MEMO: Chamath SPAC for SoFi

Tl;dr: Social Capital Hedosophia V, the blank-check company associated with investor Chamath Palihapitiya, announced that it will merge with SoFi, taking the personal financial services company public in the process.

$IPOE is merging with @SoFi  to take them public. This is an incredible company in banking and fintech that has the potential for a winner-take-most outcome. Watch @cnbc  now or listen to call at 1pm ET  bit.ly/397GAD5) to hear from me and @anthonynoto. 1-pager below.

Investment memo for SoFi SPAC

Investment Thesis for SoFi – $1POE

Summary

  • Incumbent banks have been hamstrung coming out of The Great Financial Crisis
    • Legacy technology that is, in some cases, 50-70+ years old has limited the capability of incumbent banks to thrive in an increasingly digitally native world
    • Meaningful changes to regulatory capital ratios, reduced activity in profitable business areas such as trading, and increased operational oversight have all restricted their growth
    • Focus on short term return on equity has driven restrictive lending practices and poor customer experience
    • Shareholder returns and total market cap of the largest banks have been flat and, largely, decoupled from rates since Dec-2013
  • Innovation is emerging rapidly to disrupt these legacy banking practices
    • Since 2010, 296 “Ne-obanks” have been funded to disrupt core checking and savings account capability globally
    • Since 2010, more than $500B has been invested worldwide to disrupt the entire financial services ecosystem
  • Consumer expectations in FinTech are converging to what consumers already demand in other areas of the economy: driving a consumer migration from legacy products to new startups that offer:
    • Low/no fees
    • Fair and transparent lending
    • Multiple products and a “one stop shop” for a variety of a consumer’s financial needs

Qualitative

  • SoFi has built a suite of best-in-class digital solutions to help consumers “get their money right”
    • More than 56k ratings in the app store, an average of 4.8 stars
    • More than 1.8M unique members in 2020, expected to grow to 3M unique members by 2021
  • SoFi offers a full suite of lending products and financial services to consumers which has driven increasing adoption and sequential QoQ growth over the past six quarters:
    • Lending: Student Loan Refi, In-school Lending, Personal Loans, Home Loans, Credit Card
    • Financial Services: SoFI Money, SoFi Invest, SoFi Credit Card
  • SoFi also offers the leading Enterprise banking infrastructure platform for other FinTech companies
    • This “AWS of FinTech” (aka Galileo) provides the core banking infrastructure that not only powers SoFi but also other leading FlnTech companies including:
      • Robinhood, Chime, Dave.com and Moneylion among others
    • Galileo infrastructure was responsible for enabling a large majority of all new Neobank account creation in the US in 2020

Quantitative

  • Best-in-class CAC and Churn allow for best-in-class contribution margins and rapid growth
    • 65% of Home Loan sales came from upsells to existing members
    • 24% of all new product sales came from upsells to existing members
  • Adjusted Net Revenues are scaling rapidly with 5yr CAGR forecasted to be 43%
    • 2020: $621M
    • 2021E: $980M
    • 2025E: $3.67B
  • Forecast profitability in 2021 with growing Adj. EBITDA margins approaching 32% by 2025:
    • 2020: ($66M)
    • 2021E: $27M
    • 2025E: $1.17B
  • Margin of Safety for new investors:
      • EV: $6.58B
      • Equity Value: $8.65B
      • 7x 2021E EV/Revenue
      • 8x 2025E EV/Revenue
        • 6x 2025E EV/Revenue with bank charter
      • 13.6x 2025E P/E
        • 9x 2025E P/E with bank charter

You can read the rest of the memo collection here.

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