When I discussed Pershing Square Tontine Holdings (NYSE:PSTH) near the beginning of this year, I declared up front that “PSTH stock might be good for a short-term gamble only.” It’s not always that I agree with my words written even only a few short months prior.
The market always changes and that could easily impact anyone’s thesis. In this case, I think it’s a solid description.
This isn’t to say that I don’t see the potential in PSTH stock. True, special purpose acquisition companies, or SPACs, are speculative vehicles, especially if you buy in before the blank-check company makes a merger announcement. But SPACs often live or die by their sponsors. Here, you have the great Bill Ackman, who knows a thing or two about surviving and thriving in cutthroat Wall Street.
Naturally, many investors, particularly rookie participants, feel a sense of camaraderie with Ackman. Unlike traditional initial public offerings, a SPAC allows retail investors to participate on the ground floor. So ground in fact that you don’t know what acquisition target the sponsor is considering. That’s downright subterranean, if you ask me.
But a cost exists to this opportunity because the Street is not going to give you a free lunch. Indeed, the Street often designs its financial architecture to take your lunch so you must be aware who’s really the predator and prey in the equation.
Don’t get me wrong – this isn’t a criticism exclusively about PSTH stock but of all SPACs. As I discussed in a Benzinga article, SPACs typically have two years to identify and merge with an acquisition target. When you look at the compensation structure, these blank check outfits incentivize securing a deal, not necessarily whether it’s a good one.
Shrinking Window for PSTH Stock
When I was first discussing PSTH stock, the rumor mill strongly suggested that Pershing Square Tontine was targeting Bloomberg LP. A media and software giant, Bloomberg certainly qualifies as the mature unicorn that apparently the blank check firm is seeking.
However, I also warned that a media company may not be the best choice for PSTH stock if we suffer a prolonged recession. I wrote:
As well, Encyclopedia.com reminds us that “The onset of the Great Depression in late 1929 hit the newspaper business hard largely due to a major decline in advertising revenue. Loss of the revenue meant less money for wages for employees and less money for production costs. Between 1929 and 1933 advertising revenue decreased by approximately 40 percent.”
This plays into other concerns that prospective buyers of PSTH stock should consider. Recently, wccftech.com reported that Stripe – another Pershing Square Tontine merger target – enjoyed the spoils of a $600 million private investing round. That puts its valuation at $95 billion, which is probably too rich for the blank check firm’s blood.
In context, Stripe now commands a valuation that’s ahead of SpaceX at $74 billion. Even if a reverse merger were to go through, the pricey premium may cause other prospective buyers of PSTH stock to back out.
Let’s say that Stripe is off the table for that reason. Where will the Ackman-sponsored SPAC look next? As Wccftech argues, not many attractive deals exist. This may put pressure on the sponsor to find something, which goes back to my earlier concern about SPACs – they’re about finding deals, not necessarily finding good deals.
Still, what’s crazy about PSTH stock is that it’s probably one of the best SPACs out there. If you’re going to gamble on pot shots in the dark, you might as well rely on the instincts of an industry vanguard.
Probably a Sentiment Wager
If I may inject a personal story here, I’m 50/50 with SPACs. One SPAC I invested in which turned into Fisker (NYSE:FSR) did very well. The other which became Nikola (NASDAQ:NKLA) did not. Through risk management, I am currently profitable on the two as a combined investment.
But this also shows you how tough it is to gamble on SPACs. Yes, I think relative to other SPACs, PSTH stock has potential. Plus, you can’t discount the overexuberant sentiment in the market. People love SPACs because they’re SPACs. You combine that with the Bill Ackman name and you might have a “just because” play here.
All I can tell you – because we don’t know where this is heading – is that if you’re going to buy this blank check company, do so with your eyes wide open. It can profit you, but it can just as easily go awry.
On the date of publication, Josh Enomoto held a long position in FSR and NKLA.
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.