Earlier this year, Social Capital Hedosophia Holdings V (NYSE:IPOE) stock was flying high. The SPAC (special purpose acquisition company), which is set to merge with Social Finance (SoFi), was seen as another potential blank-check hit from sponsor Chamath Palihapitiya.
Palihapitiya’s prior SPAC deals, such as Virgin Galactic (NYSE:SPCE), and Opendoor (NASDAQ:OPEN) did such that. But as of late, his superstar status has taken a hit. With SPAC stocks falling out of favor, it’s clear that betting on this prolific and outspoken SPAC impresario isn’t a guaranteed way to make money in the market.
Yet, while it may not be boom times anymore for SPACs in general, it’s best not to write off SoFi as all hype. This merger target has much more promising prospects than other names going public this route. Also, Palihapitiya’s recent stumbles may have already been absorbed by the market. It’s been two months since news of the scandals surrounding Clover Health (NASDAQ:CLOV), another company taken public via a Palihapitiya SPAC, hit the street.
There’s no guarantee shares will take off once the SoFi merger wraps up. Yet, with its strong long-term potential, consider it a buy at or below today’s prices (around $15 per share).
IPOE Stock and the Pending SoFi Merger
With around 30% of its outstanding float sold short, many are betting against this SPAC paying off for investors. But diving into the details, the shorts may be off the mark here.
As InvestorPlace’s Chris Markoch discussed April 7, SoFi’s transition into a financial institution akin to a bank could mean substantial upside. The company first made a name for itself in the student loan business. But over the past decade, it’s expanded its loan offerings. You can now get a mortgage, a personal, even a credit card via its platform. On top of that, it now offers stock brokerage services for its customers.
In short, it’s a digital-focused financial supermarket on par with rivals like PayPal (NASDAQ:PYPL) and Square (NYSE:SQ). And with its pending deal to acquire a banking charter, the company could do some serious disruption to the traditional banking business.
The ingredients for long-term success look to be in place with SoFi. Valuation (more below) also looks more than reasonable relative to its prospects. This doesn’t guarantee it’s all uphill from here in the short term, but now may still be the time to enter a long-term position.
Deal Valuation Leaves Room for Multiple Expansion
Per the transaction overview provided in the IPOE/SoFi merger presentation, the combined company will have 865.1 million shares outstanding. At today’s prices, that’s an implied market capitalization of around $12.8 billion.
Based on current and near-term results, that’s a rich valuation. But shares appear cheap compared to projections down the road. Assuming the company hits its target of $635 million in 2025, the stock today sells for around 20x that year’s earnings.
Granted, SPAC bulls have leaned on future projections to justify today’s valuations. But given the rich forward price-earnings ratios of both PayPal (58x) and Square (203.2x), there’s plenty of runway for multiple expansion for SoFi.
This bodes well for investors in the long run. But it may not prevent shares from pulling back further in the near-term.
For one, continued fading enthusiasm for SPAC stocks could put more downward pressure on shares. So too, could the continued deal close delays. Yet that’s not a reason to avoid it. Prices could continue to pull back, but there’s room for an unexpected near-term rebound as well.
Start Entering a Position Before the Deal Closes
With the strong fundamentals of its merger target, I don’t see this SPAC blowing up as we’ve seen with other companies that recently went public via blank-check company mergers. But there is the risk shares continue to trade sideways (or lower) in the coming weeks and months.
Prices could fall toward its initial offering price of $10 per share. This may point to taking your time until it hits rock-bottom. On the other hand, with the aforementioned high short interest, you may want to risk missing out by waiting out.
Any sort of sudden progress in the transaction could leave the shorts scrambling, pushing IPOE stock back up towards $20 per share and above. So, what’s the best move?
Begin accumulating a position now, as uncertainty holds the stock below $15 per share. If it continues to pull back, add to your position. While it may remain underwater in the near term, the many factors highlighted above point to great returns in the coming years.
Shares may not be as hot as they were a few months back. But use this shift in sentiment to your advantage. Ahead of the SoFi deal close, start easing into a position in IPOE stock.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
