Nelnet: An Update On Our Baby Berkshire Investment (Ticker: NNI)

Mostly good things for this financials-focused conglomerate in 2025

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Today, we released a podcast episode covering Nelnet, a stock we believe is highly undervalued and the best bet to be the next Berkshire Hathaway in public markets.

By the end of 2025, it will be five years of Chit Chat Stocks covering Nelnet. Back in March of 2023, we outlined why we own the stock:

Last week, Nelnet released its annual report and shareholder letter for 2024. This is a complicated business. In the paragraphs below, we try to unfold all of its various segments, value them, and fold them back together to form our estimate of intrinsic value.

As always, listen/watch the podcast at the links above. And give us a 5 star review on Spotify or Apple Podcasts!

What’s the story here? Why do we like the business?

(skip to the next section if you know the company’s history)

Nelnet got started in the student loan origination business. This was quite a lucrative place to be, but in ‘10 the federal government took the lending business in house. Nelnet then had this massive pile of student loans they had written that were going to spit off cash for 2+ decades to come, but they couldn’t write new ones.

So over the last 15 years, 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 new ways to lend money. They’ve now passed the peak run off of that portfolio and the other parts of the business are what is most important.

Here are some thoughts we put together last time we spoke about them:

From Brett on March 7th, 2023:

“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, 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.”

From Ryan on March 7th, 2023:

“it gives me some confidence to know that Michael Dunlap owns 42% of the shares outstanding and Jeff Noordhoek owns basically $50 million worth of stock, which I’m assuming is a huge chunk of his net worth.

On the deploying capital part, as Brett said, the capital allocation track record speaks for itself. But I also like the fact that there are now a number of greenfield investment opportunities under their umbrella. Solar, fiber, Nelnet bank, etc., are places where they can really put as much capital to work as they want.”

Let’s dive into each business segment and estimate what it is worth today.

(Brett) Nelnet Financial Services (Lending)

Time to eat your vegetables. Nelnet Financial Services (NFS) is the most research demanding part of the conglomerate. We own a “melting ice cube” of student loans, a start-up bank, real estate investments, loans held on the Nelnet balance sheet, shares of loan securitizations, and a start-up insurance operation.

Real estate, insurance, and the other small NFS segments are not meaningful to the business in 2025. If they become larger, we will cover them in detail.

On this episode, I am going to dissect progress on the loan book run-off, Nelnet Bank, and the non-student loans + beneficial interests.

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First, let’s talk about the loan book run-off. As we’ve discussed before, this is a group of legacy student loans originated years ago on the company’s balance sheet, and are referred to as FFELP loans. After 2010, Nelnet was not allowed to make any of these private student loans, but it is still holding these securitizations on its balance sheet.

In the last few years, there has been an acceleration in repayments on these loans. From the 2024 annual letter:

“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.”

If borrowers repay student loans faster, Nelnet gets less cash flow but it arrives faster. 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. After this year, this segment becomes largely irrelevant to NFS and Nelnet’s entire business. I would note that even with the stock hitting an all-time high, we are still at a market cap of only $4.5 billion, meaning there is significant value in this loan portfolio.

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Second, we need to talk about Nelnet Bank. This is an FDIC-insured, fully licensed bank in the United States that began its first full year of self-funding in 2024. In order to grow the entire NFS lending operation, management is aiming to grow Nelnet Bank.

The bank currently has four lending categories:

• Private student loans

• Parent loans (paying for college, etc.)

• Student loan refinance

• Home improvement loans

Unsurprisingly, most of Nelnet Bank’s lending products are in the company’s circle of competence (education). It has a loan portfolio of $644.6 million.

Deposits are a tad complicated. It has a small amount of intercompany loans (capital taken from the Nelnet parent balance sheet deposited at the bank), CDs, Education 529 Savings Plans, Health Savings Plans, and Sweep Deposits to maintain FDIC insurance thresholds. It takes on commercial deposits from other institutions and brokers as well as retail deposits.

More details from the annual report:

“The Bank accepts, through various partners, non-brokered large omnibus accounts structured to allow FDIC insurance to flow through to underlying individual depositors. These omnibus accounts include the Educational 529 College Savings and Health Savings plans, STFIT, and FDIC sweep deposits. A network of brokers provides brokered CDs as a stable source of funding. Retail, commercial, and institutional deposits are sourced through a direct banking platform and a deposit marketplace and provide diversified funding sources.”

At the end of 2024, Nelnet Bank had $1.25 billion in deposits. Look for this figure to grow in the coming years. Net interest margin was 3.39% in 2024 compared to 2.33% in 2023. All good signs.

As Nelnet Bank scales, we should see this solid NIM translate into building of equity on the Nelnet corporate balance sheet (i.e. value being created for shareholders).

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Now comes the hard part. The “other” loans Nelnet holds on its balance sheet. We can classify these as any loans that are not a part of Nelnet Bank or the FFELP portfolio. These are becoming a larger part of NFS, and it is a tad confusing. Annoying, but necessary to understand.

Some of these loans are securitizations, which management went into detail about in the annual letter:

“We made our first consumer loan purchases in 2017 via a partnership with private credit and have continued to grow our expertise ever since. In general, these loan purchases can be found in the beneficial interest portfolio on our balance sheet as we seek out term financing options for our loan purchases. Historically, term financing has occurred by contributing assets to the originator’s securitization shelf. We currently hold a stake in over 30 consumer deals representing almost $1.2 billion of loans. We have funded $363 million, received $264 million and currently forecast $198 million in future cash flows. Across the portfolio, we forecast an overall pre-tax internal rate of return (IRR) in the mid-teens.”

Look, all we can do is trust that Nelnet is making smart underwriting decisions when investing in these securitizations. Given the cash flow profile and IRR projections, I think they are.

Nelnet is also underwriting, purchasing, and originating wholly-owned loans on its balance sheet. These are consumer and private education loans. It purchased $600 million of consumer and other non-FFELP loans just in 2024. Again, that is a huge portion of Nelnet’s capital getting deployed in these loans.

You can see this reinvestment in the “private and consumer loan originations” and “other investments” capital deployed lines in the above table. Not all of these are NFS loans, but a sizable portion are. Nelnet has poured almost $4 billion into these line items since 2015, and at an accelerating size. If these loans achieve the teens % annual returns that management is forecasting, it can create a lot of value for shareholders.

Combined, I think NFS can contribute hundreds of millions in owner earnings to Nelnet in 2025. Growth will be muted as the FFELP book runs out, but these owner earnings should begin to grow if Nelnet keeps making new loans intelligently (at the bank and on its own balance sheet).

How much is this segment worth? Well, we have a book value of a few billion, an ROE of 15% (probably?), and some other fee generating segments for the cherry on top. It is hard to parse the true size of everything, but my napkin math makes me think NFS could be worth $3 billion to Nelnet, if not more, with room for steady reinvestment.

(Ryan) Nelnet Diversified Services (Loan Servicing)

“Quick reminder on what this segment actually does: When a lender lends money to a borrower, there’s a layer of work being done under the hood that tends to go unnoticed. This layer includes the actual distribution and collection of money, maintenance of financial records, and a central dashboard for borrowers to interface with during the payback period.”

The last 2 years have been rough for the loan servicing division, really the last 5 years.

The covid response put loans into a forbearance period, and then the Biden administration continuously renewed it on the hopes that they were going to get the loans forgiven.

Here’s what the management team said about the situation: “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 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.”

I kind of think this will resolve itself over time, but ultimately it has led to a ton of uncertainty. What matters today is the new contract.

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 to make some big technology investments and “personnel restructuring,” and they were given a lower revenue per borrower rate. This led to a significant drop in earnings for the segment, and they said it’s going to take some time to rebuild that business.

So bad year, and I’m not sure it’s going to get much better any time soon. Here’s what Michael Dunlap had to say about it?

“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 the most experienced and largest servicer of student loans in the world. We leverage our expertise in FFELP, government, private student loans and consumer loans to grow our servicing and financing of assets. There are thousands of new companies being started in artificial intelligence. We don’t have that competitive problem, but we do have the opportunity to apply AI to our business processes to provide a higher level of quality, convenience and efficiency, which we are doing aggressively.”

I honestly don’t love that quote. I think there’s a ton of uncertainty in this business and the declining revenue per borrower is concerning. I would probably value this at less than 10x EBIT, which means this is probably worth around $300-$400M in the SOTP.

(Ryan) Nelnet Business Services (Education Software)

This is a much more likeable business. Once again, for anyone unfamiliar, this is their education software business that is home to a number of different software and payments systems for all grade levels of schools.

These include tuition management, payment processing, and other software tools focused on the administration department at schools, mainly in the United States.

If you include the interest income that this business generates ($30M this year), they crossed $500M in revenue here and generated $118 million in EBT.

This remains the best business under Nelnet’s umbrella. EBT has grown at 19% annually since 2012 and they tout 97% customer retention.

It’s worth noting that Dunlap said there were “a number of one-time earnings opportunities (Covid education money) and a lot of wind at our back that we do not anticipate will be there in 2025.”

I’m not totally sure how much those one-time events amounted to, and I couldn’t find anything in the 10-K, but either way this is a business that I think would be worth quite a bit on its own. For something this deeply engrained with schools and so sticky, there’s likely some pricing power as well. I’d argue this is worth 20x trailing EBT, which would make the segment worth ~$2.3B.

(Ryan) Hudl

Just as a reminder on what Hudl is, they are a software (and somewhat becoming hardware as well) provider to the entire world of sports. Here’s a quote from Nelnet’s management:

“The company serves the entire sports ecosystem—coaches, administrators, analysts, athletes, recruiters, fans, parents and brands—at every level of play. Hudl is the industry-standard solution, like Procore is for construction management, AppFolio is for property management or Shopify is for e-commerce.”

They added yet again to their investment in Hudl this year. They invested $3M which I believe had to be just them buying some other investor’s stake because this was “not considered an observable market transaction”, so they are able to hold their stake in Hudl basically at cost.

So they say right now their 22% stake in the company is worth $169 million.

I think it has to be worth more than that, especially if the company ever went public. They serve 300k teams. I saw an estimate that they’re doing $750M in annual revenue, and that seems reasonable. I have no way of knowing whether it is exactly right though.

For context, if this got an average SaaS multiple in the public markets, let’s call it 7x revenue, Hudl would have a $5 billion market cap. Nelnet’s stake would be worth $1B.

Only issue is I have seen zero indication that they will go public, and the fact that investors are selling to Nelnet tells me Hudl continues to push off an IPO, so I don’t know what this thing is worth.

It’s obviously worth more than their cost, but Nelnet won’t see the cash flows from it for a long time. I’m going to give it a market value of 2x their cost. That’s just over $300M.

(Ryan) Allo Communications

Alright the last segment that I’ll be valuing is Allo. This is their fiber internet business.

Nelnet owns a 45% voting stake in Allo Communications, which is a leading fiber-to-the-home provider in Nebraska and some neighboring states. It also has a preferred stock with a carrying value of $225.6 million. (Carrying value was $155M 2 years ago).

Before expanding on the numbers, I’m growing more optimistic about this business. They grew customers 25% YoY, and now serve just over 200k customers in total (residential + commercial). And their total home passings grew 43% and stands at 626k. For reference, home passings is exactly what it sounds like. It’s 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.

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 capital expenditures will trend downward over the next few years.”

I’m not a fiber expert, but I have to imagine these investments are worth it over the long run. Fiber assets depreciate very, very slowly (their IRS useful life is 24 years) and I think it’s way better than traditional internet.

Valuing this stake is difficult though, because they carry “$1.14 billion of debt outstanding, an increase from approximately $715 million as of December 31, 2023.”

They use debt to grow. We don’t know the terms on that, so I think it’d be easy to be very wrong on our assumptions here. They carry their equity stake at zero using the “Hypothetical Liquidation at Book Value (HLBV) method of accounting”, which feels a bit conservative.

But let’s just say it’s fair (it doesn’t really make a difference in the SOTP), they’ve still got the $225M in preferred stock.

(Brett) Solar Energy

Solar energy is the other complicated segment for Nelnet. It is also the one underperforming the most.

The division has two operating units in tax equity investments and renewable energy construction.

Nelnet originates and syndicates solar tax equity investments, which give them tax credits to offset taxable income. 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.

“These investments provide a federal income tax credit under the Internal Revenue Code, currently equaling 30% to 70% of the eligible project cost, 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.”

Renewable Energy Construction is a poorly performing acquisition that Nelnet made. They had to post a $34 million net loss in 2023 and $26 million in 2024. It is getting rid of its unprofitable residential division and focusing solely on commercial construction.

The largest risk to this segment is the elimination of the tax credit loophole in the United States. I have no idea how likely this is of occurring, but it is a serious risk. Of course, we don’t want the construction segment to lose money again in 2025.

On the whole, I think the solar energy segment is worth at least slightly more than the capital deployed on its own. It earns the tax credits, has consistent cash flow coming in when projects are completed, and earns fees on the investments it manages for third parties.

I would peg the valuation of the solar segment at $500 million, assuming the construction business is worth zero.

(Ryan) Do we like the progress that has been made? What have some of their missteps been?

One thing that I love about this management team is just how transparent they are about mistakes. And they’ve had a couple in recent years, most notably through their Nelnet Renewable business.

Here’s a quote from Michael Dunlap in this year’s letter:

“If I were to rank my favorite pies, the order would be simple: apple, cherry and then pumpkin. 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 Brussels sprouts and canned asparagus my mom served me as a child (long before chefs made Brussels sprouts delicious).

NRE, our solar construction business, has once again drained resources. After $34 million in net losses (excluding losses attributed to our minority partners) which includes $21 million ($16 million after tax) 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 your circle of competence rarely ends well.”

(Brett) Updated Valuation

We can look at Nelnet’s valuation by doing a sum-of-the-parts (SOTP). I peg:

• the NFS division to be worth $3 billion,

• Solar to be worth $500 million.

• Ryan is valuing loan servicing at $300 million,

• NBS at $2.3 billion,

• HUDL at $300 million,

• $225 million for Allo Communications.

We have cash of just under $200 million. Total, that is $6.8 billion. Today, the market cap is $4.4 billion.

You might argue that SOTP estimates do not work. However, Nelnet is much more aggressive than other conglomerates at buying back stock and growing its dividend. As shares outstanding go down and the dividend per share goes up, we (shareholders) will keep closing the gap to intrinsic value.

Or, we can just look at growth in book value. Book value per share has grown at an 11.3% CAGR since 2005. Including dividends, we are at above 15% annual growth since 2004. Growth in book value has slowed due to the depressed stated values of solar, Allo Communications, and Hudl on the Nelnet balance sheet. If these were properly valued, book value per share would have likely compounded at 20% per year.

Today, Nelnet trades at a P/B of 1.33. The stock is less attractive than when it traded below book value at the beginning of 2024, but it is still a significant discount to the true value of Nelnet’s businesses and investments.

We both hold Nelnet as large positions in our portfolio right now. There is nothing about this year’s report that indicates our thesis is incorrect, so we plan on keep holding with an ultra-long time horizon.

-Brett

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