Social Capital Hedosophia Holdings IV (NYSE:IPOD) is up 17.9% year-to-date. The rise in IPOD stock seems natural given the rise of special purpose acquisition companies (SPACs). The thing is, this merger could still be a real opportunity, rather than another SPAC fad.
It’s one of the latest offerings by Chamath Palihapitiya, ace venture capitalist and Wall Street’s king of SPACs. He is the same man responsible for bringing Virgin Galactic (NYSE:SPCE) to the markets through a SPAC and is also famous for his involvement with the work messaging platform Slack (NYSE:WORK).
Not every one of his investments has been a home run, though. Palihapitiya-backed Clover Health (NASDAQ:CLOV) recently received a notice of investigation from the Securities and Exchange Commission following a report from short-seller Hindenburg Research.
Clover has denied the allegations, and we will see how the whole thing plays out. However, Hindenburg Research is slowly earning a reputation as a SPAC killer after its report on Nikola (NASDAQ:NKLA) led to serious problems for the electric semi-truck manufacturer.
Regardless, the latest development underlines the risks that come with investing in the SPAC space. Having said that, there are several benefits of investing in IPOD stock right now.
Chief among them is the prospect of short-term gains through charting the stock. The markets value Palihapitiya’s track record highly, and that’s why Social Capital IV, V, and VI will continue to see massive gains even before it announces a target company.
IPOD Stock: Risks and Opportunities
At this point, you do not know which private company will merge with IPOD, but we do have a fair idea regarding the sponsor and his track record. Chamath gained his fame from taking Virgin Galactic, billionaire Richard Branson’s attempt to commercialize space exploration, public through merging with his first Social Capital SPAC offering.
Last year, Social Capital Hedosophia Holdings II IPOB merged with Opendoor Technologies (NASDAQ:OPEN), and it was a very successful merger. OPEN is up 70.3% in the last three months alone. Thereafter, Clover Health was also brought to the markets via a Chamath SPAC.
Understandably, the excitement surrounding his new offerings is high. IPOD stock has raised $400 million from selling 40 million shares for $10 a pop. Social Capital IV, V, and VI have got $100 million respectively from Chamath Palihapitiya, a hefty contribution that should tell you how invested the billionaire is in these SPACs.
The agency problem is one that causes a lot of sleepless nights for investors. How can you expect management to perform for you when it’s only you that is taking all the risk? Hence, the fact that Chamath has placed his own funds in these vehicles is a hartening sign.
However, we can’t close this section without acknowledging the risks of investing in SPACs. The biggest criticism is that they are not a solid investment.
There is merit to the argument since several SPAC stocks have plunged quite spectacularly once the initial excitement has died down. However, a contrarian opinion is that several companies that took the SPAC route, such as DraftKings (NASDAQ:DKNG), Hyliion (NYSE:HYLN) and Virgin Galactic, are all trading over and above the $10 per share range. So, you can’t have a one-size-fits-all approach.
Near-Term Catalysts Will Continue to Drive Gains
We’ve established that there is a certain level of risk that comes with investing in IPOD stock and discussed why it’s worth taking a bet on it. However, what is assured is that the stock will continue to rise until a merger target is found, after which it will go hyperbolic. That has been the case with every major SPAC stock in recent memory.
At all the merger process stages, up until the start of the ticker trading, the share price will continue to jump. Considering Chamath Palihapitiya’s history and experience, I don’t expect him to come up with a dud for IPOD. However, even if you are skeptical regarding SPACs, you will make money on this investment.
Returns in the SPAC space largely depend on the sponsor. Don’t get me wrong; the target company also plays a huge role, but investors don’t know what they’re getting into when buying into IPOD stock. However, what they do know is that Chamath has done wonders in the past. And that should suffice for now.
Once a target is identified, you can decide whether to hold onto IPOD stock or take profits. Before that, I would want this one in my portfolio to play the proverbial SPAC field.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.