Buying Social Capital Hedosophia V Is a Big Swing at a Target That May Very Well Pay Off

Social Capital Hedosophia V (NYSE:IPOE) stock is suffering the same fate as many special purpose acquisition companies (SPACs) in 2021. IPOE stock is down 33% from its closing high of $25.78 on Feb. 1.

SPACs join company on puzzle pieces and handshake, 3d render

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SPAC’s are notoriously speculative investments. After seeing several of these stocks drop dramatically after they brought their target company public, investors are understandably adopting a “once bitten, twice shy” mantra.

Social Capital Hedosophia began as a venture capital fund (Social Capital) founded by Chamath Palihapitiya. It has since combined with Hedosophia of England and is busy creating SPACs. So far, Social Capital Hedosophia has taken three companies public with three more in the works.

And Palihapitiya has applied to create an additional six more SPACs.

If you haven’t guessed by now, Social Capital Hedosophia V is the fifth of these SPACs (V is the Roman numeral for five), and the “E” in IPOE stock is the fifth letter of the alphabet. Get it?

Of the six SPACs under the Social Capital Hedosophia control, only two do not have a target as of this writing. The target for number five is SoFi Securities.

IPOE Stock: Bet on the Horse, Not the Jockey

A popular saying when it comes to SPACs is to bet on the jockey (i.e. the sponsor of the SPAC) rather than the horse (the target company). In the case of IPOE stock, I like the target more than the founder.

Now I should emphasize the word “like” because SoFi is not without its issues. Perhaps the most significant issue for investors to consider is profitability.

SoFi is not a pre-revenue company, but it is not yet profitable after nearly 10 years in business. In fact, in a disclosure to the Securities & Exchange Commission, SoFi said it would need to generate significantly more revenue if it is to become profitable.

That may be changing. SoFi is acquiring Golden Pacific Bancorp (OTCMKTS:GPBI). A quick glance through SoFi’s product portfolio shows the notable exclusion of checking or saving accounts.

The same could be said of a company like PayPal (NASDAQ:PYPL), except that, by issuing debit cards, PayPal effectively acts like a bank account. In fact, PayPal is making a concerted effort to target the unbanked.

There is a potential downside to the acquisition, however.

“If SoFi wants to compete with large and reputable traditional banks, it needs to be regulated,” our own Stavros Georgiadis wrote. “That means it should be seeking to obtain a national bank charter soon.”

As For the Jockey

I have nothing against Chamath Palihapitiya. I’m just not particularly sold on the previous companies that he’s brought public.

This sentiment was echoed by Dana Blankenhorn who wrote, “If all his investments were like SoFi, I’d be a Palihapitiya fan.”

Keep in mind, SPAC sponsors are the first to cash in when a SPAC goes public. So Palihapitiya will make money regardless of how SoFi performs.

Once again, that doesn’t make IPOE stock a bad investment, but it also reminds you that there’s no such thing as a sure thing.

IPOE Stock Looks to Have Significant Upside

I’ll end this article where I started. SPACs are speculative bets. However, it doesn’t mean they can’t reward investors.

In SoFi, Social Capital Hedosophia V looks to have a target that will be even more interesting when it begins to compete like a traditional bank. Of course, being regulated like a bank will mean that the growth of SoFi may be somewhat limited.

At times like this, I tend to rely on the number-crunching of Mark Hake. In this case, Hake believes that the IPOE stock price could reach $23.91 per share, which would be about a 30% gain. That would make it a winner for investors no matter how you may feel about the sponsor.

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

Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.

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