Chamath Palihapitiya is a god among men, at least in the special purpose acquisition company (SPAC) world. Palihapitiya’s fifth SPAC, Social Capital Hedosophia Holdings Corp. V (NYSE:IPOE) stock has had a rough couple of months, but that’s only comparatively.
Palihapitiya’s previous successes in bringing the likes of Virgin Galactic (NYSE:SPCE) and OpenDoor Technologies (NASDAQ:OPEN) public buoyed his reputation. (Let’s set aside the whole Clover Health (NASDAQ:CLOV) thing for a minute). That, more than anything else pushed IPOE stock before it announced its merger target.
Recently, the SPAC announced merger target, Social Finance (SoFi) that it will bring public soon.
Now, that’s a great thing. It appears there’s a lineup at the SPAC drive-thru, and deals are harder to come by of late. However, investors may be wondering – what’s the delay in getting the merger pushed through?
The deal hasn’t closed. The arbitrary date set on Jan. 7 to close the deal was by the end of the first quarter. That didn’t happen which isn’t really here nor there. Let’s dive into what this SoFi deal looks like, and why investors may want to take a look at IPOE stock.
IPOE Stock Undervalued at Current Levels?
Fellow InvestorPlace contributor Mark Hake provided a very intriguing and well-written analysis on his reasoning why IPOE stock is likely undervalued right now.
I encourage you to have a look at his analysis. It’s spot-on and certainly worth a read. I can’t really provide anything further to this analysis. However, I particularly like Hake’s inclusion of the impact the company’s acquisition of a banking charter will have on SoFi’s EBITDA.
Indeed, the SoFi deal to acquire Golden Pacific Bancorp (OTC:GPBI) for $22 million is one that many investors may brush off. It’s a tiny deal in its own right, and likely to be one of many moving forward as SoFi looks for growth.
However, the real gem in the acquisition is that SoFi acquires a banking charter as part of the deal. As Palihapitiya points out in his SoFi investor call deck (slide 31), this is a huge factor in the company’s EBITDA growth projections.
The Office of the Comptroller of the Currency will still need to sign off on this charter transfer. However, for all intents and purposes, SoFi has acquired its way (inexpensively, at that) to achieving the four pillars stemming from obtaining a bank charter the company has pointed out: Durability, Lower cost of capital, Increased Net Interest Margin (NIM) from holding loans longer and Growth in lending
Beware of Key Growth-Related Risks
One of the key assumptions made in Palihapitiya’s investor presentation is an incredible five-year compound annual growth rate (CAGR) of 43%.
That’s a hefty number. Using the rule of 72, it’s pretty easy to see that this would translate into a doubling of revenue every two years or so. That sort of parabolic growth is hard to find, and if it materializes, investors have a gem on their hands here.
These are all projections, and as we saw with Palihapitiya’s now-infamous Clover deal, what was a 43-45% growth rate last year turned into forward guidance of around 24% for this year.
Of course, not every pick can be a winner. Indeed, Clover has its own set of fires to put out that SoFi shouldn’t have to worry about. It’s battling short-sellers on its tail, along with the Department of Justice.
It’s important to take a considerable margin of safety into account when making any investment. Personally, I like to factor in more conservative metrics into my model (particularly on growth estimates) to arrive at my target prices. That said, the Cathie Woods’ of the world have done incredibly well of late, who am I to judge?
As per Hake’s analysis, it appears at around the $15 level there’s a substantial margin of safety with this stock. Even if, for whatever reason, SoFi were to miss expectations a few quarters, it wouldn’t likely kill this stock’s valuation.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.
