IPOE - Is Too Much Risk Priced Into Social Capital Hedosophia V Now?
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Investors in Social Capital Hedosophia Holdings V (NYSE:IPOE) certainly have a lot to like with this SPAC option. Yet since touching a high on Feb. 1, IPOE stock is down 41.8%.
Indeed, IPOE’s announced merger target — Social Finance (SoFi) — is a growth play most investors will salivate over. According to sponsor Chamath Palihapitiya’s investor presentation, this is a digital banking play looking to lead “a new wave of innovation in financial services.”
The company offers a digitally native experience, customers with high LTV potential, a modern tech stack, and enduring relationships across all productions. This digital banking play provides the kind of banking solution millennials are looking for. No/low fees, fair and transparent lending, and a full suite of products and services certainly sounds enticing.
Of course, along with other celebrity SPACs, the Social Capital suite of SPACs has garnered a lot of attention from early-stage SPAC investors of late. Chamath Palihapitiya is one of those home run-hitters investors have looked to for impressive wins. And his batting average has been pretty good thus far.
As far as SoFi goes, I think this company has a ton of long-term growth potential. Indeed, this could be another win for Palihapitiya and his followers.
However, some headwinds have emerged of late for this stock. Let’s take a look at what’s transpiring for investors interested in IPOE stock.
Can the SPAC Party Continue for IPOE Stock?
Special purpose acquisition companies (SPACs) have begun to lose momentum of late. And it appears it’s not only investors who have taken notice. The media’s hopped on this decline in a big way.
Recent reports highlight the impressive decline in the premium these SPACs once commanded in the market. Perhaps bond yields are to blame. Or maybe the market is simply inferring more risk in these SPACs. Whatever the case, SPACs appear to have lost some of their speculative mojo in recent months.
Indeed, a growing proportion of SPACs are trading below their NAV today. Accordingly, some investors may be quick to point out that the music could be slowing for the SPAC boom in general.
That said, this broad-strokes view doesn’t really fit the narrative for all SPACs. Indeed, IPOE/SoFi appears to have the growth to back up its premium today. Yes, this is a celebrity SPAC. However, it’s also a company with a great growth model, in a hyper-growth market, with numbers that make the math on this SPAC exciting.
According to the company’s investor presentation, SoFi is expected to grow at an impressive five-year compound annual growth rate (CAGR) of 43%. There are a number of key catalysts for this growth outlined in his presentation. However the bottom line is that digital banking is in, and is the kind of innovative, disruptive segment investors will want to be in today.
What About Those SEC Issues?
IPOE is among a group of SPACs that have recently informed investors that its audited financial statements “should no longer be relied upon.”
Sweeping SEC changes on how warrants should be accounted for as part of their IPOs has created some turbulence in the SPAC universe. These changes essentially require SPACs to report warrants as liabilities rather than as equity in the SPAC.
Fellow InvestorPlace contributor Will Ashworth believes these changes aren’t likely to cause problems for IPOE over the long-run. It’s an accounting change, but doesn’t affect what matters on IPOE’s balance sheet — its cash/marketable securities.
On this point I have to agree.
However, there are other issues the SEC has highlighted as well in its release. The regulator called out the fact that only two accounting firms handle most or all SPAC’s books. Indeed, there’s some insinuation here that SPACs could be under some heightened scrutiny over the near-term.
Additionally, John Coates, the acting director, Division of Corporation Finance for the SEC, has provided some pretty harsh commentary on SPACs of late.
He believes an “unprecedented surge” in SPACs is leading to a situation where some businesses may pursue a SPAC reverse merger rather than a traditional IPO due to less legal scrutiny. He refutes this idea, suggesting that “in some ways, liability risks for those involved are higher not lower than in conventional IPOs, due in particular to the potential conflicts of interest in the SPAC structure.”
Accordingly, he’s set out to ensure that a “a de-SPAC transaction gives no one a free pass for material misstatements or omissions.”
Bottom Line on IPOE
SPACs such as IPOE stock are indeed seeing risk priced in to a greater degree today than every before.
To be sure, there’s going to likely be a new regulatory standard which IPOE will need to abide by. However, those confident in Palihapitiya’s team and his projections have nothing to worry about.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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