Social Capital Hedosophia’s Latest SPAC is a Coin Flip Ahead of SoFi Merger

Just after the new year, Social Capital Hedosophia Holdings V (NYSE:IPOE) confirmed it had found a merger partner in SoFi. IPOE stock is a SPAC offering from a particularly prolific group led by investment head Chamath Palihapitiya. 

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One concern here is that fintech SoFi represents a quickly, and shrewdly identified target from a group experienced in the process of special purposed acquisition company transactions. The flip side of that argument is that with so many SPACs coming from the group, it knows how to pick winners. 

IPOE Stock Just the Latest From Prolific Group

A quick visit to Social Capital Hedosophia Holdings’ website provides links to its SPAC projects. The six transactions progress alphabetically in order beginning with IPOA, and culminating with IPOF. 

According to Twitter handle @SPACGuru, that list will expand. Palihapitiya has already shared his ambition “to be our generation’s Berkshire Hathaway (NYSE:BRK.B). It’ll be a Berkshire, a holding company that, instead of holding Gillette and Coca-Cola and McDonald’s, will hold technology businesses.”

Indeed, Palihapitiya earlier revealed that he has reserved ticker symbols ‘IPOA’ to ‘IPOZ’. Further, by his accounting, the 12 SPACs he’s been involved in had average gains of 47% in 2021, and 137% in their lifetimes. It should also be noted that short sellers have called his deals into question and investors in IPOE should take note. Particularly important is the question of how quickly Social Capital Hedosophia Holdings identified SoFi. It took the company 91 days to close a combination with SoFi after announcing the SPAC itself. That is relatively quick. 

While it’s important to note the broader trend within the group, the most pertinent question relates to SoFi’s worthiness as a potential investment target. 

Striving to Create Social Finance Loop

SoFi is a financial services company which is valued at $8.65 billion following the deal to combine under the IPOE ticker. The deal is expected to bring up to $2.4 billion in cash proceeds, $1.2 billion of which is fully committed as a PIPE. PIPE is an acronym for private investment in a public company. Social Capital Hedosophia Holdings is providing $275 million of that, with institutional investors covering the remainder. 

Formally known as Social Finance, SoFi is attempting to become a one-stop shop app for consumer financial services. The company’s business strategy is to create a loop wherein members join in one service. Then trust is built, and the customer joins another of SoFi’s member services. SoFi refers to this as its financial services productivity loop (FSTL). 

The services therein include invest, personal loans, credit cards, home loans, student loans, and money. Ideally, of course, SoFi will be handling all of these areas for as many customers as possible. The strategy should clearly lower SoFi’s costs if it can truly bring customers onboard and upsell them into subsequent services. At the time the investor presentation was published 24% of product sales came from cross buy. 

Net Income Has Been a Challenge

SoFi has been steadily growing from the 629,000 members it had in Q3 of 2018. Indeed, SoFi membership increased to 1.718 million at the time the investor presentation was published in January. The company anticipates that it will reach 3 million members by the end of this year. 

SoFi comprises three distinct businesses at different stages of growth. A lending business which lacks profitability, its technology platform with a 62% margin, and its lending arm which has a 58% margin.

Taken in aggregate, the three businesses project an EBITDA of $27 million in 2021. That will be the first time it reaches positive territory. The company anticipates that that figure will rise to 1.177 billion by 2025. Yet, on a GAAP net income basis, SoFi isn’t expected to become positive until 2023. 

Takeaway on This Latest SPAC

Clearly an investment in IPOE shares is risky. Given the state of the markets I expect that shares should go sideways, that’s why I think it’s a hold now and I don’t know how it’s going to provide value with profitability quite far away. 

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

Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.

 


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