's gotten rid of its unprofitable residential division and is now focusing solely on commercial construction, but we'll see what

earnings look like in 2025. I think it would be a positive if they were just flat. The largest risk to this segment is the elimination of the tax credit loophole in the United States for solar projects. I have no idea how likely this is, but it's a serious risk. Of course, you know, we don't want the construction segment to lose money, but maybe I'll value that at zero. I think they can get it to break even, right? That seems fair. I think that seems conservative. So we add up, just try to be conservative overall. If we just add up the capital deployed into this segment and then think of the tax credits, think of the consistent cashflow coming in when these projects are completed and then the fees earned on the investments in managers for third parties

i think i would peg the valuation of the solar segment at 500 million dollars assuming the construction business is worth zero does that make sense to you ryan i think the construction business might be worth less than zero oh they said the commercial is profitable i would say it's probably worth more than zero if they get rid of this residential one i thought they said they are expecting losses again this year uh i think they're hoping not to have losses but they're still winding down some of the residential projects okay while we're on the topic i'm going to give a quote from michael dunlap in this year's letter and it talks about this he says if i were to rank my favorite pies the order would be simple apple cherry and then

pumpkin one pie saying this guy's from the midwest i know it says one pie i could do without however is humble pie unfortunately for the second year running that's exactly what i'm eating humble pie that tastes like the overcooked brussel sprouts and canned asparagus my mom served me as a child long before chefs made brussel sprouts delicious nre our solar construction business has once again drained resources after 34 million dollars in net losses excluding losses attributed did to our minority partners, which includes $21 million in goodwill and intangible assets write-offs in 2023. I optimistically thought the worst was behind us, but 2024 presented continued challenges, including shutting down the residential side of the business,

inventory write-downs, construction issues, bad estimates, and inflation amounting to an additional $26 million in net losses. Venturing beyond our circle of competence rarely ends well. So I imagine – okay, so they're shutting down the residential business. That's good. If this commercial business is profitable, that's great, but I feel like – That's why I'm paying it at zero, Ryan. Okay. I'm hoping that they just get it to positive earnings.

Yeah. And either way, even if it's at zero, if the solar tax equity investments are there and you can use that to grow that segment – Sorry, if you can use the construction to grow the amount of capital you can deploy in these solar tax equity deals, which seem highly attractive, I think that's good. Because there's no way they are doing these deals when they see mid-teens IRRs at the NFS division. They have to be seeing similar numbers within solar equity investments. And it looks like, given the outlines here, the 30% to 70% tax credit you can get, plus the consistent cash flow that's coming in year after year and quarter after quarter, when these deals come online, that's got to be worth, I'm conservatively putting it at essentially what the cash they've deployed plus what they're managing for third parties. But I think it's

probably worth more. Okay, let's finish with our valuation and our final thoughts on maybe whether we're buying, selling, and everything else. Do you want to give us the full valuation update? Yeah, let's do some of the parts. I know a lot of you hate some of the parts, but for this one, And it can work. I'm going to go to this part first and just explain why it can work. Because unlike other conglomerates, Nelnet is aggressive at consistently buying back stock. Their shares outstanding have come down by 33% since 2005. Dividend per share consistently grows. So we should see it, you know, that the value is going to get back to us eventually. We just have to be patient. all right so i peg the nfs division to be worth three billion dollars solar to be worth 500 million dollars ryan is valuing loan servicing at 300 million nbs which is the education software and payments at 2.3 billion dollars huddle at 300 million dollars out of communications at 225 million dollars and we have about 200 million dollars in cash on the balance sheet total that

is 6.8 billion dollars market cap today is 4.4 billion dollars i see really no reason to sell and in all honesty i probably wouldn't sell unless we got very very aggressively above our estimate of a intrinsic value maybe 10 billion dollars because you gotta take the tax hit and depending on what account it's in and if you have something better you know let your winners ride as long as the business is doing well that's the one takeaway we've had from david gardner and the rule at least i have i think ryan does as well you probably want to be very hesitant on selling your winners unless the valuation gets absolutely extreme which i'm not too worried about with nelnet given that it never seems to trade at a premium valuation yeah given that they have

no conference calls and like zero analysts that follow it and the likelihood of it becoming a meme stock seems pretty low i suspect this one won't get to extreme valuation territory if it does you know great for me i guess uh but yeah are you when you first started buying this which is in 2020 yeah would you say this has exceeded or come below what you expected the next five years to look like exceeded yeah because at that time we were very worried or the biggest concern is what they're going to do with the ffe ff elp portfolio runoff Now we've figured it out. I can put it into these new lending operations, real estate,

reinsurance, the bank, and solar tax equity investments. Not all of them have worked out fantastic, but I think there is a lot of value getting created here. Now, another way we can look at the valuation is book value. Price to book value right now is 1.33. Now, if you're a deep value guy, that might turn you off right away. Oh my God, it's above book value. how could I ever buy this thing? Yes, it's less attractive than when it traded at 0.9 times book

value at the beginning of 2024. But I hope as you listen to this episode, you understand that their true intrinsic value is much higher than the accounting book value on the balance sheet at the end of 2024. And despite that, if we look at that number that you gave at the beginning here, their book value per share plus dividends have compounded at a 15.7% rate since 2004 with a lot of asset light and headwinds to this accounting book value, despite there being significant amount of other value being created in those assets like huddle, solar tax equity, things like that and not to mention the software and education payments business so i think exceeded my expectations i like the consistent buyback i would maybe want them to take some of

that cash flow and maybe be more aggressive with that buyback to close the gap with intrinsic value but i don't expect that to happen that would be my wish i don't think it's going to happen i i wouldn't it's not like i'm going to sell if that happens to me as a shareholder but i'm very happy with the position it's in a hold not sell would probably buy some more if i if it becomes a smaller position in my portfolio as i get more of my income deposited into my account but i think that's all i have to say ryan what are your closing thoughts does exceed disappoint you what are your thoughts on nelnet as we close out here and look forward to 2025 I'd love to say that it exceeded my expectations, but I think if I went back to our write-ups and the podcast that we did at those times, it probably came a little under my expectations.

Certain segments have overperformed. I think now that business services has overperformed what I would have expected, the servicing is certainly worth less than I projected it to be worth three years ago, four years ago. And they've done – it seems like they've done a good job finding places to reallocate the cash flow from the loan portfolio. But I think it kind of remains to be seen what this future loan portfolio looks like and how they perform. I think it's done pretty well so far, and I suspect that given their history in education loan underwriting, they should do just fine. But yeah, I see no reason to sell right now. I'll probably just continue to own shares. I'm not really buying here, but I'm comfortable holding.

Yeah, and we should mention that it is, I think for you as well, 10% of the portfolio or higher. but we do these updates throughout the year. Anyone can ask us what our portfolio is, especially if we're going to talk about stuff that we own. We're fully transparent with that. Is that correct or wrong? Or maybe you're under 10%? Mine's about 7%. It's like my third largest holding. Okay. So still a large position. For me, it's a bit higher. I think it's 20, but probably will come down as a percentage over time. We'll see though. Maybe I'm a bit more optimistic than you, Ryan here, but we're both optimistic on the company. Let's close things

out. I think this was a fun overview. We had a lot of people asking to do an overview on Nelnet and hopefully this was a good episode for you guys to listen. If you liked the episode, again, if you got this far, consider taking five seconds and give us a review on Spotify or Apple podcast, subscribe to the newsletter for all the charts, written content that goes along with this update and feel free to chat with us on the Substack chat application on any of these episodes or any stocks you're interested in talking about. As a disclosure, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan, I, or any podcast guests may hold securities discussed in this podcast, may have held them in the past and may buy,

sell, or hold them in the future. Thank you everyone once again, and we'll see you next time. We'll see you next time.