On its face, Social Capital Hedosophia V (NYSE:IPOE) stock looks awfully attractive. SCH V is merging with SoFi, which is posting strong growth and has an intriguing strategy for disrupting the financial industry.
Yet there are nagging concerns about IPOE stock. Those concerns are somewhat hard to pin down — and even somewhat unfair.
Among the worries is the role of Chamath Palihapitiya, who heads Social Capital. Another is the general sentiment toward SPACs (special purpose acquisition companies), a trend which Palihapitiya has helped guide and one that looks like it may well have peaked. And SoFi’s prospects itself deserve some scrutiny.
To be honest, the cause for skepticism is based somewhat on “feelings”— which really does seem unfair. At this point, IPOE stock seems like a play whose trajectory in retrospect will look obvious.
If SoFi becomes a true disruptor and a pillar of the financial system, investors will kick themselves for missing out on IPOE stock when it was trading below $20. If the company, on the other hand, struggles amid entrenched competition — or worse, implodes — that, too, will appear almost preordained looking backward.
It’s up to the individual investor to judge how IPOE stock looks now — which requires a thorough accounting of both its potential risks and rewards.
The Case for IPOE Stock
It’s difficult to review the information disclosed by SCH and SoFi so far without getting at least a little excited. That’s true even though it’s clear that both firms are doing their best to show SoFi in a positive light.
A financing company, SoFi is growing at an impressive clip. At the end of 2019, it had just shy of 1 million members. By the end of 2020, the figure had reached 1.7 million, with SoFi expecting 3 million by the close of this year.
That membership growth has enabled its financial performance to rebound. Its adjusted net revenue, which excludes some non-operational accounting items, was $241 million in 2018. SoFi expects the metric to reach $621 million in 2020, despite pressures on lending volumes from the novel-coronavirus pandemic.
SoFi’s Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was well ahead of the company’s guidance last quarter and should turn positive on a full-year basis in 2021.
So the lender is heading in the right direction. And there could, and maybe should, be more improvement going forward. SoFi this month acquired a bank, which will allow it to become a nationwide digitally-based financial institution. It sees a path toward selling its internally-built tech platform to other institutions, with the revenue from that initiative nearing $1 billion by 2025.
On top of those opportunities, its core financial offering will expand. Bear in mind that SoFi originally started as a relatively targeted student lender. It’s now planning to move into credit cards, home loans, and investing in stock.
SoFi can become a U.S. financial-services giant. If that happens, the current pro-forma market capitalization of IPOE stock, which is about $16 billion, will look like a steal.
That said, it’s also hard not to have at least a few misgivings about SoFi and IPOE stock.
For one, to be blunt, I don’t entirely trust Palihapitiya. The failure by Clover Health (NASDAQ:CLOV), which went public via SCH III, to disclose a regulatory investigation, is a concern. Will SoFi be similarly tight-lipped?
Palihapitiya’s endless claims of support for retail investors are seemingly contradicted by Social Capital Hedosophia V’s taking of 20% of its own shares for a nominal consideration. SCH V will, as a result, own more than 2% of SoFi, a stake currently worth more than $300 million.
Then there’s the day trading at the peak of the GameStop (NYSE:GME) frenzy. Although Palihapitiya did donate his recent earnings from trading stocks to charity, there was little need to fan a fire that wound up burning many retail investors as GME stock unsurprisingly collapsed at one point. All told, the Robin Hood-esque story Palihapitiya is pitching strikes me, personally, as disingenuous.
There are also the broader concerns around SPACs. SoFi’s merger presentation included projections of massive growth through 2025. Palihapitiya has defended the use of projections more broadly as a key benefit of SPACs, but projections are just estimates. SoFi’s target of $911 million in tech-platform revenue by 2025 certainly seems aggressive.
Finally, there’s the mixed history of disruptors in the financial markets. Axos Financial (NYSE:AX), formerly Bank of the Internet, has done well over the long haul, with AX stock soaring since last March’s lows in particular. But its investors have had to stomach significant volatility. Ally Financial (NYSE:ALLY) has also been a pandemic winner, but its shares provided minimal returns for years before that.
On the Fence
The obvious question is to what extent these concerns are valid. And the answer, to be honest, is that it’s impossible to tell right now.
Palihapitiya’s arguments about the benefits of SPACs have some validity. It’s not good for individual investors to be shut out of growth businesses like SoFi.
But these businesses are risky And those of us on the outside don’t have access to the same data available to sponsors like Social Capital Hedosophia V.
That leaves investors reliant to a great deal on trust, and that’s really what the case for IPOE stock and SoFi boils down to. How much do you trust Palihapitiya? How much do you trust SPACs more broadly?
SoFi clearly has a meaningful opportunity, and its growth so far has been impressive. If that’s enough, then IPOE stock is worth buying.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.