Social Capital Hedosophia Holdings Corp. V Is a Bet on a Real Fintech Disruptor

Superstar investor Chamath Palihapitiya’s Social Capital Hedosophia Holdings Corp. V (NYSE:IPOE) will be merging with fintech up-and-comer SoFi. The enterprise aims to become a one-stop shop for a multitude of financial services. Additionally, its strong profile aims to attain a national bank charter, which is in many ways the Holy Grail for fintechs. Though IPOE stock is trading at over 50% of its redemption value, the massive potential of SoFi has hardly been priced-in.

A hand lingers over a bright blue tech wheel that says "fintech."

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The transaction is expected to close in the second quarter this year and deliver close to $2.4 billion in proceeds to SoFi. It includes a $1.2 billion private investment which places it at an equity value of $8.65 billion. The company generated roughly $620 million in revenues last year and is expected to grow to approximately $3.7 billion by 2025. Additionally, it expects to deliver a positive EBITDA with solid growth in subsequent years. Moreover, with a potential bank charter, its estimated revenues could skyrocket, especially its lending arm.

Bank Charter

SoFi recently acquired a California-based community bank called Golden Pacific Bancorp for $22.3 million. The bank is estimated to have assets worth $150 million in assets and further strengthen its case for a national bank charter.

The management has talked up the value of a potential bank charter and how accretive it could be for its business. The bank charter would allow the company to make loans using the deposits from customers. This will, in turn, help drive down costs compared to financing loans as a non-bank. Many considered this to be a gamechanger for the fast-growing fintech industry, giving SoFi the first mover’s advantage.

We will get a better idea of the charter’s value proposition when we pair it with the company’s products. Its unique web of services enables the company to cross-sell effectively, which will ultimately allow for a cheaper base to make loans. This, in turn, lowers the cost of capital and increases the overall profitability of the company. Its products’ bundling gives it a unique edge, allowing it to surpass its revenue targets comfortably.

There is naturally a risk with bundling, where the SoFi could fail in its execution and the availability of other solutions. A lot of its success will come down to the quality of its management and bundling strategies.

SoFi’s Path To Profitability

SoFi is currently on track to have over 3 million members by 2021, representing a year-over-year increase of 75%. The fantastic growth in its members is a testament to the growing momentum of its business model. Additionally, SoFi’s investing app has also been a hit during the recent Reddit-induced short squeeze.

Going public opens up a wealth of new possibilities for the company to expand its market share and operational capability.  The most obvious catalyst for it is its U.S. bank charter, which should help it meet its EBITDA profitability this year. Its cost of capital is likely to decrease with a corresponding increase in net margins.

I expect its revenue multiple to rise considerably along with the rest of its peers. With an estimated $980 million in revenues this year, with an enterprise value of $8.65 billion, we are looking at an EV/Sales multiple of 8.8. That is impressive, but it’s still lower than its peers in PayPal and Square. However, in time I wouldn’t be surprised if that multiple climbs significantly higher.

Final Word on IPOE Stock

IPOE stock’s merger target has lofty ambitions in disrupting the fintech industry. SoFi has its sights set on attaining a bank charter, which has eluded several fintech giants. Bundling will allow the company to cross-sell its services effectively along with the bank charter, which significantly reduces costs. Therefore, IPOE stock has massive potential to blow-up after its merger.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University. 


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