IPOE - The SoFi Merger With Social Capital Hedosophia Is On Track Despite SEC Scrutiny
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Social Capital Hedosophia V (NYSE:IPOE), a SPAC (special purpose acquisition company), is still on track to close its merger with Social Finance, or SoFi. The new ticker symbol for IPOE stock will be “SOFI” once the reverse merger closes. Once it does, the stock is likely to move significantly higher.
Based on recent tweets from SoFi’s investor relations, once the Securities and Exchange Commission (SEC) declares its recently amended S-4 effective, the company will mail the proxy materials. After that, it will take about three weeks for the vote and merger to occur.
Forecasts and Valuation
I wrote an article last month showing how IPOE stock is still undervalued. My estimate is that SOFI stock will be worth $23.91, which is the midpoint of an estimated value range of $20.02 to $27.80 per share.
My estimate was based on SOFI’s forecasts for its revenue and EBITDA (earnings before interest, taxes, depreciation and amortization) from its slide presentation. For example, on page 42 of the slide deck, SOFI forecasts it will be profitable this year to the tune of $27 million in EBITDA. By 2025, it expects to be making $1.117 billion in EBITDA profits.
Interestingly, the company has not changed any of its forecasts. This is even after reports that the SEC is scrutinizing SPAC merger deals more closely. In fact, IPOE revised its S-4 filing to take into account concerns that the SEC had over the accounting for warrants. It wants them to be considered liabilities, not equity.
For most people, this is arcane accounting nonsense. Frankly, I don’t even understand what the fuss is all about with the SEC’s revisions. Here is the bottom line. If the SEC doesn’t force SPAC merger deals to change their future revenue and earnings forecasts, there will be little effect on the stock price. In this case, I can’t see that anything has changed in this regard.
To be sure, the SEC is now forcing SPAC companies to restate their prior financial statements, according to Seeking Alpha. In fact, IPOE filed an 8-K on April 22. Marcum LLP, the company’s independent registered public accounting firm, had concluded that it needed to restate certain items. But none of these items changed the company’s forecasts for future profits.
Where This Leaves IPOE Stock
My analysis shows that IPOE stock (SOFI) is worth at least 40% more than its price on April 30, which was $17. Once SOFI receives the $1.9 billion from the merger and analysts start following SOFI stock, it could begin rising. This should be in about a month from now.
But I could be wrong. The increased scrutiny by the SEC could have a general dampening effect on IPOE stock for a while. The SEC’s change for warrants doesn’t prevent them from finding issues with SPACs’ potentially overly optimistic forecasts. In this regard, IPOE did not change its forecast for EBITDA profits this year and next year. This shows that SOFI must be pretty confident about its forecasts.
So, it may take longer than expected, perhaps over a year, for IPOE stock (actually SOFI stock after the merger) to rise 40% to $23.19. However, this is still a pretty good return on investment (ROI) for most patient investors.
So far, there are no analysts covering the stock. Maybe they want to see if the company is going to change any of its forecasts. They don’t want to make any predictions now that would have to be revised. But I do expect that as soon as the deal closes you will see analysts coming out with recommendations.
At that point, IPOE stock could easily rebound. Even if it doesn’t, I expect that the stock will slowly move higher over the next year, closer to my $23.91 price target.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
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