David Erickson, a senior fellow in finance at the University of Pennsylvania, recently opined that “the SPAC market, like with all markets after they’ve had a significant run, will likely see a correction soon.” A recent article in Harvard Business Review also argued that SPACs are already in bubble territory and that the bubble is about to burst. January was a record month for SPACs and it makes sense to be cautiously optimistic.
At the same time, SPACs continue to provide some attractive long-term investment opportunities. Among the announced business combinations in the last few months, there are SPACs that can deliver value.
Let’s talk about four least risky SPACs with focus on the reasons why each merged entity is likely to see strong growth in the coming years.
- CIIG Merger (NASDAQ:CIIC)
- Foley Trasimene Acquisition (NYSE:BFT)
- Silver Spike Acquisition (NASDAQ:SSPK)
- Tortoise Acquisition Corp (NYSE:SNPR)
The 4 Least Risky SPACs: CIIG Merger (CIIC)
CIIG Merger announced a business combination with Arrival in November 2020. Over the last six months, CIIC stock has moved higher by 119.6%. The stock has been in a consolidation zone and a break-out on the upside is likely once the merger is completed.
I rate CIIG Merger among the least risky SPACs. As an overview, Arrival is a commercial electric vehicle manufacturer. The company already has orders worth $1.2 billion from United Parcel Service (NYSE:UPS).
In terms of the product pipeline, Arrival expects to launch the electric bus this year. Further, their electric vans are scheduled for launch in the coming year. The company also has strategic investment from Hyundai and Kia Motors. The collaboration underscores the company’s credibility.
One key factor to like about Arrival is micro-factories. These factories can be set-up at a relatively low capex. Further, the factory construction time is just six months. Over the next two years, the company plans to have micro-factories in U.S. and Europe.
It’s worth noting that upon completion of the merger, Arrival will have a cash buffer of $660 million. The proceeds can be used for setting-up 12 micro-factories.
With a new approach to manufacturing and a high focus on technology, Arrival is an attractive name in the commercial EV space. In January, Wolfe Research Group initiated coverage on CIIC stock with a target price of $50. This would imply nearly 100% upside from current levels of $26.60.
Foley Trasimene Acquisition (BFT)
BFT stock has also been in a consolidation mode after an initial spurt. I believe that Foley Trasimene is also among the least risky SPACs. At current levels of around $15, the stock is worth considering.
In December 2020, the SPAC announced a business combination with Paysafe. Paysafe is a global payments provider with a focus on digital commerce and iGaming.
The first reason to like Paysafe is the fact that the company has an established business model. There are dozens of SPACs that are yet to commence operations. For the current year, the company expects to deliver $103 billion in payment volumes.
Further, for FY2020, the company reported revenue of $1.4 billion and an EBITDA of $420 million. With an asset-light model, the company is already reporting an EBITDA margin of 30%.
Paysafe expects to increase revenue to $1.9 billion by FY2023. For the same period, the EBITDA margin is likely to increase to 36%. Clearly, the company’s growth is attractive. Further, with a healthy EBITDA margin and low capex requirement, I expect significant free cash flows.
I also like the fact that the company has significant presence in the iGaming segment. As more states in the U.S. legalize iGaming and sports betting, Paysafe is well positioned to benefit.
Overall, BFT stock is attractive and Paysafe has a proven business model. With steady growth and cash flows, I expect the merged entity to be a value creator.
Silver Spike Acquisition (SSPK)
SSPK stock has been trending higher ever since the SPAC announced a business combination agreement with WM Holding. Currently, SSPK stock trades around $22 and remains attractive for fresh exposure.
As an overview, WM Holding operates Weedmaps, which is a leading online listings marketplace for cannabis consumers. The cannabis space already seems overcrowded with companies providing premium recreational and medicinal products. Weedmaps is a different play in the cannabis industry. The company is well positioned for growth as the legalization and adoption of cannabis increases.
WM Holding has reported revenue growth at a CAGR of 40% in the last five years. For FY2020, the company’s revenue was EBITDA was $160 million and $35 million respectively.
It’s worth noting that the company already had 10 million monthly active users and 18,000 business listings in the U.S. The company also has business listings in nine countries outside the U.S. Therefore, a strong business presence, healthy top-line growth, and a positive outlook for the cannabis industry are growth catalysts.
Tortoise Acquisition Corp (SNPR)
In a February 2020 business combination announcement, Volta Industries agreed to merge with Tortoise Acquisition. Given the business, I would consider Tortoise among the least risky SPACs. SNPR stock has moved higher by 27% in the last three months and it seems likely that more upside is due.
In general, electric vehicle SPACs have been hot in the recent past. Churchill Capital (NYSE:CCIV) has surged five times just on rumors that a business combination is likely with Lucid Motors. However, the growth of the EV industry is unlikely without a proper charging infrastructure.
This makes Volta Industries attractive. The company is an operator of public electric vehicle charging infrastructure. Given the growth outlook for the EV industry, Volta is positioned for strong top-line growth in the next decade.
In FY2020, the company reported $25 million in revenue. By FY2025, the company is targeting revenue of $826 million. This would imply revenue growth at a CAGR of 100% over the next five years. Further, the company also expects to achieve EBITDA break-even in the coming year. By FY2025, the target EBITDA margin is 30%.
With these growth projections, SNPR stock is attractive. I believe that the growth outlook is realistic if the markets believe that EV adoption is at an inflection point.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored more than 1,500 stock specific articles with focus on the technology, energy and commodities sector.