Can star investor Chamath Palihapitiya redeem himself with his latest special purpose acquisition company (SPAC), Social Capital Hedosophia VI (NYSE:IPOF)? IPOF stock isn’t performing as well as some of the earlier Palihapitiya stocks.
Palihapitiya has been taking public fire since it was revealed through regulatory filings that he has sold his personal position in space tourism company Virgin Galactic (NYSE:SPCE), a company he took public in a SPAC deal last year.
Critics pointed to Chamath Palihapitiya’s sale of his SPCE stock as a sign that a bubble has formed among companies that went public through SPAC deals. Others questioned the commitment and loyalty of SPAC sponsors such as Palihapitiya to the companies they bring public through so-called “blank check companies.”
Many people claim big investors are misleading small retail investors and leaving them to hold the bag on still unproven companies such as Virgin Galactic while they take the money and run once a SPAC deal concludes.
In 2019, prior to going public, Palihapitiya told investors that Virgin Galactic would generate $31 million in revenue in 2020 and $210 million this year. Virgin Galactic executives said recently that they have yet to record any significant revenue.
The Next Deal and IPOF Stock
Despite the public thrashing, Chamath Palihapitiya has remained largely unrepentant about the sale of his SPCE stock, saying that he unloaded his position in order to raise capital so that he can invest in other companies that are focused on addressing inequality and solving climate change.
These earnest comments have drawn attention to Social Capital Hedosophia VI, Chamath Palihapitiya’s latest SPAC company, which has yet to announce a merger deal.
Given Palihapitiya’s recent comments, speculation is growing it will be a company that is focused on technology to address climate issues. Regardless, IPOF stock has been trading at a premium based almost solely on his track record of bringing companies public through SPAC deals.
After listing for just $0.75 a share in late November, IPOF stock rose an astonishing 2,275% to a high of $17.81. Following the Virgin Galactic criticism, the stock has since pulled back to around $12 per share. But, considering that Social Capital Hedosophia VI has yet to identify an acquisition target, the stock remains richly valued.
Worth the Risk?
After the criticism he’s taken for selling his Virgin Galactic stake, coupled with the fact that SPCE stock has fallen 55% since Feb. 11, Palihapitiya will need to target a very exciting company for Social Capital Hedosophia VI to bring public through a SPAC merger.
Anything less than a high profile target, and IPOF stock can be expected to continue falling in the coming weeks. For this reason, Social Capital Hedosophia VI is a risky play for investors right now. Currently, investors who take a position in the stock aren’t investing in anything. They are literally putting their money into a shell corporation.
The other risk is the bubble that might now be forming in the entire SPAC market. While analysts and investors remain divided on the question of a bubble, there’s no question that the SPAC sector has become frothy this year.
Nearly 400 blank check companies with nearly $120 billion in capital are currently seeking to bring companies public through a merger.
CNBC’s “SPAC 50 Index,” which tracks the 50 largest SPAC deals, has fallen more than 15% in recent weeks, negating any and all gains year-to-date. Critics also point to the number of celebrity-backed SPACs and the increasing weirdness of some of the deals as signs the sector has now jumped the shark.
Pass on IPOF Stock
In the current market, which is increasingly volatile, making a speculative investment in a blank check company such as Social Capital Hedosophia VI is foolhardy.
Investors need to ask themselves, “What am I investing in by taking a position in IPOF stock?” Right now, investors are betting on the reputation of Chamath Palihapitiya, and that reputation has been badly tarnished by revelations that he dumped Virgin Galactic, a SPAC target he aggressively sold to retail investors prior to taking it public.
At a minimum, investors should wait for Social Capital Hedosophia VI to announce the company it will bring public through a reverse merger. But given the current risks that seem to be building in the broader SPAC market, it might be best to avoid IPOF stock altogether.
Money might be better spent investing in a cyclical or industrial stock that’s likely to benefit from the economic reopening that’s now underway.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article.