SPACs, or special purpose acquisition corporations, have become increasingly popular in recent years. Firms have chosen to forego the traditional initial public offering process, instead merging with an existing, already-public, SPAC to create what might be called a SPAC IPO.
That description admittedly is technically inaccurate. A SPAC IPO is when the acquirer itself goes public, offering shares and warrants at $10 per unit. Those shareholders then vote on a SPAC merger; if approved, shareholders can redeem their holdings at the $10 price (plus interest) or ride with the new, merged, company.
More of those mergers have been approved of late. Indeed, over the last year, dozens of SPACs have executed mergers that brought their targets to the public markets. Among them are some of the best stocks so far in 2020. What once was a path only for struggling companies unable to take the traditional IPO path has become an attractive option.
We’ll likely see more SPAC IPOs, and more mergers, going forward. In the meantime, it’s worth reviewing 10 of the top SPAC mergers of the last year. These aren’t necessarily the ten biggest, or the ten best buys going forward. But they’ve certainly received more than their share of investor attention.
The top 10 (in no particular order):
- DraftKings (NASDAQ:DKNG)
- Virgin Galactic (NYSE:SPCE)
- Nikola Corporation (NASDAQ:NKLA)
- Repay Holdings (NASDAQ:RPAY)
- Vivint Smart Home (NYSE:VVNT)
- Collier Creek Holdings (NYSE:CCH)
- Vertiv Holdings (NYSE:VRT)
- Immunovant (NASDAQ:IMVT)
- AdaptHealth (NASDAQ:AHCO)
- Allied Esports Entertainment (NASDAQ:AESE)
The Last Year’s Top SPAC IPO ventures: DraftKings
DraftKings announced in December that it would be going public via the SPAC route, thanks to a merger with Diamond Eagle Acquisition Corp. Investors greeted the news warmly, as was what then DEAC stock rose on the news, and kept gaining.
The March sell-off briefly interrupted the run, but as with much of the market investors turned bullish. DKNG now trades at about $35.
The case for the stock seems attractive at this point. DKNG stock isn’t a play on its daily fantasy sports business. That business, as merger filings showed, remains sharply unprofitable.
Rather, DraftKings is acquiring customers via DFS who can be monetized as U.S. sports betting becomes legal. And with the company picking up back-end technology provider SBTech as part of the merger, DraftKings won’t have to share betting revenue with a supplier.
The concern after the rally is valuation. DraftKings now has a market capitalization of about $14 billion. (Note that some public data sources inaccurately report a much higher number.) The company itself is targeting just over $1 billion in EBITDA (earnings before interest, taxes, depreciation and amortization) five years after 65% of the U.S. population has legalized sports betting. We’re still a long way from that point.
That said, investors believe that sports betting momentum may accelerate as states look to repair budget holes created by the novel coronavirus pandemic. And valuation – SPAC IPO or no SPAC IPO – has not been a reason to sell growth stocks in this market. Investors really have to believe in the opportunity, and the company, to own DKNG stock here. But the rally since December suggests that many have precisely that belief.
Investors have been all over the map when it comes to Virgin Galactic stock. Shares bounced in October when the merger with Social Capital Hedosophia was completed. In less than a month, however, the stock was below $7.
2020 saw an enormous rally, and potentially a bit of a bubble. The February/March sell-off deflated that bubble, and SPCE stock now has settled into a range around the current price of $14.
So what’s SPCE stock worth? As our Matt McCall wrote last month, it’s truthfully anybody’s guess. The market for space tourism obviously barely exists at this point. Virgin Galactic still needs to raise likely billions of dollars in capital to get to consistent revenue, let alone profitability.
But that market could be huge. And there is some speculation that Virgin Galactic’s efforts could lead to a revolution in hypersonic travel within the atmosphere. Twenty or 30 years from now, SPCE stock at $17 in retrospect could look the bargain of a lifetime. Or Virgin Galactic could be out of business.
One thing is clear, however. As McCall wrote, when it comes to this SPAC IPO, even bullish investors shouldn’t invest money that they can’t afford to lose.
Both DKNG and SPCE have seen parabolic rallies. Neither, however, has seen the buying that NKLA stock has. Indeed, few stocks ever have.
Nikola stock closed at $13 on May 1. It touched $93 on Tuesday. Shares since have pulled back, but at Wednesday’s close of $65 still are up 400% in less than six weeks.
As with SPCE and (to a lesser extent) DKNG, valuation is in the eye of the beholder. The case for Nikola is that it can do for trucks what Tesla (NASDAQ:TSLA) has done for vehicles: create a sustainable, profitable, fast-growing fleet that can revolutionize the industry.
The valuation, however, is a concern. As I wrote this week, NKLA stock already is pricing in the same level of success Tesla has posted, and possibly then some. The company, with essentially zero revenue in 2019, now has a market capitalization over $27 billion.
Meanwhile, the company itself sold shares at $10, not only via the merger with its SPAC sponsor but in a private placement for $525 million in equity. Is management so short-sighted as to accept such a low price? Or, as seems more likely, have the optimism shown by public investors gone a little too far?
Not every SPAC IPO has become a retail investor darling. Repay Holdings has slid a bit under the radar – but it’s performed well all the same. Shares touched an all-time high above $26 this week, and have more than doubled from March lows.
There’s an intriguing business here, and a case for more upside. Repay is targeting areas of the payment industry where digital adoption has lagged. That includes categories like mortgages and personal and auto loans, along with business-to-business spending.
The focus on specific verticals creates two benefits. One, it creates a longer runway to growth as digital adoption catches up. Two, it allows Repay to aggressively go after those markets, while avoiding direct competition with the myriad payments giants operating elsewhere.
Given that model, a 37x forward price-to-earnings multiple is not terribly out of line. And Repay could become an acquisition target for a company like PayPal (NASDAQ:PYPL) or even Square (NYSE:SQ) that is looking to juice its own growth. The optimism that has greeted this SPAC IPO thus makes some sense – and could continue.
Vivint Smart Home
The SPAC IPO route generally requires more interest from retail investors, whereas traditional IPOs focus more on allocations to institutional investors. And so the number of consumer-focused companies on this list isn’t a surprise.
From that perspective, nor is the number of SPAC IPO stocks that have seen huge, and potentially unsustainable, rallies. VVNT stock is no exception, as shares moved from $10 in January to (briefly) over $30 in March before collapsing.
Where Vivint Smart Home is different from other SPAC plays is in the amount of debt it still has on the books. The company finished the first quarter with $2.7 billion in debt net of cash – a figure modestly higher than its market capitalization. That leverage adds to the potential risk in VVNT stock, and may have undercut the rally as the market grew nervous in March.
That said, there’s still an intriguing case here. Vivint’s business for now focuses on home security, but there is plenty of room to expand into broader smart home offerings. Valuation on an EBITDA basis is somewhat reasonable. VVNT trades at a premium to ADT (NYSE:ADT) but has a better offering and stronger growth.
Meanwhile, Vivint has sailed through the COVID-19 crisis: unlike most companies, Vivint reaffirmed full-year guidance after first-quarter results. The company probably needs to perform a bit better to support a rally back near $15, but if it can do, the optimism seen in February may well return.
Collier Creek Holdings
Collier Creek Holdings hasn’t completed its merger yet. But initial returns look good.
The company announced last week that it would merge with snack food maker Utz Quality Foods. So far, the market has signaled its approval, as CCH stock has rallied from under $11 to over $14 in a matter of sessions.
The optimism makes some sense. Snack stocks have done well in recent years, headlined by the acquisition of Snyder’s-Lance by Campbell Soup (NYSE:CPB) in 2018. Food stocks more broadly have been winners in recent months, thanks to consumer stocking. And Utz is a steady, family-owned business which will celebrate its 100th anniversary next year.
As is the case elsewhere, however, valuation is a bit of a concern. After the rally, UTZ is valued at over 12x EBITDA. That’s a discount to the multiple assigned Snyder’s-Lance in the Campbell buyout (20x, and 13x including cost savings), and not a terrible valuation in the context of the sector.
That said, snack stocks have been a bit quieter of late. Mondelez (NASDAQ:MDLZ) and Frito-Lay owner PepsiCo (NASDAQ:PEP) both have stalled going back to last year. And Utz faces significant competition – including from Frit0-Lay and Snyder’s-Lance. This does look like a good deal for CCH shareholders who bought at $10. After the rally, however, there’s a case that new investors should exercise some patience.
Vertiv stock has taken the same roller-coaster ride as the market as a whole. Its merger with GS Acquisition – sponsored by Goldman Sachs (NYSE:GS), in a sign of how widely accepted SPAC IPOs now are – closed in February, and VRT touched $14. Barely a week later, global markets headed south, and by mid-March VRT was below $5.
But shares now have tripled from those lows, which makes Vertiv an exceedingly interesting play. The company was sold by Emerson (NYSE:EMR) in 2016 to a private equity consortium for roughly $4 billion. The SPAC merger was used to pay down the debt used to fund that deal – and get Vertiv to the public markets. But on these markets, the company, including debt, now is valued at more than $7 billion.
As a supplier to data center operators, that expanding valuation would seem to make some sense. After all, Vertiv is poised for impressive growth. But in fact revenue was flat in the fourth quarter and declined in the first quarter of this year, even excluding the estimated impact of the pandemic. That trend needs to improve.
The VRT story seems like it can play out in multiple ways. If growth returns, even $14 may look too cheap. Current performance, however, doesn’t look good enough.
Immunovant stock is another sign of the acceptance of SPAC IPOs and mergers. Biotech stocks like IMVT historically have gone the traditional IPO route. That process includes institutional investors – and investment bankers – well-versed in the sector who can more accurately forecast a biotech’s prospects.
But the SPAC route has worked out well for Immunovant, whose stock trades at about $24. That includes a 200%-plus rally from March lows.
That rally is a bit surprising – and potentially concerning. After all, economic factors shouldn’t impact a biotech’s valuation all that much. Immunovant did deliver solid Phase 2a data for its thyroid eye disease treatment in late March, which sent the stock 23% higher. But that news seemingly only accounts for a small portion of the rally.
As always, biotech investing is hit-or-miss, and IMVT likely is no exception. More good data could drive a higher share price. Still, after this rally, it’s fair to wonder if at least some of the company’s potential has been priced in.
AdaptHealth stock looks intriguing here, even with a 70% rally from December levels. The provider of home healthcare equipment including sleep apnea machines has a defensive business and is posting solid growth. Sales and earnings are growing through both organic means and via acquisitions; recent deals have expanded the company’s reach into diabetes treatment as well.
Here, too, debt is a bit of a concern, though manageable in the context of what should be at worst stable revenue and profits. With sleep therapy, in particular, unfortunately a growth business in the U.S., AHCO stock should have more upside ahead.
Allied Esports Entertainment
To judge by this list, every SPAC IPO winds up moving higher. But Allied Esports Entertainment shows that’s not actually the case. AESE stock fell sharply after its merger closed last year, and briefly dipped below $1 at the height of the March panic.
That weak trading seems surprising given the long-term potential of esports, which has boosted much larger stocks like Activision Blizzard (NASDAQ:ATVI) and Electronic Arts (NASDAQ:EA). The pandemic has created a short-term hit, as it’s closed the company’s arenas and pressured revenue from the company’s World Poker Tour asset. But investors elsewhere in the market have looked past near-term headwinds toward long-term potential.
They may be doing the same with AESE, which has clawed back to above $3. And while there’s still a great deal of risk here, as the business remains unproven, the long-term potential remains enormous. Esports will be big. The WPT should bounce back, and could benefit if the same budget crunches expected to drive sports betting legalization lead to an expansion of online poker.
For investors looking to bottom-fish, and willing to take on some risk, AESE is an intriguing choice, even if early trading has been disappointing.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.