It’s confession time. Personally, my gamble on Spartan Energy Acquisition (NYSE:SPAQ), a special purpose acquisition company that is on schedule to become Fisker Inc. was my FOMO play. That’s an acronym for fear of missing out. Now, I’m beginning to think that maybe I should have missed out on SPAQ stock.
Let’s back up for a moment. When the novel coronavirus first breached our shores, I had a sinking feeling in my stomach. Even when Larry Kudlow, director of the National Economic Council, assured the American people that the government had the coronavirus “pretty close to airtight,” I was skeptical. Sure enough, the markets soon collapsed, hurdling us toward the new normal.
About the only sectors that I felt good about were precious metals and gun stocks, and purely for cynical reasons. I found it absurd that any consumer discretionary retail name would soar, let alone something as expensive as cars. After all, with the shutdowns, what was the point of driving for non-essential workers?
Nevertheless, I was proven wrong. Companies like Tesla (NASDAQ:TSLA) soared to the moon, presumably in part because the coronavirus badly exposed global supply chain vulnerabilities of the traditional combustion vehicle market. As well, other electric vehicle manufacturers saw their equity shares rise. Thus, it seemed perfectly normal under the new normal that SPAQ stock would rise.
But it wasn’t for following the EV crowd. Rather, I felt that Henrik Fisker, the brilliant mind behind his namesake organization would bring something to the table: distinguished design. Fisker designed some of the most iconic cars that automotive enthusiasts crave.
As I argued, Fisker is an automotive company that incorporates the latest technologies to provide the mechanical catalyst, not the other way around. Further, I stated the simple truth about automotive marketing: it’s the exterior design that compels luxury auto consumers to consider buying the vehicle. The features are secondary to the initial impulse.
To be clear, I still believe this. However, the coronavirus pandemic may finally be bringing some rationality into the broader economy. Unfortunately, that may impact the automotive economy, which isn’t great news for SPAQ stock.
Consumer Headwinds May Stymie SPAQ Stock
Beyond the gorgeous design of Fisker’s electric Ocean SUV, what drew me into SPAQ stock was the pricing. According to Cnet.com, the Ocean can be purchased for $37,499, which isn’t bad at all. Consider that the entry level Tesla Model 3 starts for around that price and that’s a sedan.
With the Ocean, you get an SUV. As you can tell from your daily commute (before the pandemic), Americans just love their SUVs. And in the new normal, the desire to buy such a platform will likely increase due to its inherent utility.
Plus, consumers have the option to lease the Ocean for only $379. In my opinion, that’s a bargain for what you’re getting. Unfortunately, that might not be enough to help Fisker, which is now staring at a potentially devastating turn for the worse in the automotive market.
One of the shocking elements of the pandemic was that used car values didn’t plummet as anticipated. Instead, they skyrocketed. Why? With people eschewing public transportation in major metropolitan areas which don’t necessarily require a personal vehicle, many ended up buying their first car. Logically, used cars provided the most value.
In addition, with consumers seeing used car prices rise, they probably figured they should jump in before the prices get too out of control. It became a self-fulfilling prophesy as the Manheim Used Vehicle Index shared an almost perfect direct correlation with dealership-based used car sales. But that’s a problem because these two metrics should generally be inversely correlated.
As you know from basic economic principles, lowering the price results in greater demand volume, all other things being equal. But those principles didn’t apply in the new normal, at least not then. But now, it appears that rationality is creeping in.
From government data, revenue for used car dealerships started to peak during the summer season. In response, it appears that dealerships have been marking down their vehicles, per the Manheim index. Collectively, this dynamic suggests that the consumer is becoming price sensitive.
In that case, the main impetus for SPAQ stock — luxury SUVS at reasonable prices — will likely take a hit. And that’s not a risk to play down.
Is There Hope for Fisker?
Frankly, Fisker finds itself now in a tough spot. It isn’t Ferrari (NYSE:RACE), so it doesn’t have the ultra-luxury brand appeal. And while the Fisker brand appeals to automotive enthusiasts, the mass consumer base prefers Tesla, at least for now.
But that doesn’t mean you should give up all hope. When you drill into the nuances of the Manheim index, you’ll see that pickups, luxury cars, and SUVs rank as the most popular choices for used cars, in that order. Well, Fisker addresses the latter two in one package, which isn’t a bad deal.
Further, if it can reach production goals — and that’s not guarantee — the $379 lease deal is outstanding. Certainly, the looks are sharp and distinctive, true to Henrik Fisker’s brilliance. If it can hold on, there are reasons for optimism.
However, I concede that multiple variables exist. Further, this is not an investment for the faint of heart. If you don’t mind the risk, you may want to check out SPAQ stock. For everyone else, you should probably observe from afar.
On the date of publication, Josh Enomoto held a long position in SPAQ.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.