There has been a broad-based sell-off in SPACs. Social Capital Hedosophia Holdings V Corp. (IPOE), which is set to merge with Social Finance or SoFi, fell over 9 percent on March 8 and is now down 43 percent from its 52-week highs. What’s the forecast for IPOE before it merges with SoFi?
Fintech stocks have been under pressure amid the recent sell-off in tech stocks. Square has lost 28 percent from its 52-week highs. Root Insurance, which listed in 2020 and offers auto insurance, is down 58 percent from its peaks. Affirm, which delayed its IPO in 2020 and had a bumper listing in January 2021, is also down almost 50 percent from its peaks.
IPOE's stock forecast
IPOE announced a merger with SoFi. Like all of the other SPACs, IPOE’s forecast depends on the merger target, which is SoFi in this case. SoFi is a fintech company that offers a suite of products including loans, credit card, and insurance. The company boasts of over 1 million members.
IPOE and SoFi merger
IPOE’s merger with SoFi is expected to close in March. It's subject to shareholder approval and other regulatory approvals. The deal with IPOE valued SoFi at a proforma post-money equity value of $8.65 billion. Looking at IPOE’s current stock price, SoFi is valued at a proforma market capitalization of $13.7 billion.
SoFi's valuation compared to other fintech companies
SoFi expects to generate adjusted net revenues of almost $1 billion in 2021—up 60 percent from 2020. According to a one-pager shared by Chamath Palihapitiya, SoFi is expected to post revenues of $3.67 billion in 2025. He projects that the company’s revenues will rise at a CAGR of 43 percent between 2020 and 2025.
SoFi expects to become EBITDA positive in full-year 2020. Palihapitiya expects the company’s EBITDA margins to rise to 32 percent by 2025. Looking at the valuation multiples, SoFi is valued at a price-to-sales multiple of almost 14x in 2021. The valuation is on a fully diluted basis and assuming warrant conversion.
To put that in perspective, PayPal is valued at an NTM price-to-sales multiple of 10.3x, while Affirm is valued at an NTM price-to-sales multiple of 21.2x. Affirm could be a better peer to compare with SoFi than PayPal, which is a much more mature business.
IPOE SPAC stock is a good buy
Looking at the current valuations, IPOE looks like a good stock to buy before the merger with SoFi. The entire fintech space has come under pressure over the last two weeks and IPOE has also been put in the penalty box. This isn't surprising and we’ve seen something similar in the EV space.
After the sharp rise in 2020, all EV stocks have come under pressure in 2021. Churchill Capital (CCIV), which is set to merge with Lucid Motors, has also tumbled. That said, the outlook for EV stocks as well as fintech companies looks positive even as their valuations could be a cause of concern. However, after the recent fall, some of the fintech stocks seem to offer a good entry point.
Coming back to IPOE, the SPAC stock looks like a good buy at these prices. While there could be volatility in the short term, it could be a long-term wealth creator. There's a secular shift from traditional banks to fintech companies especially, among Millennials. SoFi looks well placed to capitalize on the opportunity.