As 23andMe Flounders, Buying Into VG Acquisition Looks Like a Terrible Idea

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VG Acquisition (NYSE:VGAC) is a part of the blank-check boom frenzy that shows no signs of slowing down even though VGAC stock down 27.2% in the last month alone.

close up of Businessman holding glowing DNA helix with energy sparks.

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After a massive 2020, more investors and companies are taking this route to attract billions of dollars. However, one should exercise caution.

“All that glitters is not gold” is an aphorism that aptly describes several special purpose acquisition companies (SPACs), at this stage and that might very well be what’s playing out with VGAC stock.

The freefall came after the Richard Branson-backed SPAC announced that it’s taking consumer DNA-testing firm 23andMe public. The deal values the merged entity at $3.5 billion. As part of the deal, 23andMe will receive $759 million in proceeds.

Founded in 2006, the direct-to-consumer genetic test company offers the chance to look into your ancestry through its saliva-based test kits. It’s an interesting niche company but, again, a curveball for investors. Usually, exciting electric vehicle plays and fintech companies are the targets of these SPAC vehicles.

Even if the concept excites you, the company is unprofitable and has been so for a while now. Against this backdrop, it’s unsurprising that VGAC stock is not doing well. It’s best to exit your position and look elsewhere for a better investment.

Anticlimactic Merger Spells Trouble for VGAC Stock

The current market reminds some investors of the dot-com era. The rampant speculation that we see nowadays is mind-numbing.

According to Goldman Sachs research, an obscure investment vehicle, the shell corporation setup, dominated last year, with more than 50 SPACs raising over $73 billion, handily outpacing traditional initial public offerings (IPOs).

However, a SPAC usually goes through a fairly typical boom and bust cycle. Due to the billions of dollars raised, whenever a credible sponsor gets involved and lists a SPAC, it starts to skyrocket from its $10-floor price.

As the speculation keeps increasing, the share price keeps jumping higher. When a merger target is identified, shares go hyperbolic, providing you with a nice return on your investment. Once the initial excitement peters off, then investors are left with a difficult decision.

Either they sell their stock or stay on if they believe in the long-term prospects, which is rare. However, the writing is on the wall with this one. It’s clear that 23andMe is hardly the next Tesla (NASDAQ:TSLA) or NIO (NYSE:NIO).

According to one report, the global genetic testing market was worth $12.68 billion in 2019 and is forecasted to reach $21.26 billion by 2027, growing at a CAGR of 10.1% from 2020 to 2027.

There is certainly money on the table, but the genetic test company is not profitable, and sales have been falling for a while now. Plus, as my colleague Josh Enomoto astutely points out, it doesn’t have a big consumer base.

Additionally, the pandemic is not over. People are not chomping at the bit to buy DNA test kits when discretionary incomes are down.

Dangers of Investing in SPACs

Investing in SPACs is not for the faint of heart. An excellent analysis from Goldman Sachs revealed that although SPACs generally outperform the S&P 500 and Russell 2000 over the month and quarter following their deal announcements, when the merger closes and the SPAC shares convert to stock in the target company, returns will lag over the following quarter, half-year, and year.

Ultimately, the quality of the sponsor, the management team, and the long-term prospects will set each company apart. Granted, 23andMe is interesting. The company can help people identify if they are prone to certain diseases because of their family history.

Undoubtedly, it can be valuable to have this information, and the company has done well to pivot in this direction. In January, the company cut 100 employees, about 14% of its workforce. The reason is that consumers just aren’t purchasing as many at-home DNA tests.

Despite the pivot, there are still questions regarding the long-term viability of the company. Furthermore, according to a Consumer Reports article, the kits themselves have certain performance issues.

If you get a positive result from these tests, you have a higher risk of a certain disease, but a negative result doesn’t necessarily mean you’re safe because there could be other variants of the disease that remain undetected.

Considering all these aspects, VGAC stock presents a sorry picture before the merged entity starts trading under the symbol “ME” on the New York Stock Exchange.

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 in 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.


Article printed from InvestorPlace Media, https://investorplace.com/2021/03/vgac-stock-terrible-idea-23andme/.

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