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SoFi Is Going Public Through a SPAC Merger -- Should You Buy It?

By Matthew Frankel, CFP® - Jan 20, 2021 at 6:17AM

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Chamath Palihapitiya's latest SPAC target is a different kind of fintech.

We recently learned that the acquisition target for Chamath Palihapitiya's fifth special purchase acquisition company (SPAC), Social Capital Hedosophia Holdings V (IPOE), is none other than millennial-focused fintech startup Social Finance, better known as SoFi.

In this Jan. 11 Fool Live video clip, Fool.com contributor Matt Frankel, CFP, and Industry Focus: Financials host Jason Moser discuss what investors need to know about SoFi's business, and how the SPAC merger will work for investors. 

Jason Moser: Let's pivot over to another business that plays, it seems in the same sandbox, maybe a little bit of a different focus there on who they are lending to, but we're looking at SoFi, Social Finance, also known as SoFi, looking to go public here possibly soon through the SPAC vehicle. Before we get into SoFi real quickly, let's just give our listeners a quick rundown on how SPACs work. I know that you had a great conversation, not all that long ago with Dan Caplinger and you had gone over some of the basics here in regard to SPACs and how they work. Just for our listeners, give us a quick primer their on SPACs.

Matt Frankel: The brief overview is a SPAC, which stands for special purpose acquisition company. As the name implies, the special type of company [laughs] that it's formed for one reason, to acquire a private business and take it public. A SPAC goes public, it has no business operations when it goes public. It goes public, raises usually a few $100 million, then it seeks an acquisition target. That acquisition target gets that few $100 million plus some extra capital infusion, and in exchange, they combine, these businesses, go public, under the SPACs, already public entity. The idea is that it simplies the traditional process of IPOs, the IPO roadshow, the need to hire new underwriters, things like that. By combining with it already public company, it makes it easier for some of these companies to go public. That's why we're seeing this giant wave of SPAC IPOs. DraftKings (NASDAQ: DKNG) was a big one last year, Nikola (NASDAQ: NKLA) was a SPAC IPO, Opendoor (NASDAQ: OPEN) was a very recent SPAC IPO. Virgin Galactic (NYSE: SPCE) was another one. All these companies are electing to go public via SPAC and add some advantages, cost, and otherwise. The new one, SoFi, it's been agreed upon, so it's going public under a SPAC that you can buy on the market right now. The ticker symbol is IPOE, it's one of Chamath's SPACs. This is his fifth SPAC.

Moser: Wow.

Frankel: The first three were Virgin Galactic, like I just mentioned, Opendoor Technologies which just finalized, and Clover Health (NASDAQ: CLOV), which just finalized. The fourth one, IPOD (IPOD 0.15%), is still looking for its acquisition target, and that's in the market right now. You can still buy that one pre-deal. It's trading at a huge premium because he's been so successful with the other ones. Then there's a sixth one, IPOF (IPOF -0.30%), which is the largest one so far. It's a billion-dollar SPAC that is still looking for its acquisition target. IPOE, Social Capital Hedosophia V is the official name for it. But just call it an IPOE, let's keep it simple. They raised about $800 million and the various other investors are contributing another $1.2 billion to acquire SoFi, which is an online financial business. That's the brief overview of how SPAC works. We'll get into the actual business shortly, but that's the general idea of how this merger is happening. Another name for SPAC is a blank check company. They raised all this money, the company has no operations other than having this giant bank account with money, and they're using it to take SoFi, which is a popular financial company in public.

Moser: SoFi is popular. It's been around for a little while, and it's interesting to see how these businesses evolved because it really started out as an alumni funded lending model that ultimately it was just helping students and graduates deal with student loans. It was something that was helping students deal with, student debt and it really has grown to be a full-fledged banking style operation here. I saw that with SoFi unlike Upstart (NASDAQ: UPST), here SoFi, has actually gotten conditional approval for its National Bank charter application.

Frankel: So far, to my knowledge, Upstart has no desire to become a bank. SoFi is a lot more than a personal lender at this point. They applied for and received conditional approval like you said in October, they got conditional approval for a bank charter. If approved, they're going to be a bank. That's a big cost of capital advantage for a lender. If you can make your own loans and not go through an intermediary, that's one less person you have to pay, so it can save money. SoFi has a lot of operations. Like you said, they started as a community-based student lender, refinancing loans, issuing private student loans, they branched out into mortgages. When my wife and I were in the market for a second home, I got a mortgage quote from SoFi, they were the lowest when we saw. Then COVID happens, so we didn't actually do it. But [laughs] SoFi does have a big mortgage operation. We mentioned personal loans, the student loans, they just launched their credit card product on the lending side, they also have a high-yield savings platform, they have an investing platform where you can buy and sell stocks similar to a Robinhood, I would call it, but honestly doing a better job of educating the consumer and really bringing the community into the investing process, not just trading. They have a robo-advisor, there's an insurance division that partners with other insurance companies to offer products to their members. They have 1.8 million members. I mentioned that Upstart has done a little over 600,000 loans in its history, SoFi is 1.8 million members and all of these other products. A banking charter really makes sense for them.

Moser: Sure. That's something they have to upkeep, obviously, that comes with responsibilities, and regulations, and ratios, and requirements. But as you mentioned, that can be a real source of capital, which is their business.

Frankel: Upstart is trying to become a financial technology company that partners with banks and just to help them do their existing business better. SoFi wants to be the bank of the future.

Moser: Yeah.

Frankel: Another really interesting part of the business is the Galileo Financial that they acquired in 2020. They just paid $1.2 billion to acquire it. It's essentially up in the processing business with about 50 million accounts. [laughs] It helps businesses process checks and things like that. That could be a big part of the story, just to increases the technology umbrella that they have. One thing that really surprised me about this SPAC deal is that the valuations really doesn't seem that insane. They're valuing SoFi at about 8.65 billion, including the $2.4 billion and new money that's coming in. When I mentioned Upstart, which is just a personal lender, just 600,000 loans, that's impressive, but comparatively, it's small. It's trading at a $4 billion market cap. SoFi, including $2.4 billion of new capital, is about 8.65 billion. That doesn't sound like too outrageous of a valuation with 1.8 million members, this proprietary digital payments platform that's been very successful that they acquired, they're expecting about a billion dollars of revenue this year alone. I mentioned Upstart's trading at about 20 times revenue, so far it's trading at about eight times revenue and that's including about $2.4 billion in cash. It's not a surprise that the shares of the stock took off after this announcement. That's why. It's because the valuation's lower than a lot of people thought SoFi it would end up going public for. The stock trades for about twice its par value, which implies a market cap of about $17 billion once it actually goes public. But it still sounds pretty reasonable when you consider what some of these other fintechs are trading for considering just the wide scope of what they do.

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Stocks Mentioned

Social Capital Hedosophia Holdings Corp. V Stock Quote
Social Capital Hedosophia Holdings Corp. V
IPOE
Social Capital Hedosophia Holdings Corp. IV Stock Quote
Social Capital Hedosophia Holdings Corp. IV
IPOD
$9.95 (0.15%) $0.01
Social Capital Hedosophia Holdings Corp. VI Stock Quote
Social Capital Hedosophia Holdings Corp. VI
IPOF
$9.98 (-0.30%) $0.03

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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