Special purpose acquisition companies (SPACs) are very risky. With all the stock given to founders and sponsors, I need 10x growth to see a profit. SoFi (NASDAQ:SOFI) stock is the rare exception with the potential to deliver that.
SoFi went public under its own name and ticker symbol on June 1, after months spent trading under the symbol IPOE.
I wrote back in April that it was only the SPAC mess holding SoFi back. It’s not too late for you to climb on board.
The “mess” has a name, and its name is Chamath Palihapitiya. The mouthy billionaire with the eminently followable Twitter account was recently profiled in The New Yorker. They called him The Pied Piper of SPACS. I’ve compared him to Prof. Harold Hill in The Music Man, due for a revival in December, so we’re on the same page there.
Chamath’s two previous SPACs, Virgin Galactic (NASDAQ:SPCE) and Clover Health (NASDAQ:CLOV), have been over-hyped disasters for small investors. The New Yorker profile was forgiving, noting that the early years of mutual funds, junk bonds and mortgage insurance were also marked by charges of fraud.
Fine, I just don’t like losing my money on it.
A Closer Look at SOFI Stock
SoFi is the rare SPAC that deserved to go public.
There are still some dicey bits left to digest. SoFi reported March quarter results before going public. As a result, there’s no press release about it on the Web site, just a presentation from the investors page.
The numbers themselves, however, are tasty. Members have more than doubled over the last year to 2.28 million. That’s partly due to acquisitions, like Galileo Financial, an Application Program Interface (API) library and payments platform bought in April 2020.
APIs are very powerful. They’re hooks into larger systems that can be used to mimic those systems. I wrote about them recently in regard to Twilio (NASDAQ:TWLO). SoFi is also “profitable,” before interest, depreciation, and amortization (EBITDA), to the tune of $4.1 million.
SoFi started as a student loan re-financer. Under CEO Anthony Noto, whom I believe is the reason you should consider the stock, it has become a full-service bank.
The plan is to offer accounts, loans, and trading from a simple mobile interface. This in a world where over 37% of young consumers prefer digital-only banks to those with offices.
I have a warning, however. Previous efforts at digital-only banking have failed investors. OnDeck Capital, which went public in 2014, was eventually sold for less than 10% of its IPO price. Lending Club (NYSE:LC), which also went public that year, is also still below its IPO price. The same is true for Affirm Holdings (NASDAQ:AFRM), which debuted in January.
SoFi hopes to be different by selling its loans for a quick profit while retaining parts of them for interest income. It expects to remain the low-cost leader with Galileo and Apex Clearing, in which it holds a minority stake. Apex itself is a SPAC candidate expected to go public via a merger with Northern Star Investment Corp. II (NYSE:NSTB)
The Bottom Line
Being first in a technology market is no guarantee of success. Search engines like Excite and social networks like MySpace attest to that.
The key is creating low-cost technology and relentlessly focusing on what you know. That’s what Alphabet’s (NASDAQ:GOOGL) Google and Facebook (NASDAQ:FB) did.
SoFi stock is still very expensive, based on revenue and earnings, so this is pure speculation on my part. But my spidey sense tells me that Noto has timed this right, that his API-based platform and sunny advertising can gain traction.
I wouldn’t put my rent money into SoFi, but a young speculator with cash to risk can buy some shares and, if they’re up in a year, buy some more.
On the date of publication, Dana Blankenhorn held LONG positions in FB. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.
