Social Capital Hedosophia Holdings V (NYSE:IPOE) stock traded sideways since I last wrote about late last month. The SPAC (special purpose acquisition company) is one of many brought to market by sponsor Chamath Palihapitiya. This “King of SPACs” was flying high at the start of 2021.
But his collection of former blank-check companies have not fared well. Shares in de-SPACed stocks he’s been behind, like Clover Health (NASDAQ:CLOV) and Virgin Galactic (NYSE:SPCE), have fallen significantly from their highs set earlier this year.
Sure, Palihapitiya’s overall issues don’t necessarily spell doom for this particular blank-check company he has sponsored. There’s big potential here once it closes on its merger with Social Finance (SoFi).
Yet as the tech sell-off continues, it may be tough for shares to see a boost from the upcoming transaction. In fact, as investors reassess growth stock valuations, expect shares to sell off in the short term.
Don’t get me wrong, I believe SoFi has big long-term potential. It could, in the coming years, scale up into the next PayPal (NASDAQ:PYPL) or Square (NYSE:SQ), and become worth many times what it trades for today. But with the stock likely trending lower for now, those looking at as a long-term opportunity may want to approach it cautiously.
IPOE Stock and Its Long-Term Potential
Some may see a short-term opportunity with IPOE stock in the lead-up to the SoFi merger, even with the specter of a continued growth stock sell-off. Buying now, while shares hold steady at around $15 per share, the stock could see a boost once the deal gets finalized. With the upcoming shareholder vote on the merger, this may happen in a matter of weeks.
Yet, this may not be the best way to approach IPOE stock. Instead of buying it at $15 in the hopes it goes up to $20 after the deal closes, taking the long approach appears to be the better play. Take your time and wait for lower prices.
Why wait? As I broke it down previously, the stock (which trades around where it was when I last wrote about it) appears reasonable valuation-wise compared to its 2025 projections. Based on the valuation of peers like PayPal and Square, the stock could have tremendous room to gain, from multiple expansion alone.
That being said, I wouldn’t just take SoFi’s far-off projections, apply the rich multiples its established rivals trade for, and call it a day.
First, obviously, is that the company’s 2025 projections may not pan out. Actual results may come in far short of these numbers. Second, given that a few years back, names like PayPal traded at far lower price-earnings ratios after the runaway bull market of the past few years (coronavirus crash notwithstanding), we may see some serious valuation contraction in the years ahead.
Expect Some Near-Term Declines
A few weeks back, there may have been some hope that growth stocks had a shot of bouncing back after their losses starting in February. But as May plays out, the forecast appears to be for an additional sell-off.
With the Federal Reserve now talking more about raising rates to cool down an overheated economy, the names that have benefited the most from a near-zero interest rate environment may be in for a continued world of hurt. This is bad news for “story stocks” across many sectors. And it’s bad news for SPAC stocks like this one.
This may be one of the higher quality, more established names going public via a SPAC. But that won’t stop investors from throwing it with the bathwater. As uncertainty looms, investors will bail out of “story stocks,” whether high quality or low quality. As a result, shares could fall to their offering price ($10 per share) before the dust settles. Or perhaps even lower to single-digit prices.
With this in mind, it may not be worth it to rush into IPOE stock ahead of the deal close. Why buy today, where’s there’s a good chance it trends sharply lower in the short term?
It May Be a Buy at Less Than $10
Social Capital Hedosophia V may be making swift progress in closing on its deal to merge with SoFi. But it’s best to read the room. The most overheated segments of the stock market are looking to further correct. Buying now may not be a worthwhile move.
Instead, wait for a better entry point for IPOE stock. Take a wait-and-see approach. You may be able to enter a long-term position at an even better entry point at less than $10.
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.