Wait and See When It Comes to Social Capital Hedosophia Holdings Stock

Stock Market

Social Capital Hedosophia Holdings Corp. IV (NYSE:IPOD) stock is another special purpose acquisition company (SPAC) that has all the advantages and risks of SPAC investing strategies. There’s potential for high returns, but at the same time quite a bit of risk. Therefore, let’s look at the main factors to consider when investing in IPOD stock.

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The U.S. Securities and Exchange Commission (SEC) has published a bulletin to inform investors about the major concepts to consider when investing in a SPAC.

It is a well-organized bulletin that is very informative about SPACs’ specific investing characteristics. Education is the first step before investing, not just in SPACs but in any stock. I also like Deloitte’s primer on SPACs, which discusses the huge trend of SPACs in 2020 and in 2021 as well.

So what makes IPOD stock interesting, and what is my financial analysis on it now?

A quick reminder about my previous SPAC articles on Switchback Energy Acquisition Corporation (NYSE:SBE) and Churchill Capital Corp IV (NYSE:CCIV). My main argument about these SPACs was that they pose general risks and valuation concerns. On Jan. 11, when I wrote “Switchback Energy Is a Risky, Volatile SPAC That Could Easily Crumble,” the closing price of SBE stock was $42.51. On Feb. 26, the stock closed at $30.83.

On Feb. 18, when I wrote “SPAC Mania Does Not Make Churchill Capital Corp IV a Buy,” the stock price closed at $58.05. On Mar. 5, the stock price was $24.40 at close.

The reason I am referring to these two SPAC articles is not to brag about my forecasting skills or to make any promise about the returns of my stock picks. On the contrary, I cannot ever make any claim about these; the only reason I mention them is to argue that SPACs are too risky, and IPOD stock is no exception to this rule.

Social Capital Hedosophia’s Goal

The company states that “IPOD may pursue an initial business combination target in any industry or geographic location (subject to certain limitations). IPOD intends to focus its search for a target business operating in the technology industries.”

This is the first general risk to mention. We know that the target company will be in the technology industry, but we do not know any further details. There are many business models in these technology industries. Some companies focus on software, hardware, cloud services, the internet, telecom, robotics or artificial intelligence.

For me, not knowing specifically in advance what type of company will be the acquisition target is both a bet and a huge risk. And it creates plenty of uncertainty and hesitation to buy this stock.

 Management Is Too Important for SPACS

One person on the management team of Social Capital Hedosophia that is responsible for other mergers and acquisition (M&A) deals is Chamath Palihapitiya. He has a track record of several recent M&A deals, such as Virgin Galactic (NYSE:SPCE), Opendoor (NASDAQ:OPEN) and Clover Health (NASDAQ:CLOV).

The management team is among the most important due diligence key points for any public company, and SPACs are no exception. But to me, that does not mean that all future SPAC deals will be a success. Nothing is guaranteed. And this SPAC mania in 2021 may end, as we have already seen a sell-off for speculative stocks and financial assets. Plus, tech stocks are under selling pressure for now.

Why? This brings me to my next argument: valuation concerns.

Rising Bond Yields and IPOD Stock

In 2021, the rising bond yields have caused a sell-off for several recent hot trends in investing, such as software technology companies and various electric-vehicle startups. Is the motto “buy the rumor, sell the news” still valid?

In the case of IPOD stock, yes and no. What I mean is that the stock price surged to a 52-week high of $18.31 on no news. The current stock price is $13.19 at the close of Mar. 12.

So, why would investors pay this high price of over $18 per share on no material stock news? The answer is they should not have; it was pure speculation. Remember the unit price for IPOD stock offered to investors was $10 per share. Is this premium over $10 justified?

For me, without having any material business news, the premium is not justified. It is just a bet on the sponsor of this SPAC that a proposed merger will gain interest and push the stock price higher upon its public announcement. But bets ignore the valuation completely.

There is no tangible deal on the table yet, so now speculation is the key driver for this SPAC.

Let’s Talk Valuation

The latest balance sheet published on Oct. 14, 2020, shows that 57.5 million common shares are outstanding, Class A and Class B.

While there are no meaningful key financial ratios yet, such as price-to-sales or price-to-cash-flow, any premium paid over the $10 per share is not justified now. Investors should consider buying the stock near $10 per share to minimize any risk. Any price paid over the $10 per share makes it both very expensive now and too risky.

While the stock could surge in the event of any merger deal, it is wiser not to get too excited yet.

I would suggest investors employ a wait-and-see approach. Better to avoid the stock for now and not chase it in the event it spikes on any news. Rather, be patient and focus on the prospects of any announced deal based on due diligence, and not just excitement.

On the date of publication, Stavros Georgiadis, CFA, did not have (either directly or indirectly) any positions in the securities mentioned in this article.