The rise in SPACs, or special purpose acquisition companies, has been one of the biggest trends of the past 12 months. Formerly relegated to mostly small and often junky companies, SPACs now are raising capital for many of the market’s hottest sectors.

Indeed, in January of this year, SPACs raised more capital than they did in all of 2019. The novel coronavirus pandemic gave the group an edge, given what is usually quicker access to committed, already-raised capital. Huge gains in the likes of Virgin Galactic (NYSE:SPCE), DraftKings (NASDAQ:DKNG), and, in its early days, Nikola (NASDAQ:NKLA), did the rest.

But at this point, there are reasons for caution. Sheer math is one of them. There simply aren’t that many great companies out there on the private markets. Yet nearly 400 SPACs have joined the public markets just since the beginning of last year.

SPAC sponsors are heavily incentivized to get a deal done, as their compensation often is zero or close without a finalized merger. At some point, and we may be nearing that point, there simply aren’t many good deals left to do.

More broadly, financial history shows that being late to a ‘hot’ trend is common way to lose money. We saw it with dot-com stocks in late 1999 and early 2000, housing in the mid-2000’s, and even in ‘mini-bubbles’ like uranium stocks last decade. Early adopters win. Latecomers usually don’t.

However the category as a whole fares going forward, there are going to be SPACs that prove to be enormous disappointments. Here are five that could be in that group:

• Churchill Capital IV (NYSE:CCIV)
• Social Capital Hedosophia IV (NYSE:IPOD)
• Social Capital Hedosophia VI (NYSE:IPOF)
• Climate Change Crisis Real Impact I Acquisition (NYSE:CLII)
• Sandbridge Acquisition (NYSE:SBG)

SPACs That Could Go Wrong: Churchill Capital IV (CCIV)

The problem with CCIV stock is not its target. Churchill reportedly is in the late stages of talks to merge with electric vehicle manufacturer Lucid Motors. With EVs hot and seemingly every investor looking for the ‘next’ Tesla (NASDAQ:TSLA), it’s no surprise investors are looking to get a piece of CCIV. Lucid has impressive management (it’s in fact led by a former Tesla engineer) and its vehicles look like they could be the real deal.

The problem is the price. CCIV has gone from $10 to $53 as of this writing. Churchill Capital IV itself simply is a pile of money. It raised $2.07 billion in its initial public offering. Yet, based on the company’s 207 million shares outstanding, investors are valuing that $2.07 billion in cash at nearly $11 billion.

It gets worse. There are 84 million warrants outstanding, exercisable at just $11.50. Private investors are going to buy more Lucid stock at a discount. And Lucid isn’t selling the whole company.

The current CCIV stock price and the 291 million shares outstanding (including warrants) value Churchill’s eventual stake in Lucid at roughly $15 billion. Churchill is providing cash of just $3 billion. That aside, the problem is that the deal reportedly values all of Lucid at $15 billion.

Either Lucid is giving Churchill Capital IV the deal of a lifetime, with its existing shareholders giving up vast amounts of control, or CCIV stock has run too far. The more likely answer seems to be the latter.

Social Capital Hedosophia IV (IPOD) and Social Capital Hedosophia VI (IPOF)

The group-wide problem of SPAC demand versus private market supply can apply to individual sponsors as well. Churchill Capital itself is an example: Churchill Capital II (NYSE:CCX) remains without a deal some 20 months after its IPO.

Social Capital Hedosophia and its head, Chamath Palihapitya, could run into the same problem. So far, SCH’s SPACs have done rather well. Virgin Galactic and Opendoor Technologies (NASDAQ:OPEN) both big winners. Social Capital Hedosophia V (NYSE:IPOE) is up over 100% after a well-received merger with Social Finance (SoFi).

But each successive deal has seen lighter returns. Most notably, Clover Health (NASDAQ:CLOV), which merged with the third SCH vehicle, has fallen below $11 after a short seller revealed an undisclosed federal investigation.

Both Clover and Palihapitiya have denied any wrongdoing in that case. That aside, both IPOD and IPOF now trade at $15. And as I wrote regarding IPOF in particular, that requires that SCH create roughly $1 billion in value for its shareholders through a deal.

That’s a far bigger issue than the price of CLOV stock. Deals like that don’t come around every day. Yes, the previous SCH vehicles have provided exceptional returns, but the fifth- and sixth-best deals may not fare quite as well. A 50%-plus premium in each stock to the IPO price doesn’t seem to incorporate that risk.

Climate Change Crisis Real Impact I Acquisition (CLII)

Another risk in the SPAC space is that when multiple deals are made in the same sector, later SPACs may not be getting the biggest prize. That’s the key risk to CLII stock.

This SPAC is merging with EVgo, a provider of “fast charging” stations for electric vehicles. Investors clearly love the space, with Switchback Energy (NYSE:SBE), which is tying up with ChargePoint, and Blink Charging (NASDAQ:BLNK) both soaring.

EVgo has some intriguing attributes. It has a deal with General Motors (NYSE:GM). The company claims leadership in fast charging stations in the U.S.

But this also is a company that expects to generate just $14 million in revenue in 2020, and $20 million this year. Certainly, the company is projecting explosive growth, with estimated 2027 revenue of nearly $1.3 billion.

The concern is all the other charging station operators see the same growth on the way. At least one of those companies will prove to be too optimistic. With EVgo’s pro forma market capitalization now at $4.7 billion, there doesn’t seem to be much room for disappointment.

Sandbridge Acquisition (SBG)

Valuation isn’t the only risk that faces SPACs. In fact, a low price can be its own risk, as SBG stock shows.

To be fair, that seems somewhat contradictory. SPAC stocks like CCIV shouldn’t be punished for being too expensive, while others are criticized for being too cheap. But in both cases, degrees matter.

The issue with CCIV isn’t that it doesn’t trade at $10, but that it trades at $53. The concern for SBG is that in a market where nearly every SPAC rises, it hasn’t.

SBG closed Friday at $10.50. The SPAC is merging with Owlet, a company that would seem a perfect fit for this market. The company offers a wearable sock that monitors an infant’s health. It’s a wearables play and, long-term, potentially a ‘Big Data’ play as well. The Owlet platform already has expanded to monitors and even a pregnancy band. This seems to be a company set for growth.

But there are concerns. Notably, the American Academy of Pediatrics actually recommends against wearables. That aside, for all the hype about the space, few companies have actually driven much, if anything, in the way of profit from wearables so far. Owlet, which still is running losses, isn’t any different.

This SPAC also sets up an exit for Owlet’s private-equity owners. As a result, and unusually for a SPAC deal, Owlet will still have net debt even once the merger closes. An enterprise value of $1.4 billion including that debt is nearly 20x 2020 estimated revenue.

This is a deal that looks good at first glance, but has flaws up close. Relative to other SPACs, SBG does look cheap, but there seems to be plenty of reasons why.

On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.