Fintech start-up Social Finance, also known as SoFi, is gearing up to go public through a reverse merger with a blank-check company Social Capital Hedosophia Holdings V Corp. (IPOE). The SPAC is backed by billionaire venture capitalist Chamath Palihapitiya. IPOE stock surged on the news of the merger deal but has pulled back recently. So, is IPOE stock a buy or a sell before the merger?
On March 3, IPOE stock was down 8.3 percent at $17.22. However, the stock is still up 72 percent from its IPO price of $10 per share. What was the catalyst for the significant stock movement and how does SoFi compare to Affirm? Affirm went public on Jan. 13 after raising $1.2 billion in an IPO.
SoFi versus Affirm
Founded in 2011, SoFi is an online personal finance company. The company offers various financial products like mortgages, personal loans, and student loan refinancing. SoFi also provides newer products and services like credit cards, stock trading, and a robo-adviser. Recently, the fintech company applied for a banking charter.
Founded in 2012, Affirm Holdings is a financial technology company that offers easy payment solutions for shoppers. Affirm’s buy-now-pay-later options make large orders more affordable. The company does this without charging late fees or compound interest.
Is SoFi a better company than Affirm?
Currently, SoFi has nearly 1.72 million members and is on track to hit 3 million members by the end of 2021. In 2020, the company reported revenue growth of 38 percent YoY to $621 million. SoFi expects to generate sales of $980 million in 2021, $1.5 billion in 2022, $2.1 billion in 2023, and $2.8 billion in 2024. However, the company has been posting net losses. SoFi lost $220 million in 2020 and forecasts net losses of $238 million in 2021. The company expects to turn adjusted EBITDA positive in 2021.
In fiscal 2021 (year ended June 2021), Affirm expects to generate revenue between $760 million and $780 million. In fiscal 2020, the company revenues increased by 93 percent YoY to $509.5 million.
SoFi's enterprise value is around $6.5 billion. As a result, SoFi is valued at a 2021 EV-to-sales multiple of 6.6x, which looks cheap compared to other fintech companies. In comparison, Affirm and PayPal have NTM EV-to-sales multiples of 27.4x and 11.5x, respectively.
Why IPOE stock is falling
Investors have continued to handle Palihapitiya-backed SPACs cautiously after Hindenburg Research accused the venture capitalist of misleading investors in the Clover Health deal. The short-seller argued that the billionaire didn’t conduct proper due diligence on Clover before suggesting it to IPOC investors. As a result, the SEC launched a probe into Clover.
SoFi can deliver Affirm-like returns
The recent pullback in IPOE stock might be a good buying opportunity for investors based on the growth prospects and valuations. With the SoFi merger deal in hand, IPOE could be a good way to play the fintech space since the stock could deliver Affirm-like returns. However, the IPOE SPAC stock is a speculative bet until the merger deal closes.