We have seen a number of SAVS (Special Purpose Acquisition Companies) like Hedosophia V share capital (NYSE:IPOE) has taken a hell of a beating in recent weeks. Many of these sales seem to be deserved. The one in the IPOE stock, however, does not.
It’s pretty obvious that the PSPC trend in general has just gone too far. We have seen a PSPC increase by over 400% even before details of an agreement were announced and confirmed. Others have won even more before and after their mergers, often in exchanges that look a lot like a bubble.
There were excesses in the group. There is still some left. Too much money drives out too few good ideas. PSPCs looked like “easy money” just a few months ago; a semblance of reality has set in.
This reality appears to have put pressure on the IPOE stock, which has lost about a third in the past two months.
But just because PSPCs as a whole have question marks does not mean that all PSPCs have them. Indeed, the merger of SCH V and target SoFi (Social Finance) looks awfully appealing. SoFi looks like a potential fintech leader. Thanks to the massive sale of SPAC, investors can now (eventually) own this leader at a much lower price.
SoFi’s growth so far
As 2020 approached, I was extremely bullish on the equity market. I predicted that a number of major trends would underpin a decade to be known as “The roaring 2020s.“
The coronavirus pandemic started the decade hard. But as normalcy returns, the decade is back on track.
One of the most significant changes that we are going to see in the years to come is a massive upheaval in the financial industry. The days of “big banks” dominating personal finance are over. Disruptors are on the way.
Some of these disruptors will be basing their efforts on cryptocurrencies. But some, like SoFi, will operate within the more traditional boundaries of the financial system.
SoFi’s growth is already impressive. The business started just ten years ago with a pilot student loan program. It has since spread to mortgages and personal loans. Backed by a proprietary subscription system that goes way beyond a credit score, SoFi’s membership has exploded.
At the end of 2019, according to the presentation of the merger, SoFi had a little 1 million members. It is expected to reach 3 million by the end of the year.
These members are expected to generate more than $ 600 million in revenue in 2021. And SoFi expects to be profitable on the basis of EBITDA (earnings before interest, taxes, depreciation and amortization).
The case of IPOE actions
What makes the IPOE action so exciting is that SoFi’s story should only get better.
Take the company’s product offering. There is no reason SoFi should stop growing in the mortgage business, and in fact it won’t. SoFi intends to branch out into credit cards and stock and crypto trading.
Indeed, SoFi itself seems on its way to becoming a bank. The company is acquisition of a small Californian bank, which it can use as a platform to develop a digital financial institution serving consumers nationwide.
That’s not all. SoFi plans to expand Galileo, a payments company it acquired last year. Galileo offers software that essentially enables any business to build 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 presenting the merger, the current “too big to fail” banks combined have a market capitalization well over $ 1,000 billion. SoFi is looking for these banks.
Assessment and risks
After the merger, what will be a publicly traded SoFi will have 865 million shares outstanding. The current IPOE share price therefore suggests a market cap of just under $ 15 billion. With $ 2.4 billion in cash, the company is valued at around $ 12.4 billion.
It is a large number, certainly. That’s almost exactly 20x the revenue for 2020.
But when you consider SoFi’s growth potential, it’s a multiple in which the business can easily grow. In fact, the company itself is forecasting earnings of around 50 cents per share in 2023 and over $ 1 by 2025. If SoFi meets these targets, that share is expected to more than double over the next 4-5. years.
After all, look around the fintech space. Even mature companies are trading for over 40 times the profits. A well-growing and functioning SoFi would likely receive a premium. Apply, say, a multiple of 50x to $ 1.10 in 2025 earnings and the IPOE stock pays over 200%.
So what’s wrong? Obviously, there are always risks. In particular, we cannot just assume that SoFi will achieve its goals. Competition will be tough and an untimely macroeconomic turnaround could impact the company’s growth.
The PSPC sale may not be over. Wider concerns about market valuations could also put pressure.
But for this story, those look like risks worth taking. Even though SoFi is slightly below its targets, it will continue to grow at an impressive rate. The company has already gone from zero to over $ 600 million in revenue by taking over the businesses of the same competitors it will face in the future.
Even the chart looks good, with IPOE stock showing clear support below the current level.
There is simply a lot to love here. The growth so far has been phenomenal. The opportunity for the future is enormous. SoFi is a company worth owning. And it’s certainly worth owning it at a price a third cheaper than it was two months ago.
As of the date of publication, neither Matt McCall nor the InvestorPlace research staff member primarily responsible for this article held (directly or indirectly) positions in any of the securities mentioned in the article.
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