Special purpose acquisition companies (SPACs) are blank check businesses that seek out targets for reverse-merger acquisitions. A large number of private companies announced reverse-merger deals with SPACs that are already listed on a stock exchange in 2020. Both institutional and retail investors have jumped at the opportunity to buy into SPACs over the past year. And as a result, the space has become overcrowded.
The U.S. Securities and Exchange Commission (SEC) highlights that a SPAC is an investment vehicle, “created specifically to pool funds in order to finance a merger or acquisition opportunity within a set timeframe. The opportunity usually has yet to be identified.”
In other words, a SPAC has an initial public offering (IPO) and uses those proceeds to seal a future deal with a private company that prefers to become public via reverse merger, instead of a traditional IPO. A SPAC’s management team usually has a two-year time frame to find an acquisition candidate that could potentially be approved by shareholders.
How Prices of SPACs Fluctuate
InvestorPlace.com readers will likely know that SPACs typically trade between $8 and $10. When management announces a potential candidate for the merger, these stocks usually move up. In 2020, most deal announcements have led to significant run-ups in the share prices of such SPACs.
When a merger is complete — generally in a matter of months — the new company’s fortunes depend on a range of fundamental and market factors, much like the shares of companies that go public via a conventional IPO. In recent weeks, we are witnessing a decreased risk appetite in many of the SPAC darlings of the past year. But there is potentially room for further declines.
According to CNBC, Cathie Wood, CEO and chief investment officer of ARK Investment Management, has recently “raised concerns about investors pouring cash into speculative SPAC deals.” Jim Cramer has also expressed concern over the current level of speculation in a large number of SPACs.
Here are 7 overheated SPACs that have gotten ahead of themselves:
- Defiance Next Gen SPAC Derived ETF (NYSEARCA:SPAK)
- Eos Energy Enterprises (NASDAQ:EOSE)
- Open Lending (NASDAQ:LPRO)
- Plby (NASDAQ:PLBY)
- Porch (NASDAQ:PRCH)
- SPAC and New Issue ETF (NYSEARCA:SPCX)
- Velodyne Lidar (NASDAQ:VLDR)
Given volatility in the SPAC space as well as broader markets, potential investors should be ready to embrace increased choppiness in many of the SPAC stocks.
SPACs: Defiance Next Gen SPAC Derived ETF (SPAK)
52-Week Range: $22.15 – $35.08
Year-to-date (YTD) change: Down about 10%
Expense Ratio: 0.45%
The recent growth in SPACs has also meant the inception of a number of thematic exchange-traded funds (ETFs). The Defiance Next Gen SPAC Derived ETF provides exposure to both pre-deal SPACs and post-merger companies of the past two years. SPAK started trading on Sept. 30, 2020, at a price of $25.74.
The ETF, which has 211 holdings, tracks the returns of the Indxx SPAC & NextGen IPO index. SPAK is rebalanced quarterly. At present, the top ten names comprise close to 40% of net assets of $68 million. Among the leading names are the fantasy sports and betting platform DraftKings (NASDAQ:DKNG), online digital real estate platform Opendoor Technologies (NASDAQ:OPEN), Bill Ackman’s SPAC Pershing Square Tontine Holdings (NYSE:PSTH), Churchill Capital Corp IV (NYSE:CCIV), analytics company Clarivate (NYSE:CLVT), Vertiv (NYSE:VRT) and producer of rare earth materials MP Materials (NYSE:MP).
In mid-February, the fund hit a record high price of $35.08. But it now trades around $25.50. Despite the decline, there could be further choppy days ahead. The new earnings season will likely put pressure on several of the names in the fund. Market participants might consider investing in SPAK around $22.
Eos Energy Enterprises (EOSE)
52-Week range: $9.70 – $31.95
YTD change: Down about 17%
Edison, New Jersey-based Eos Energy provides zinc-based energy storage systems. Founded in 2008, the company’s flagship product is Eos Znyth, a stationary battery designed for grid storage. The zinc battery is expected to compete against the Lithium ion batteries that dominate the storage market.
In November 2020, Eos Energy announced that it would go public via reverse merger with SPAC B. Riley Principal Merger Corp. II. Eos Energy recently released full-year 2020 earnings in late February 2021. Total revenue was $0.2 million, attributable to the recognition of previously deferred revenue. Net loss was $68.8 million and improved by $10.7 million year-over-year (YoY) compared to the loss of $79.5 million in FY19. Cash and equivalents at end of FY20 stood at $121.9 million.
CEO Joe Mastrangelo said:
“The increase in energy decentralization, democratization, decarbonization and demand that Eos envisioned when we were founded more than 12 years ago is playing out. Our Znyth battery technology — optimized for 3- to 12-hour duration — and flexible storage system configurations are well positioned to support the new customers and needs of this evolving energy landscape.”
Given the pro-green approach of the Biden administration, Wall Street has been excited about prospects for EOSE stock as well as its peers. And risk appetite has pushed many alternative energy stocks to record highs. The market expects battery storage technologies to grow significantly in the coming years.
However, given that Eos Energy has very little revenue at the moment, we could see further declines in the share price.
Open Lending (LPRO)
52-week range: $9.37– $43.00
YTD price change: Up about 10%
Austin, Texas-based Open Lending provides lending and risk analytics solutions to credit unions, regional banks and other finance companies. Since its founding in 2000, it has facilitated close to $9.5 billion in automotive loans and developed over two million unique risk profiles. Open Lending currently works with approximately 360 active automotive lenders.
In June 2020, Open Lending agreed to a reverse-merger with Nebula Acquisition Corporation, a SPAC at the time. Open Lending released 2020 year end financials on March 9. It facilitated 26,822 certified loans during the quarter, compared to 22,559 certified loans in Q4 of 2019. Total revenue climbed from $26.1 million levels in Q4 2019 to $39.6 million in Q4 2020.
GAAP net income declined by 12.7% YoY and recorded as $15.2 million. Diluted EPS was $0.12 vs. $1.19 loss of Q4 2019. Adjusted EBITDA on the other hand, grew 37% YoY and was $24.8 million in the fourth-quarter. Cash and equivalents stood at $101.5 million.
CEO John Flynn commented:
“The fourth quarter was a great end to a very productive year for Open Lending. During the quarter, we reported a 19% increase in certified loans, a 52% increase in revenue and a 37% increase in Adjusted EBITDA compared to the fourth quarter of 2019.”
The company’s year-end guidance remained unchanged. Namely, top line is expected to be in $184-$234 million range as compared to $108.8 million realized in 2020. Adjusted EBITDA is anticipated to be in $125-168 million band vs. $69.5 million of 2020 level.
LPRO stock’s forward P/E and P/S ratios are 48.78 and 29.36, respectively. Given the frothiness of valuations, a decline toward $35 or below is likely in the coming days.
Plby (PLBY)
52-Week range: $9.85 – $39.88
YTD change: Up about 260%
Los Angeles, California-based PLBY is a well-known leisure lifestyle company with more than $3 billion in consumer spend annually across 180 countries. The company’s flagship brand is Playboy, one of the most recognizable entertainment brands in the world.
In October 2020, Playboy Enterprises agreed to a reverse-merger with Mountain Crest Acquisition Corp. Licensing revenues account for 40% of sales and the company has been expanding its product offerings in recent quarters.
PLBY has also been making headlines with its recent entry into the world of non-fungible tokens (NFTs). It recently announced a partnership with NFT platform Nifty Gateway. The hype surrounding cryptos and NFTs has pushed this stock to record highs.
Plby released Q4 and full-year 2020 earnings in late March. Q4 revenue was $46.3 million, up 118% YoY and full year revenue was $147.7 million, up 89% YoY. Q4 net loss narrowed YoY by $5.5 million to $0.5 million. FY20 net loss was $5.3 million, declining by $18.3 million YoY. Cash and equivalents were $13.4 million, down 51.6% YoY.
CEO Ben Kohn said:
“Our revenue growth accelerated across the business, driven by our expansion of direct-to-consumer digital commerce sales and 20% annual growth of our highly profitable licensing business… The business is off to a great start in 2021 and we are raising our outlook to project revenue to exceed $200 million this year.”
Forward P/E and P/S ratios are 92.59 and 5.87 respectively, showing an overstretched valuation level. The brand recognition and the progressive steps taken by management could easily propel PLBY stock to new highs in the coming years.
However, for now, the up move might be in its final legs. A potential decline below $35 would make the shares more attractive.
Porch (PRCH)
52-week range: $9.74– $24.41
YTD price change: Up about 19%
Seattle, Washington-based Porch is a vertical software platform for the home. It provides software and services to approximately 11,000 home services businesses, such as home inspectors, moving companies, utility companies and home insurers. About a quarter of all U.S. home inspections are processed through Porch.
In July 2020, Porch announced it would reverse-merge with PropTech Acquisition Corp. The new entity started trading in the final days of last year. Since then, the company has acquired four businesses in its efforts to grow customer base.
At the end of March, Porch reported financial results for Q4 and full year 2020. Total quarterly revenue was $19.5 million, an increase of 7% YoY. Adjusted EBITDA remained in the red. But it improved from $8.1 million loss in Q4 2019 to $3.2 million loss in Q4 2020. As of the 2020 year-end, cash and equivalents totaled $207.5 million.
CEO Matt Ehrlichman stated, “The fourth quarter marked a strong finish to a successful and transformative year for Porch. Overall, our vertical software platform is working extremely well, as evidenced by approximately 85% YoY revenue growth rate expected in Q1 2021. We continue to have success generating more revenue per monetized service as we focus on higher value services like insurance.”
For Q1 2021, management expects total revenue to be approximately $23 million. For the full year of 2021, Porch improved its 2021 top line outlook from $170 million to $175 million. Although these metrics are impressive for a young businesses, the stock currently trades at 8.34 times its sales. That is an expensive valuation.
Furthermore, in early April, Spruce Point Capital Management led by Mr. Axler, an activist short-seller, issued a report on the company titled “Porch Is The “Everything” Spaghetti Business Model In Search of Satisfying A Consumer Need That Doesn’t Exist: 50% – 70% Downside Risk.” Spruce Point also regards the recent acquisitions as low-quality. Potential investors might want to read the report before committing new capital.
SPAC and New Issue ETF (SPCX)
52-Week Range: $225.05 – 32.91
YTD price change: Up about 11%
Expense Ratio: 0.95%
As money raised through SPACs went up over the past 12 months, the number of ETFs with a thematic focus also increased. The SPAC and New Issue ETF is an actively-managed fund that began trading on Dec. 16, 2020, at the price of $25.10. By early February, it hit a record high of $32.91. Now it is hovering at $29.
SPCX currently has 83 holdings. The top 10 holdings make up close to 30% of net assets of almost $150 million. Leading names include Starboard Value Acquisition (NASDAQ:SVACU), CC Neuberger Principal Holdings II (NYSE:PRPB), Apollo Strategic Growth Capital (NYSE:APSG) and Cohn Robbins Holdings (NYSE:CRHC).
Put another way, this ETF focuses on pre-deal SPACs with low prices. Thus, it stands to make money when the rumor mill regarding a deal pushes the price of a given SPAC up. After a deal has been announced, the fund usually gets out of that name.
Because this is an actively-managed fund, holdings are likely to change frequently. Interested investors should ideally analyze the holdings of the fund in detail prior to committing capital into SPCX.
In recent weeks, Wall Street has been openly debating whether all of these pre-deal names could indeed offer solid investment prospects. Valuations, management styles and target companies all come into play to make a merger successful. It is hard to expect all these businesses to create long-term shareholder value.
SPCX is a new ETF with little trading history. You might want to study the fund and wait for a dip in price before investing.
Velodyne Lidar (VLDR)
52-week range: $10.11– $32.50
YTD price change: Down about 41%
Light Detection and Ranging (Lidar), “is a remote sensing method that uses light in the form of a pulsed laser to measure ranges (variable distances) to the Earth.” Lidar group Velodyne provides real-time 3D vision for autonomous systems. Its products are used in a wide range of industries, including autonomous vehicles, robotics, unmanned aerial vehicles, smart cities and security.
In July 2020, the San Jose, California-based Velodyne Lidar announced it would go public via a reverse-merger with Graf Industrial Corp, a SPAC at the time. VLDR released Q4 and 2020 year-end financials at the end of February. Quarterly revenue was $17.8 million compared to $19.0 million in Q4 2019. Non-GAAP net loss was $65.1 million and non-GAAP net loss per share was $0.44 in Q4 2020. Cash and equivalents stood at $205 million as of the 2020 year-end.
CEO Dr. Anand Gopalan commented, “We are leading the industry in providing lidar units to customers, manufacturing and shipping 11,710 units in 2020 and 4,237 units in the fourth quarter.” However, investors were not pleased with the results or the fact that Velodyne cut prices to attract new customers.
VLDR shares are trading at 20.78x of sales, meaning a high valuation despite the recent decline in price. Furthermore, recent management troubles and corporate governance issues have also become a drag on the shares. Specifically, the Board has replaced both the Chairman of the Board and the Chief Marketing Officer. Although Lidar technology is likely to be a winner in the coming years, interested investors might want to wait for VLDR price to settle, possibly around $10.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.