Editor’s Note: This article was updated on June 1 to correct the exchange that SOFI stock will trade on.
Shares of Chamath’s SPAC, or special purpose acquisition company, rallied close to 25% ahead of the May 27 merger vote, closing at just more than $20.
These are some short-term catalysts left as SOFI stock begins trading. And undoubtedly, they will push shares northward for the foreseeable future. Still, if investors are skeptical regarding this SPAC and SoFi, an online personal finance company, then I don’t blame them.
Shares of IPOE skyrocketed when the SPAC announced the combination on Jan. 7. They continued their upward ascent in the succeeding weeks, eventually reaching a $28.16 intraday high on Feb. 1 – 132% above the $12.12 per share just before the merger announcement. Some of those gains have since evaporated.
I believe the larger issue for investors is whether to stick around for the long haul. Indeed, that seems to the major issue with most SPAC stocks. SPACs are notorious for their boom and bust cycles. Few, if any, have managed to break this mold and become solid investments after the dust has settled. On that end, I am happy to report that there is light at the end of the tunnel as far as this investment is concerned.
SoFi’s financial growth and margins are impressive. And it has a solid management team to steer it to further prosperity. Its financials are a picture of health, and it has an asset-light model in a high-growth space. What’s not to like?
Perils of SPAC Investing
A wave of SPACs hit the stock market in 2020. The hype that they have generated in the last few months is nothing short of extraordinary. However, the major problem for SPACs is speculation. So, evaluating a SPAC before it makes a deal is the key to making significant profits in this space.
When a sponsor brings a SPAC to the market, investors try to piece together whether there is any chance to scalp profits, premerger. Usually, if you have a big name involved, such as Palihapitiya or Sir Richard Branson, the stock will start shooting for the moon.
Once the hype subsides, SPACs can see large drawdowns after day traders take their profits. The real casualties are long-term investors. When short-term-minded traders take profits, they become disillusioned and sell their investment, generally at a loss.
You can choose to redeem a SPAC stock, though, and get a proportional share of the trust assets. Thus, even after a deal is made, investors have an opportunity not to participate. There are two advantages of this approach. First, there is a significant possibility that shares might rise after a deal is announced. Second, the warrants, which are similar to long-term call options, can appreciate substantially after a deal.
On rare occasions, you will see stocks maintain their momentum. It’s not impossible. You need not look any further than DraftKings (NASDAQ:DKNG). But the writing is generally on the wall a few days after the ticker starts trading. But due to the solid fundamentals, IPOE stockholders have a good chance to make a quick gain and participate in the long-term success of the fintech companies.
SOFI Stock Will Be a Solid Performer
SoFi was founded in 2011 by Mike Cagney, Dan Macklin, James Finnigan and Ian Brady, four pupils who met at the Stanford Graduate School of Business. The founders believed SoFi could give students more affordable options for those taking on debt to finance their education. The rest, as they say, is history.
After growing by leaps and bounds, SoFi agreed to merge with a SPAC to go public at a $9 billion valuation this year.
Incidentally, SoFi’s long-awaited debut comes in the year when the mobile-first service is expected to turn a profit finally. According to an investor presentation, it is forecasting a record adjusted EBITDA of $27 million in 2021, expected to grow as much as $1.18 billion by 2025. SoFi’s projections on its revenue mix are also very interesting.
In 2020, SoFi produced over 75% of its adjusted net revenues from lending, with its technology platform and financial services offerings making up the rest. By 2025, the financial services products are expected to grow to 32% of adjusted net revenues, with lending accounting for 43% of the revenue. The technology platform will contribute approximately 25%, according to the presentation.
One of the best things about SOFI stock is that the company has pursued an aggressive merger strategy even though it is relatively young. On March 9, the personal finance startup unveiled plans to purchase a small community bank Golden Pacific Bancorp for about $22.3 million in an all-cash deal, expediting the online lender’s push to get a national bank charter.
In a press release detailing the move, the company said Golden Pacific has about $150 million in assets and three branches in California. SoFi plans to keep the community-bank business while also embarking on its “national, digital business plan.” Golden Pacific has about $150 million in assets under management. SoFi will add a further $750 million to that tally if it gets the bank charter.
Last year, the personal finance start-up inked a definitive deal to buy Utah-based payment processor Galileo for $1.2 billion. The software company connects banks to credit card processors through APIs or application programming interface software. Interestingly, it works with many of SoFi’s competitors, including Robinhood, Chime, Monzo, Revolut, Varo and TransferWise.
Worth a Look
Even after the merger with IPOE and the run-up in stock price, there are still be a few short-term catalysts left for you to exploit. The larger question is whether you want to stick around post-merger completion.
In all respects, it is not a bad idea to remain invested in this one, considering where SoFi is headed. Plus, history shows that it’s always better to buy fintech companies when they are nascent. Just based on their operating model, these companies have the potential to be multi-baggers.
All things considered, SOFI stock is not a bad investment.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.