SoFi -- the fintech set to go public via merger with SPAC Social Capital Hedosophia Holdings V (IPOE) -- is a promising start-up. The mobile-first company is expecting to grow at a rapid pace in the coming years as it expands its banking services and has made a couple of transformational acquisitions to help it execute on its plans.
After getting dragged down with other high-flying tech stocks in recent weeks (it's is down 30% from all-time highs as of this writing), I'm ready to start taking a very small nibble of it.
Fast growth ahead, especially for a bank
Banking is a highly fragmented industry, and it's common for most American households to have multiple banking relationships. Besides cashing in on the general migration to all things digital, SoFi aims to consolidate this by providing multiple services via its app.
The company got started offering debt consolidation loans (especially targeted at student loan debt). But the company has used its base to launch itself into other banking needs. The pace at which it has rolled out these new services is impressive. In just the last couple of years, SoFi has made a foray into money and debt tracking, investing, home loans, and credit cards. The investor presentation put together by the team running Social Capital Hedosophia Holdings V (headed by former Facebook exec Chamath Palihapitiya) stated SoFi had 1.8 million members.
As it adds new services, SoFi is anticipating being able to add plenty of new members. It thinks it will reach 3 million in 2021. And along the way, the deepening of its product portfolio will help it expand on those relationships. It anticipates nearly doubling multi-product accounts (like a loan paired with an investment account, for example) from 398,000 at the time of the investor presentation to some 775,000 in 2021.
As a result, SoFi thinks revenue will expand from about $621 million in 2020 to $980 million in 2021. It also projects reaching $3.7 billion in revenue by 2025 -- although this is really long-term, and a lot could change between then and now (more on that in a minute).
SoFi has made a couple of acquisitions to bolster its positioning as a full-service bank and financial services organization. It acquired fintech Galileo (a digital payment automation platform, plus one-sixth ownership stake in investment services firm Apex Clearing) last year, and more recently announced it was acquiring tiny Sacramento, Calif.-based Golden Pacific Bancorp to accelerate its application to get a Federal bank charter (which would make SoFi's lending operation more profitable).
SoFi will be infused with about $2.4 billion in cash from the SPAC merger, and it will be allocating $750 million of that cash to Golden Pacific to ramp up the national rollout of its banking services.
Taking it slow until there's more info
What about other SPACs hitting a rough patch? After all, some of Palihapitiya's other companies taken public via SPAC haven't done so hot lately. Virgin Galactic keeps delaying test flights, Opendoor Technologies reported a steeper fall in Q4 revenue than expected due to the pandemic, and Clover Health estimated lower growth than previously forecast for 2021. Will SoFi just be the latest blunder?
But as with its Palihapitiya-led SPAC peers, SoFi is all about long-term disruption. And even successful disruptors don't grow in a straight line. Periods of underperformance are to be expected. All three of the firms previously taken public by Palihapitiya aren't just tech outfits. They're using tech to disrupt the status quo of very complex existing industries -- travel, real estate, and insurance and healthcare. SoFi is no different. There are lots of well-entrenched banks (thousands of them in the U.S. alone) that will try to make their own digital transformation to stave off SoFi. It will be tough going at times.
Nevertheless, in five years (the max financial forecast provided on SoFi in its presentation), I think digital-based banking will have a greater share of the market than today, and a younger generation of customers will demand more services be delivered in convenient app form. With its plan to deliver more services digitally all from one place, SoFi's positioning looks good to me.
But I'm not piling in here. I'm breaking one of my basic rules to wait before purchasing an IPO stock until after it goes public and after I see a quarter or two of results. When I buy, it will be my typical starter position (about 0.5% or less of my portfolio value) with the aim of buying more if positive progress continues at SoFi.
Given the rapid pace at which the world is being remade by technology, I anticipate SoFi will indeed deliver the goods in the years ahead. I'm thinking I'd like to get started early on this one and am ready to dip a toe in the water after IPOE's recent stock price tumble.