The SPAC trend remains hot, with yet another merger in the works. This time the play is Gores Metropoulos (NASDAQ:GMHI), which is combining with automotive-tech company Luminar. Investors like the deal so far, as GMHI stock has rallied since the announcement.
But for several reasons, I expect GMHI will get more than just the 14% pop it has seen so far. This is a smart deal for both sides. Luminar is set up for literally decades of growth. And investors have bid up many other SPAC mergers in recent months.
I expect GMHI stock will be the next winner. There is simply too much to like here.
Why a SPAC?
SPACs, also known as blank-check companies, have become hugely popular this year — and it’s not hard to see why. I detailed the trends driving demand in my recent report, but it is worth highlighting one key factor: volatility.
We’ve seen more market volatility in 2020 than in any year in at least a decade. And volatility is the enemy of traditional initial public offerings.
After all, IPOs take months from start to finish. Companies need to find the right investment banks to lead the offering, pitch institutional investors, detail financials, and only then price and execute the offering. If investor sentiment weakens during that period, the company is left with two unpalatable options: Pull the IPO, or offer a far lower price.
SPACs, meanwhile, have a war chest of cash raised during their own IPO. And so they can almost guarantee the amount of capital going to the merger target (in this case Luminar), as well as the effective valuation.
Given the market plunge we saw in February and March, it is no surprise so many private companies are going the SPAC route.
But it is not just a matter of dynamics that makes SPACs attractive. The private company gets a partner — and Luminar is getting a good one. Gores Metropoulos is headed by Alec Gores, head of private equity firm The Gores Group. TGG has helped dozens of companies grow, and its counsel no doubt will be exceedingly useful as Luminar tries to drive its own growth.
Meanwhile, Luminar itself is backed by well-known tech investor Peter Thiel. There will be no shortage of experience, and expertise, available to its management.
Luminar’s Edge
Gores and Thiel didn’t make their billions by choosing the wrong companies to partner with. I don’t believe Luminar will be an exception.
Luminar is an early leader in so-called LiDAR (light detection and ranging). LiDAR is a pivotal technology required for autonomous vehicles — and Luminar has a chance at being the premier developer of that technology.
As CEO Austin Russell detailed on a conference call last week, Luminar has a key edge. (Incredibly, Russell founded the company when he was just 17.) The company has built its LiDAR offering from the ground up. That includes the semiconductors used, which were developed in house.
After all, off-the-shelf parts simply were not powerful enough to meet the specifications needed for truly autonomous driving. That type of capability — known as Level 5 — requires capturing immense amounts of data in three dimensions. Existing chips weren’t up to the task.
And so Luminar can offer a complete hardware stack built specifically for both autonomous vehicles and ADAS (Advanced Driver-Assistance Systems). It has developed software as well.
For global automakers, Luminar will offer a “one-stop shop,” so to speak, for both AVs and ADAS. And that should separate it from the many other rivals in the space.
GMHI Stock Looks Reasonably Valued
Early results indeed suggest Luminar has the edge. The company already has 50 commercial partners. It’s working with seven of the 10 largest automakers globally.
Most notably, Luminar has won the first major production contract for LiDAR, from Volvo (OTCMKTS:VLVLY). More such deals are likely to follow.
Indeed, Luminar is targeting over $800 million in revenue by 2025. And that is only a drop in the bucket relative to the long-term potential. Luminar expects an addressable market of $150 billion, roughly evenly split between “robo-taxis,” trucking and passenger vehicles.
Yet after the merger closes, what will be LAZR stock hardly looks all that expensive. Market capitalization based on the current GMHI stock price sits below $4 billion. Enterprise value should be in the $3.5 billion range, as Luminar is raising over half a billion dollars in the deal.
Neither figure is onerous for a potential winner in a $150 billion market. In the best-case scenario, GMHI stock rises by multiples of its current valuation. Even assuming the company is one of multiple winners, there’s still big upside here.
Investors will figure this out — and potentially soon. As they do, I expect the recent rally in GMHI to continue.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.
