Updated: Jan 9, 2021
Psalm 90 verse 12 states, "Teach us to number our days, that we may gain a heart of wisdom."
I find this verse very practical. God has given me my time here on earth and it is finite. I do not know how long this will be, but I need to trust God, and recognize that regardless, this time will be brief and that I need to prioritize His kingdom as a guide over all aspects of my life.
For investing, I always attempt to create tools to better prepare me for the unknown future, whether immediate or longer term. One of those tools has been to assess and deconstruct the world of Special Purpose Acquisition Companies (SPACs).
What I have learned is that today's SPACs remain risky, but there is going to be a tipping point where a larger amount of them will likely be successful. This is due to the quality of companies that are now using SPACs to go public.
This brings me to today's topic, Social Capital Hedosophia Holdings Corp. V's (IPOE) announced merger with SoFi. As a reminder, I have extensively researched SPACs and during 2020, developed a successful short-term strategy by investing in warrants. As part of this, I have selectively remained long common stock after announced mergers have been completed.
Let's keep this simple. SoFi starts off their theme based on something that we hear all the time, disruption. The company uses examples of Alibaba Holdings (BABA), Amazon, Inc. (AMZN), and Tesla, Inc. (TSLA) as disruptors in their respective industries, and how far ahead of their legacy incumbents they have grown today, as an indication of disruption success.
SoFi views its legacy competition as large banks like Wells Fargo (WFC), Bank of America (BAC); more mature payment companies like PayPal Holdings (PYPL), and larger peers like Visa, Inc. (V) and Mastercard Incorporated (MA).
The company's focus is on multiple segments including money, investing, personal loans, credit cards, home loans, and student loans. SoFi feels that their multi--product strategy has equated to better unit economics as a one-stop shop for financial services through its app. This naturally transcends cross-buying, accelerating growth opportunities, lower costs per account and higher margins, among others.
Just on the banking side, the total addressable market (TAM) reflects 500 million-plus accounts across 4,700-plus FDIC incumbent banks. Top 10 legacy banks hold greater than 50% of consumer bank accounts, and 50% of Americans use more than one bank for financial services. 80% of consumers cite inadequate one-stop shops as the main reason for more than one account.
Anthony Noto is the CEO of SoFi with C-suite experience at Twitter, Inc. (TWTR), the National Football League (NFL), and managing director experience at Goldman Sachs (GS). Other C-suite team members have strong experience as well, as does the senior management team.
SoFi's member focus is high income, high FICO score (HENWS). Member growth has witnessed six consecutive quarters of accelerating growth to 1.7 million, with the expectation to exceed three million by 2021 year-end. Most recent quarterly growth rates have tracked 75% greater from the prior year's quarter. Multi-product members are expected to double in 2021, to 775,000.
As part of the multi-product approach, SoFi is seeing substantial cross-buying across products driving better unit economics. The company is seeing an inflection in its core financial services productivity loop (FSPL) of how it has organized these products. Expanding product breadth through its recently acquired Galileo (for a $1.2 billion price tag), has also witnessed corresponding account growth to 50 million accounts. SoFi's goal is to take as much market through offering the full gamut of consumer financial needs.
Investment Potential & Valuation
SoFi is estimated to generate over $600 million in Adjusted Net Revenue for 2020. From this level, the company is projecting annualized Adjusted Net Revenue growth of over 40% to $3.7 billion by 2025. Concurrently, SoFi is projecting its Adjusted EBITDA to improve to a greater than 30% margin, or $1.2 billion by 2025.
Pro forma shares outstanding are at 865 million. The merger is anticipated to bring $1.9 billion cash to Balance Sheet. I have begun constructing my financial model, and the preliminary information, assuming that SoFi is able to achieve its 2023 Adjusted Net Revenue target of $2.1 billion and Adjusted EBITDA margin of 23%, I am setting my initial Price Target at around $55 per share over the next 24 months. This equates to a potential investment return from today's price, of 190%, or over 40% return per year.
I have begun to make some assumptions of SoFi's Operating Cash Flow, OCF, per share as the core way to value SoFi's business. Again, it is important to note that valuing any company by OCF is paramount to achieving the strongest visibility on performance and investment success.
I initially purchased warrants on Social Capital Hedosophia Holdings Corp. V (IPOE.WT) last year at $1.94 per warrant. Today, the warrants finished up just over $6. What I have learned from warrants, is that if you can get in early enough and the merger is an ideal opportunity, it makes sense to hold towards the merger completion. After that, it becomes very selective on what may happen.
Based on this, I am looking to transition my warrants to common above $10 per warrant, possibly towards $12. Opendoor Technologies (OPEN) was a big winner for me with my warrants, and the common is trading towards $30 per share. I think that SoFi can justifiably go north of $20 per share for the common, driven largely by the OCF margin expansion potential over the next five years.
My approach has afforded me to have the opportunity to maximize the appreciation for my warrants, and then to decide whether the future opportunity merits a transfer of the majority or other determined level, into the common. Regardless, today's common price at $19 still offers strong upside potential.
It will be highly important to begin adjusting my model once the merger is completed and further information is filed to flush out other key inputs. I will be watching SoFi closely as I am very optimistic on their potential.