Social Capital Hedosophia Holdings V Has Competition on Two Fronts

For an upfront disclosure, I’m worried about the extreme speculation in the market. The way that several popular asset classes have jumped higher simply doesn’t make sense. Nevertheless, if you had to bet on a higher-risk, higher-reward play, you could make a fundamental case for Social Capital Hedosophia Holdings V (NYSE:IPOE). Shedding about 14% over the trailing five days, IPOE stock might also be trading at a discount.

the Social Finance (SoFi) logo is displayed on a smartphone.
Source: rafapress / Shutterstock.com

First off, while the market doesn’t make sense to me, I’m not the arbiter of where the equity sector goes. I think that’s the primary disconnect that many traditional analysts have regarding the present market conditions. Yeah, it’s crazy that IPOE stock has moved the way it has following the initial announcement that the underlying blank-check firm will reverse merge with SoFi. Still, it is what it is.

Second and on a related note, we should appreciate that for now, the market adopted a new cadence. Just a few years back, nobody really talked so intensely about special purpose acquisition companies, or SPACs. They existed, but only as an alternative to a traditional initial public offering (IPO). Now, being a SPAC play is itself an upside catalyst.

Again, it’s totally nuts, but that’s where we are. It’s worth reminding ourselves of a critical lesson: The market can stay irrational longer than you can stay solvent.

To be fair, though, IPOE stock does have strong credibility, whether as a SPAC bet or as a standalone investment. The reverse-merger target, SoFi, represents an intriguing and elegant concept in the fintech space.

By bringing a member’s financial transactions under one umbrella — credit cards, home and auto loans, insurance and other products — they can streamline their money. More importantly, through cash-back rewards and similar incentives, members can use their account to work toward their financial goals.

So, what can go wrong? As you can see from IPOE’s chart, plenty.

Don’t Ignore the Risks for IPOE Stock

Back in late March of this year, I discussed the case for IPOE stock. At the time, I appreciated how its online business is relevant to younger Americans. That component of my argument hasn’t changed.

Specifically, SoFi features elements that are very similar to neobanks, which are physical branchless institutions that provide bank-like services. Because they don’t have the overhead associated with the big banks, they can pass down the savings to their members in the form of higher-yielding savings accounts and other compelling rewards.

SoFi taps into this demand dynamic. Further, its investment platform allows members to invest in stocks, exchange-traded funds (ETFs) and even cryptocurrencies. Therefore, SoFi is financial services geared toward the millennial mindset. Since this demographic is the largest in the U.S. workforce, you can’t go wrong catering to this consumer base.

Still, the compelling narrative will attract competitors, which could lead to commoditization in the neobank and digital financial services segments. Also, I’m not really sure if SoFi’s core marketing pitch of lower debt financing charges for prospective members is really that groundbreaking. As a nation, we need to fix why so many young people are trapped into overwhelming debt loads before messing around with novel solutions like digital financial services.

It’s one of the reasons why I said I would be on the sidelines with IPOE stock. I’m glad I said that, because shares lost 9% since my March article. At time of writing, IPOE is down nearly 47% from its peak.

But does this mean IPOE stock is due for a comeback? After all, it’s still popular among the social media crowd.

While I can’t deny its attractive allure, I think you need to look at the broader context. As our own Nicolas Chahine pointed out, SPACs enjoyed outsized gains last year but have shed their speculative fervor this year.

The Whack-a-Mole of Speculation

What Chahine stated could be the first sign that names like IPOE stock have further value to shed. You see, if it’s true that social media has driven SPAC-related trades into the stratosphere, you’re really banking on a market with limited resources.

Obviously, younger people are mostly involved with social media. And generally speaking, younger private investors don’t have as much money to throw around. Therefore, if one sector goes up, it’s likely a matter of mathematical necessity that another sector falls short.

I can’t help but notice that, as SPACs are deflating, cryptocurrencies are reflating. So long as digital assets enjoy their mercurial ascent, there just won’t be as many funds directed toward SPACs. Especially because IPOE stock has already benefitted from a wild swing up, combined with weakness in the blank-check sector, I’m not sure if lightning will strike twice.

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

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.


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