This year has so far seen special-purpose acquisition companies (SPACs) become among the hottest asset classes in the markets. SPACs are publicly listed blank-check companies. They are increasingly used to take private companies public, instead of using a traditional initial public offering (IPO), which can be expensive and time-consuming. Today, I’ll discuss seven recent SPAC IPOs that investors may want to keep on their radar screen.
A SPAC is an investment company without any operations of its own. It initially raises public funds for the sole purpose of acquiring a private company, usually within a two-year time frame. Most SPACs begin trading at a range of $8-$10. Investors bet on a given SPAC’s management team to find a suitable target business. When the SPAC announces a potential candidate for a reverse merger, the share price usually starts going up.
Following the completion of the merger, the fate of a given stock depends on a plethora of factors. In the past, not all reverse mergers with SPACs have been successful. Many such companies eventually go below $10. Yet there are others that become quite successful.
According to the Harvard Law School Forum on Corporate Governance, “Since the beginning of 2020 through July 22, 2020, 48 SPAC IPOs have been completed, raising almost $18 billion in proceeds, with another $5.4 billion of SPACs on file to complete IPOs this year. SPACs have remained popular notwithstanding the COVID-related market disruption.”
September has seen SPAC IPOs gain attention for possibly the wrong reason, due to developments at pre-revenue Nikola (NASDAQ:NKLA), which specializes in electric and hydrogen-powered trucks. On Sept. 8, following the announcement of a partnership with General Motors (NYSE:GM), NKLA shares surged to a recent closing high of $50.05. However, then came the news that short-seller Hindenburg Research was accusing Nikola of fraud. Since then, the stock has come under fire and is now below $20. Nikola has since “admitted to faking a video of its truck driving itself.”
If there is further bad news, then there could easily be more downside to not only Nikola shares, but also to other SPACs as well.
The recent hype around SPAC IPOs means retail investors and day traders chase these companies daily. In most cases, they may not even be doing much due diligence before hitting the “buy” button. However, I’d urge potential investors to study the SEC filings and quarterly announcements of SPAC IPOs first and commit capital later.
Going public is one of the most important strategic decisions taken by private companies. With all that information, here are seven SPAC IPOs to research further. I believe they deserve your attention and may offer a better risk/return profile in the case of short-term price weakness in their shares:
- AdaptHealth (NASDAQ:AHCO)
- DraftKings (NASDAQ:DKNG)
- Immunovant (NASDAQ:IMVT)
- Repay Holdings (NASDAQ:RPAY)
- Social Capital Hedosophia II (NYSE:IPOB)
- Virgin Galactic (NYSE:SPCE)
- Workhorse (NASDAQ:WKHS)
SPAC IPOs: AdaptHealth (AHCO)
Plymouth Meeting, Pennsylvania-based AdaptHealth sells and leases home healthcare equipment, such as mobility and oxygen equipment, walkers, bath aids, bed lifts, nutritional supplies, and sleep apnea machines. With operations in 35 states, it is a network of full-service medical equipment companies. As one of the largest distributor of home medical equipment in the U.S., it serves over 800,000 patients annually, processing around 7,000 orders daily.
In November 2019, DFB Healthcare Acquisition Corp., a SPAC, announced a reverse-merger with AdaptHealth Holdings. The combined entity started trading under the ticker symbol AHCO.
In July 1, 2020, it acquired Solara Medical Supplies and ActivStyle. The Street believes these deals will help AdaptHealth grow its continuous glucose monitoring business, focusing on diabetes patients.
Earlier in August, the company announced second-quarter results which showed record revenue and profitability. Net revenue was $232.1 million, up 87% from Q2 2019 and 21% higher than the first quarter of 2020. Net income was $4 million– 8 cents per diluted share — compared to Q2 2019’s net loss of $2.1 million, or 10 cents per diluted share.
Management said the quarterly successes was due to “its ability to supply critically needed equipment and medical supplies to referral partners during the COVID-19 pandemic.” The company also gave an improved outlook for the rest of the year.
Year to date, AHCO stock has nearly doubled. I’d look to buy the dips, especially between $15 and $17.50.
Boston-based, DraftKings made its stock market debut in late April, when it started trading at $20.49. At the time, it merged with Diamond Eagle Acquisition Corp., a SPAC that was already publicly traded, and SBTech. Since then, DKNG shares are up over 150%. It is currently hovering around the $57-$58 area.
The company was initially set up as a fantasy sports platform where players can put together their own fantasy teams of real-life players and compete for cash prizes. Now, its offerings also include online sports betting. For example, it has recently started to collaborate with Disney’s (NYSE:DIS) ESPN.
In mid-August, the group released Q2 results, which showed “GAAP revenue of $71 million compared to $57 million during the same period in 2019.” It also reported over $1.2 billion in cash — and no debt. During the quarter, most professional sports in the U.S. could not take place. Nonetheless, management introduced a range of new fantasy sports and betting products for Nascar, golf, UFC and European soccer.
Recent research suggests that in the coming years, the global online gambling market is expected to grow at a compound annual growth rate (CAGR) of over 11%. If you believe that DraftKings is possibly at the right place at the right time, you may consider investing for the long-term, especially if the shares decline below $50.
Our next discussion centers around Immunovant, which in October 2019 announced a reverse merger with Health Sciences Acquisitions Corporation, a SPAC. The deal closed in December 2019. IMVT is a clinical-stage biopharmaceutical company that specializes in autoimmune diseases.
Antibodies play an important role in immune defense against pathogens, which are infectious agents that cause “disease or illness to its host.” Immunovant highlights, “autoimmune diseases occur when the immune system is unable to distinguish between harmful pathogens and the body’s own healthy tissues.”
The company has an investigational product candidate, IMVT-1401. It is intended as an injection to be applied under the skin for the treatment of autoimmune diseases caused by pathogenic IgG antibodies.
YTD, IMVT has more than doubled, trading around $35. In other words, the stock has traded well, possibly in part due to increased interest in the biopharma space as a result of the Covid-19 pandemic. Potential investors may want to wait for the company’s next quarterly statement to be released in November. A decline toward the $30-level would make the shares more attractive.
Repay Holdings (RPAY)
Atlanta, Georgia-based digital payments software company Repay is the next of our SPAC IPOs. It was formed in July 2019, upon closing of the merger of Hawk Parent Holdings LLC with a subsidiary of Thunder Bridge Acquisition, Ltd., a SPAC. The new entity changed its name to Repay Holdings Corporation.
It offers businesses of all sizes various tools to make payment processing easy. In other words, it works with companies, including banks and credit unions, to update their payments and receivables operations. In July, the payment systems provider announced it would be buying accounts-payable automation system cPayPlus for up to $16 million. Investors seemed excited about this purchase, as cPayPlus had sizeable customer integrations.
For example, it has recently partnered with Advanced Business Computers of America (ABCoA), a provider of software with real-time accounting for subprime finance companies, to enhance card payment acceptance and processing. As a result, Repay “will enable companies utilizing the ABCoA Deal Pack platform across the automotive and financial industry with the ability to securely accept debit cards, credit cards, and ACH payments through its digital suite of payment channels.”
Earlier in the summer, the group announced Q2 results, which showed “growth in card payment volume and gross profit of 63% and 63%, respectively, compared to the second quarter of 2019.” Revenue came at $36.5 million, up 68% year over year. It also reported organic gross profit growth of 21% YoY. Management highlighted it has benefitted from further digitalization in the pandemic era.
So far this year, RPAY stock is up about 62%, hovering around $24. In the coming quarters, I expect the company to expand its footprint in the fintech space. Long-term investors may regard any potential drop toward the $20 level as an opportunity to go long the shares.
Social Capital Hedosophia II (IPOB)
The next SPAC IPO is a recently-announced deal between the Social Capital Hedosophia II (NYSE:IPOB), a SPAC led by venture capitalist Chamath Palihapitiya, and Opendoor, a property-technology company that directly buys homes from sellers, makes repairs, and then resells them.
InvestorPlace.com readers are likely to be familiar with Palihapitiya, whose first SPAC, Social Capital Hedosophia, had in 2018 reverse merger with Virgin Galactic, which I will also discuss today.
CNBC reported that on Opendoor’s platform “Homeowners get a quote, through an algorithm, and can sell their houses directly to the company. Opendoor may make some fixes and then put the house on the market to sell. The spread between what the home is bought for and sold is a part of how Opendoor generates revenue. Opendoor, which operates in 21 markets, says it sold more than 18,000 homes last year.”
The current deal values Opendoor at close to $5 billion. Competition comes from Redfin (NASDAQ:RDFN) and Zillow Group (NASDAQ:Z, NASDAQ:ZG). In 2017, the number of houses flipped in the U.S. was over 207,000. Thus, there is a big market, waiting to be disrupted. Opendoor is aiming to make the sales process more efficient and faster.
It is too soon to tell how IPOB stock’s fortunes will evolve. For example, if a prolonged economic contraction affects house prices, the shares could come under pressure. Also if interest rates increase, that could bring headwinds. However, on Sept. 16, Federal Reserve Chairman Jerome Powell stressed that interest rates would likely to remain close to zero in the foreseeable future.
Potential investor may want to keep a close eye on IPOB stock and the developments around Opendoor.
Virgin Galactic (SPCE)
Virgin Galactic, part of Sir Richard Branson’s Virgin Group, has become the first publicly traded space tourism company. The entrepreneur had previously founded Virgin Atlantic Airways which itself is owned in part by Delta Air Lines (NYSE:DAL).
Virgin Galactic, founded in 2004, defines itself as “the world’s first commercial spaceline and vertically integrated aerospace company.” In the final quarter of 2019, it merged with Social Capital Hedosophia.
On Oct. 28, 2019, SPCE started trading at an opening price of $12.34. By Feb. 20, the shares were trading at an all-time high of $42.49. As markets plunged in March, they went as low as $9.06. Since then, it has been a volatile ride for shareholders. The stock now changes hands around $19.
The company offers individuals to participate in a suborbital space experience in its high-tech spacecraft. For Space shares to make a new leg up form these levels, its next earnings call in November would need to be robust. Investors would like to see details on future bookings and a potential space flight details. If management cannot deliver, then the stock may come under further pressure.
I believe SPAC is a high risk/return stock as during the decade, space tourism could become a market of $3 billion. I’d consider investing for the long-run if the shares go below $15, especially toward the $12.50 level.
YTD, Workhorse Group (NASDAQ:WKHS) stock is up an eye-popping 736%. But that number tells only half the story. In March, the shares were trading around $1.30. Thus $1,000 invested in the firm then would now be worth over $19,500.
The Loveland, Ohio-based group manufactures electrically powered delivery and utility vehicles. It specifically targets the “last-mile” delivery sector. According to the most recent quarterly results, revenue was $92,000 and operating expenses were $5.57 million. Net loss stood high at $131 million, mostly due to increased interest expense, which was $124.3 million.
Why is there so much hype in a company that is not yet showing much revenue? In addition to being a year of SPAC popularity, 2020 has also become the year when retail investors are looking for the next Tesla (NASDAQ:TSLA).
As Louis Navellier has recently discussed, Workhorse is one of the final three short-listed companies bidding for a lucrative U.S. Postal Service (USPS) contract. The reason I have included Workhorse in our discussion of SPAC IPOs is, however, different.
August brought cheer to the shares for a reason other than its core operations. Workhorse Group has 10% ownership in the privately held Lordstown Motors, another newcomer to the EV space, specializing in electric pickup trucks.
Workhorse investors so far seem delighted, as they believe company’s shares in Lordstown could soon be worth considerably more. Put another way, if you are considering investing in DPHC stock, you may instead take a bet on Workhorse. However, if you are not yet a shareholder in WKHS stock, you may want wait on the sidelines until a pullback toward $20.
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. She also publishes educational articles on long-term investing.