CLOV - Is Social Capital Hedosophia Holdings V Worth the Hype?
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With weakness starting to print on the charts – and especially for the technology-centric and arguably more speculative Nasdaq composite – the idea of gambling on special purpose acquisition companies or SPACs may now seem unusually risky. However, some might make an exception for Social Capital Hedosophia Holdings V (NYSE:IPOE). IPOE stock is on fire and for good reason.
As our own Dana Blankenhorn explained, the fifth iteration of the Hedosophia SPAC is going to take banking app firm SoFi public via a reverse merger. To clarify, it’s called that because the SPAC is a blank-check firm that is also a publicly traded entity. By merging with SoFi, by virtue SoFi becomes publicly traded, essentially being a reverse-order initial public offering.
It’s important to recognize this because a certain mysticism of SPACs have sprouted among investor circles, particularly on social media. Honestly, SPACs simply represent a different way of going public. Gambling on such blank-check entities simply on their methodology is a silly way to lose money because SPACs have their fair share of pros and cons.
There might be some element of SPAC fever with IPOE stock. Nevertheless, the bulk of the bullish narrative centers on the underlying business. As a digital financial service, SoFi has many elements of what many term neobanks. These are institutions that provide bank-like services but without the overhead associated with physical branches. This also means neobanks typically provide better returns on savings account.
However, the main problem with neobanks is that most are not truly banks but have partnerships with financial institutions to provide various services. Largely, though, if you want comprehensive services, like auto loans or home mortgages, you need a “real” bank.
Well, SoFi is basically just that, recently acquiring Golden Pacific Bancorp of Sacramento. Therefore, the fundamentals appear very strong for IPOE stock. But what seems like a no-brainer may require more skepticism.
Should You Trust IPOE Stock?
On surface level, it’s hard not to get enamored with SPACs. Besides their trendy feel, blank-check fever has substantive results to back up the hype. For instance, the same sponsor of IPOE stock – venture capitalist Chamath Palihapitiya – also backed up Virgin Galactic (NYSE:SPCE), which went public via a reverse merger.
So yes, the hype train is worrisome for rational investors. At the same time, there’s a somewhat justifiable momentum play going on. Palihapitiya has the Midas touch and he has delivered on some knockout hits. But no streak lasts forever. And that has got to be the main concern for IPOE stock.
Personally, I think InvestorPlace contributor Vince Martin said it best when he declared that “I don’t entirely trust Palihapitiya. The failure by Clover Health (NASDAQ:CLOV), which went public via SCH III, to disclose a regulatory investigation, is a concern. Will SoFi be similarly tight-lipped?”
I don’t mean to put Martin on the spot because I don’t exactly trust the hype around Palihapitiya either. As Martin further explained:
Palihapitiya’s endless claims of support for retail investors are seemingly contradicted by Social Capital Hedosophia V’s taking of 20% of its own shares for a nominal consideration. SCH V will, as a result, own more than 2% of SoFi, a stake currently worth more than $300 million.
Exactly. The equity take is equivalent to what a typical sponsor takes. Thus, the idea that IPOE stock is somehow the people’s SPAC is exaggerated to say the least. I liken it to those beverages that advertise “10% more (insert favorite liquid) FREE!” But if you don’t have an accurate baseline to compare that discount to, how do you really know that you’re getting a deal?
With IPOE stock, you might be getting the short end of the stick. Just ask those who bought in at the highs of Virgin Galactic, only to be dumped on by – you guessed it, Chamath Palihapitiya.
Fundamental Concerns to Watch
Of course, whether IPOE stock flops or not depends on the viability of SoFi’s business moving forward. Even at a rich premium, if SoFi delivers the goods, this could be one of the better long-term investments to make. Certainly, the digitalization of finance has been a massive trend in recent years.
Nevertheless, even here, you want to be careful. For instance, SoFi offers packages to help students refinance their loans. But is that what society at large really needs? A cheaper way to manage huge debt loads?
I suggest that we need to first get over this pandemic. Then we need a robust labor infrastructure. Later, we’ve got to do something about the de facto usury that is the academic industrial complex that puts young Americans financially behind the eight-ball.
We’ve got so many critical factors to worry about before SoFi will make a dent in social accretion. Don’t let me stop you if you’re dead set on IPOE stock. But as for me, I’ll watch from the sidelines.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
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