The billionaire investor and so-called SPAC king, Chamath Palihapitiya has launched several SPACs including IPOA, IPOB, IPOC, IPOD, IPOE, and IPOF. Earlier in January, Palihapitiya’s fifth SPAC, IPOE announced that SoFi is its merger target. The SPAC raised about $800 million in an October 2020 IPO.
Initially, IPOE's stock price rose on the merger news, but it has fallen for six consecutive days now. Why is IPOE stock falling and should investors buy or sell it before the merger?
IPOE and SoFi merger date
The IPOE and SoFi deal valued SoFi at $8.65 billion post-money. The deal will provide SoFi with $2.4 billion in cash proceeds, including a $1.2 billion PIPE (private investment in public equity) led by Palihapitiya. SoFi's enterprise value is about $6.5 billion. In 2019, SoFi raised $500 million at a valuation of $4.3 billion. Its current valuation implies a 2x value to the company’s last private valuation.
While a definitive date for the merger hasn't been set, the companies expect the deal to close in the first quarter of 2021. The transaction is subject to approval by IPOE shareholders and other customary closing conditions.
How Sofi makes money
Social Finance or SoFi is a U.S. online personal finance company. SoFi offers a variety of financial products including student loan refinancing, loans, mortgages, credit cards, and automated and active investments.
Since SoFi offers a variety of products, there are different ways that the company makes money.
SoFi makes money from lending products like student loan refinancing and personal loans. The company makes money from these products by securitization and selling the loans to investors like pension funds and insurance funds. These buyers pay premium upfront for future cash flows.
SoFi makes money off its investment products. In the past, the company used to make money from management fees. Now, it doesn't charge management fees. After SoFi started offering its automated investing and active investing, it went commission-free. There are a number of other ways that the company makes money on these products. For example, SoFi earns interest from uninvested cash held in an account and from securities that are lent to institutions that need to borrow shares.
SoFi also earns money from rebates it receives from market makers through its clearing firm. The company applies a markup of up to 1.25 percent on all its crypto transactions.
Is IPOE buy or sell?
IPOE stock has risen by 74 percent since it went public. The stock rose by nearly 58 percent on Jan. 7 when the SPAC announced its merger target. However, the stock has lost nearly 20 percent of its value from the peak of $22.5 on Jan. 19. Is IPOE a good buy on a dip or is it a sell?
There isn’t a specific reason why IPOE is falling. In general, SPACs are falling, likely due to the recent comments by some experts that SPACs could be a risky business and that they are in a bubble. Former Goldman Sachs CEO Lloyd Blankfein told CNBC that investors need to be careful since the SPAC process circumvents the rigorous due diligence of the normal IPO process. The riskiness of SPACs also depends on the sponsors. Since IPOE is backed by Palihapitiya, who is a seasoned investor and has successfully taken many companies public, the panic is overdone.
As far as SoFi's fundamentals are concerned, there are positive catalysts that don’t seem to be priced in by the market. The bank charter could be one of the biggest catalysts, which would reduce the cost of capital. The company's fundamentals seem to be in place with a large addressable market. Palihapitiya thinks that SoFi would do in banking what Amazon has done in retail. His growth estimates for SoFi imply solid growth and rising cash flow. The recent drop in IPOE stock is a good opportunity to get exposure to this fintech startup at a low price.
Chamath Palihipitya interview
On Jan. 27, Palihapitiya did a CNBC interview. He told CNBC that while he has closed his position on GameStop, he defends retail investors’ right to sway stocks like hedge funds or other big investors do. He thinks that the stock movement in GameStop is a pushback against the establishment. He thinks that retail investors are capable of doing research at par with the best on Wall Street. He said, “That edge is gone. Now all of a sudden, retail can be on the same footing and they don’t have to be the ‘bag holder’ to Wall Street.”