Social Capital Hedosophia Holdings (IPOE) has completed its merger with SoFi. IPOE is the fourth company backed by Chamath Palihapitiya to go public. IPOE stock picked up some lost ground over the last month even though it couldn't get near the 52-week highs levels. What’s the forecast for SoFi stock? Will IPOE be the best SPAC from Palihapitiya?
Virgin Galactic, Opendoor, and Clover Health have gone public through reverse mergers with SPACs sponsored by Palihapitiya and the post-merger performance has been mixed.
Palihapitiya SPAC post-merger performance
So far, Clover Health is arguably the worst-performing stock after the merger with a Palihapitiya-sponsored SPAC. Clover Health trades at roughly half of what it did when the merger was completed. It's also below the IPO price of $10—the only Palihapitiya SPAC trading below the price level.
Virgin Galactic is way above the price level from when the merger was completed. However, Opendoor trades below the price level when the merger was completed.
It isn't helpful to generalize the situation because there has been a sell-off in growth names in 2021. All of the SPACs sponsored by Palihapitiya have fallen sharply from their peaks amid the painful sell-off.
However, there have been controversies about some of his investments. First, Hindenburg Research accused Clover Health of fraud and hiding facts from investors. Also, Palihapitiya selling off his stake in Virgin Galactic didn't sit well with some investors. They thought that he was cashing out too early.
What’s next for SoFi stock after the IPOE merger?
From a technical perspective, IPOE will stop trading and the merged entity will start trading under the new ticker symbol "SOFI." Also, SoFi would get $2.4 billion as cash from the transaction, which includes IPO proceeds and the PIPE investment.
The company will use the proceeds for growth, new product development, and geographical expansion. It could also look at acquisitions considering its cash pile. In 2020, SoFi acquired payments software company Galileo. The acquisition was $1.2 billion, which was considerable for a company of SoFi’s scale.
SoFi's earnings beat the estimates.
SoFi released its earnings for the first quarter of 2021 in May, which showed high growth. Overall, the earnings were better than expected. The company’s members increased 110 percent YoY to 2.28 million in the quarter. While some of the growth companies are battling a slowdown in growth rates, the growth rate of SoFi members has increased YoY for seven quarters.
In the first quarter of 2021, SoFi posted adjusted revenues of $216 million, which were 151 percent higher than the same quarter in 2020. The revenues were ahead of the $190 million–$195 million guidance provided by the company. Also, the business turned positive on the adjusted EBITDA level on an LTM basis.
SoFi's long-term forecast
SoFi reiterated its 2021 guidance of $980 million in revenues and $27 million in adjusted EBITDA. Looking at the long-term forecast, the company expects its revenues to rise at a CAGR of 43 percent between 2020 and 2025 and reach $3.67 billion in 2025. SoFi expects its adjusted EBITDA margins to reach 32 percent in 2025 and hit $1.17 billion that year.
SoFi stock is a good long-term investment.
SoFi has a pro forma market capitalization of $17.5 billion and an EV (enterprise value) of around $19.5 billion. This would mean a 2021 EV-to-sales multiple of just under 20x. Looking at the 2025 multiples, SoFi is valued at a 2025 EV-to-sales multiple of 5.3x and an EV-to-EBITDA multiple of 16.6x.
The multiples look rich especially considering the bloodbath in growth stocks, which has led to compressed valuation multiples. For example, Affirm trades at an NTM EV-to-sales multiple of 15.6x, which is almost a third of what it traded at the peak.
While IPOE stock also crashed amid the sell-off in growth and fintech names, it recovered a lot of lost ground in May. Most of the gains came after the company announced the merger vote.
Overall, I don’t expect much upside in the near term from SoFi stock when it lists. However, it's still a good long-term investment. If the company can get a bank charter, it will be another growth driver. For now, don’t expect much from the stock.