We’ve seen a number of SPACs (special purpose acquisition companies) like Social Capital Hedosophia V (NYSE:IPOE) take a big hit in recent weeks. A lot of those selloffs seem merited. The one in IPOE stock, however, does not.
It’s pretty obvious that broadly speaking, the SPAC trend simply went too far. We saw one SPAC rise more than 400% even before the details of a deal were announced and confirmed. Others have gained even more before and after their mergers, often in trading that seems an awful lot like a bubble.
There were excesses in the group. There still are. Too much money is chasing too few good ideas. SPACs looked like “easy money” just a couple of months ago; some semblance of reality has set in.
That reality seems to have pressured IPOE stock, which is off about a third over the past two months.
But just because SPACs on the whole have some question marks doesn’t mean that every SPAC does. In fact, the merger of SCH V and target SoFi (Social Finance) looks awfully attractive. SoFi looks like a potential fintech leader. Thanks to the broader SPAC selloff, investors can now (eventually) own that leader at a much lower price.
SoFi’s Growth So Far
Coming into 2020, I was hugely bullish on the equity market. I predicted that a number of huge trends would underpin a decade to be known as the “Roaring 2020s.”
The coronavirus pandemic got the decade off to a terrible start. But as normalcy returns, the decade is getting back on track.
One of the bigger changes we’re going to see in coming years is massive upheaval in the finance industry. The days of “big banks” dominating personal finance are over. Disruptors are on the way.
Some of those disruptors will build their efforts on cryptocurrencies. But some, like SoFi, are going to operate within the more traditional confines of the financial system.
SoFi’s growth already is impressive. The company began only a decade ago with a pilot program for student lending. It has since expanded into mortgages and personal loans. Underpinned by a proprietary underwriting system that goes far beyond a credit score, SoFi’s membership has exploded.
At the end of 2019, according to the merger presentation, SoFi had just shy of 1 million members. It should get to 3 million by the end of this year.
Those members should drive over $600 million in 2021 revenue. And SoFi expects to be profitable on an EBITDA (earnings before interest, taxes, depreciation and amortization) basis.
The Case for IPOE Stock
What makes IPOE stock exciting is that SoFi’s story should only get better.
Let’s take the company’s product offering. There’s no reason SoFi has to stop expanding at mortgages, and indeed it won’t. SoFi has plans to move into credit cards and equity and crypto trading.
Indeed, SoFi itself seems set to become a bank. The company is acquiring a tiny California-based bank, which it can use as a platform to develop a digital financial institution that serves consumers nationwide.
That’s not all. SoFi plans to expand Galileo, a payments company it acquired last year. Galileo offers software that essentially allows any company to create sophisticated financial services to serve consumers and businesses.
Obviously, there are years of growth ahead. In fact, there may well be years of growth ahead. As SoFi itself pointed out in the merger presentation, the current “too big to fail” banks combined have a market capitalization well past $1 trillion. SoFi is gunning for those banks.
Valuation and Risks
After the merger, what will be a publicly traded SoFi will have 865 million shares outstanding. The current IPOE stock price thus suggests a market capitalization just shy of $15 billion. Backing out $2.4 billion in cash, the business is valued at about $12.4 billion.
That’s a big number, certainly. It’s almost exactly 20x 2020 revenue.
But when you consider SoFi’s growth potential, that’s a multiple the company can easily grow into. In fact, the company itself sees earnings of about 50 cents per share in 2023, and over $1 by 2025. Should SoFi hit those targets, this stock likely more than doubles over the next 4-5 years.
After all, look around the fintech space. Even mature companies are trading for more than 40x earnings. A SoFi that’s growing well and executing well likely would receive a premium. Apply, say, a 50x multiple to $1.10 in 2025 earnings and IPOE stock returns more than 200%.
So what goes wrong? Obviously, there are always risks. Notably, we can’t simply assume SoFi will hit its targets. Competition will be stiff, and an untimely macroeconomic reversal could impact the company’s growth.
The selling in SPACs may not be over. Broader valuation concerns in the market could provide pressure as well.
But for this story, those look like risks worth taking. Even if SoFi falls modestly short of its targets, it’s still going to grow at an impressive clip. The company already has gone from zero to $600 million-plus in revenue by taking business from the same competitors it will face going forward.
Even the chart looks good, with IPOE stock showing clear support below the current level.
There’s simply a lot to like here. The growth so far has been phenomenal. The opportunity going forward is huge. SoFi is a business worth owning. And it’s certainly worth owning at a price one-third cheaper than it was two months ago.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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