Back in early March 2021, I wrote another article on Social Capital Hedosophia Holdings, the company that has six SPACs (special purpose acquisition companies) under development. The title was “Wait and See When It Comes to Social Capital Hedosophia Holdings Stock,” and it was about Social Capital Hedosophia Holdings Corp. IV (NYSE:IPOD).
Now, this article is about Social Capital Hedosophia Holdings Corp. V (NYSE:IPOE) stock. And interestingly enough, there are many things in common in my investment theses regarding these two stocks. But IPOE stock has its own story. The question is, is the story enough to consider buying?
IPOE Stock: The Basics
The main points investors should know about this SPAC are the same as per my previous article. First, management is too important. Second, rising bond yields now make stocks vulnerable to selloffs, and they lower their valuation as the risk-free premium is now higher. And third, valuation is of paramount importance — always.
Whenever I see any SPAC trading far above the $10 share price, which is most common for the initial public offering (IPO) price of SPACs, I become alarmed about valuation. Interestingly, when I wrote the article about IPOD stock in early March 2021, the stock price was at $13.19, and as of close on March 31, 2021, the stock price was $10.96.
What makes IPOE stock different?
SoFi: Is a Fintech Disruption Possible?
SoFi, or Social Finance, Inc., is an online personal finance company based in San Francisco. And it is also the fintech startup that is set to go public through a SPAC merger with Social Capital Hedosophia Holdings Corp. V soon. How soon? Within months most likely.
SoFi says it is a one-stop shop for your finances, with its mobile app available both for Apple’s (NASDAQ:AAPL) iOS devices and Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Android devices. The company offers a credit card and a plethora of financial services, such as personal and student loans, home loans, small business financing and insurance.
Back in late 2020, the World Bank published a press release titled “Fintech Market Reports Rapid Growth During COVID-19 Pandemic” with key points being,
“[t]he fintech market has continued to help expand access to financial services during the Covid-19 pandemic — particularly in emerging markets — with strong growth in all types of digital financial services except lending, according to a joint study by the World Bank, the Cambridge Centre for Alternative Finance at the University of Cambridge’s Judge Business School, and World Economic Forum.”
Now, if lending did not see strong growth, then SoFi having a large part of its business operations related to lending may be a problem. This is not positive news for SoFi or IPOE stock.
SoFi Business Prospects
SoFi seems to be a promising fintech company. After all, the company states it has “1,000,000+ members and counting.” So further expected growth is positive and supportive of the business plans to disrupt the financial industry.
If SoFi wants to compete with large and reputable traditional banks, it needs to be regulated. That means it should be seeking to obtain a national bank charter soon.
I will not go into much detail about the merger with Social Capital Hedosophia.
And this is one of the biggest concerns I have about SoFi. Is this valuation justified? To me, the answer is simply no. The following numbers reported on the Securities and Exchange Commission (SEC) filing are far from inspiring:
“Our net losses were $141.4 million, $239.7 million and $252.4 million for the nine months ended September 30, 2020 and the years ended December 31, 2019 and 2018, respectively. As of September 30, 2020, we had a total permanent deficit of $380.3 million. We may continue to incur net losses in the future, and such losses may fluctuate significantly from quarter to quarter. We will need to generate and sustain significant revenues for our business generally, and achieve greater scale and generate greater operating cash flows from our Financial Services segment in particular, in future periods in order to achieve, maintain or increase our level of profitability.”
SoFi and IPOE Stock: Promising Yes, Cheap Not, Risky Yes
So for a company that started its business operations in 2011 and is struggling to make a profit, despite any revenue growth, this valuation seems too rich. I want to see more than just marketing things, like disrupting the future of finance.
I want to see profitability. Buying IPOE stock now is too risky. And the stock is not cheap either. With a premium of over 70%, as IPOE stock price is now trading around $17 per share, compared to the IPO price of $10 per share, this huge premium is not justified. Pay for the future based on hope? Not a sound investment decision.
SPACs are not suitable for all investors, especially for those using valuation as a top financial metric. That’s the safer way to evaluate a stock, compared to pure emotional investing.
On the date of publication, Stavros Georgiadis, CFA, did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.