Special purpose acquisition companies (SPACs), created out of whole cloth to take private companies public, were a big investment story in 2020.
In 2021, though, they’re facing the inevitable backlash.
The idea that a promoter could just go on TV and hype a stock, then pocket a big chunk of the proceeds always seemed a little off to me. But it saved companies a lot of money over the traditional initial public offering (IPO). After investors spent years waiting for venture-funded companies to come public, then being offered WeWork, SPACs seemed like a good deal.
That many companies coming public through the SPAC process was seen as a feature, not a bug. You were getting in on the ground floor of profit! Some SPACs, like DraftKings (NASDAQ:DKNG), also turned out to be home runs — nearly tripling in value over the last year.
But if there’s one rule in investment, it’s that a good thing will inevitably be followed by too much of a good thing. Any idea that works will be copied. SPACs were no exception. Celebrities were quick to get on board. But you have to ask, what do they bring to the table? What are they planning to skim off it?
As with any pullback, however, values are revealed. You may still find some good investments in SPACs. Just be careful.
That said, these eight SPACs are now facing that backlash I discussed before this year. They are:
- Churchill Capital IV (NYSE:CCIV)
- Social Capital Hedosophia V (NYSE:IPOE)
- Social Capital Hedosophia VII (NYSE:IPOF)
- QuantumScape (NYSE:QS)
- Virgin Galactic (NYSE:SPCE)
- Clover Health (NASDAQ:CLOV)
- Fisker (NYSE:FSR)
- Star Peak Energy Transition (NYSE:STPK)
Now, let’s dive in and take a closer look at each one.
SPACs Facing Backlash: Churchill Capital IV (CCIV)
Reporters, lawyers, and analysts were unable to pierce the SPAC bubble.
These were no ordinary accountants. These work for the Securities and Exchange Commission (SEC). Two letters from these accountants have busted SPAC valuations. This includes Churchill Capital IV, which is taking electric car company Lucid Motors public. Shares that cost $60 each in February were below $20 in April.
The first letter, on April 8, warned that projections of future growth might not be legally protected if SPAC sponsors know they’re false. This was followed by a statement warning that warrants, often issued to Private Investors in Public Equity (PIPE) to boost valuations, may be liabilities, not equity.
These aren’t final rules. But they may force SPAC companies to restate financial statements, even after a deal is complete. And there’s that liability issue. Lucid originally said its deal with Churchill took months to negotiate. Now it seems to have come together in 12 days.
This doesn’t mean you have to get out of CCIV stock . Our Mark Hake says CCIV stock is currently undervalued, that the electric car market is taking off , and that Lucid has a compelling plan to compete. The shares may also benefit from a short squeeze.
Social Capital Hedosophia V (IPOE)
Chamath Palihapitiya is the King of SPACs. Not only has the Social Capital CEO taught us all how to spell Palihapitiya, but he has brought six SPACs to the market, and half have dance partners. The best may be Social Capital Hedosophia V, which is taking SoFi public.
SoFi, based in San Francisco, is bidding to become the JPMorgan Chase (NYSE:JPM) of the online world — offering a full range of financial products from a single mobile app. If the name seems familiar, SoFi has a naming rights deal on the new Los Angeles Rams stadium.
CEO Anthony Noto, formerly of Goldman Sachs (NYSE:GS), Twitter (NASDAQ:TWTR) and the National Football League, has already bought a brick-and-mortar bank. He has opened a brokerage that competes with Robinhood. He has bought a credit card processor. It’s the bank deal that may be delaying IPOE changing its ticker to SOFI. Bank transactions need a lot of approvals.
The deal values SoFi at about $6.5 billion and brings in $3.2 billion of capital, but current investors will still own 74.2% of it after the merger. When I look at potential investments, I tend to focus on the jockey rather than the horse. Can this executive execute on the company’s plans, and lead it to glory? I think Noto can do it.
SPACs Facing Backlash: Social Capital Hedosophia VII (IPOF)
As noted with IPOE, Chamath Palihapitiya is the King of SPACs. He has made three deals and had three more blank check companies, including Social Capital Hedosophia VII, still looking for partners, as this was written.
But when your castle is under attack, it’s not good to be the King. And Palihapitiya’s castle is under attack.
Chamath Palihapitiya is a charming, voluble and telegenic character. He reminds me of Professor Harold Hill from The Music Man. That’s a Broadway musical, soon to be revived, that my mom took me to see at age 3.
The question is, does Palihapitiya know the territory? The first two companies he has taken public, Virgin Galactic and Clover Health, are doing poorly. Accountants at the SEC are starting to question key premises of the SPAC boom, its use of warrants and the way boosters like Palihapitiya talk about them.
SPACs start life with an implied value of $10 per share. If they fail to find a merger partner in about two years, investors can get their money back. As of now, IPOF is trading at about $10.60. The big risk isn’t that Chamath Palihapitiya can’t find a partner, but that he can, and that partner may not be worth buying.
For every unprofitable company that comes public through a SPAC, the question is always the same. Can they back up their claims? Do they have what they claim to have?
This has been the question ever since Quantumscape came public in November, after merging with Kensington Capital Partners.
This is still the question.
QuantumScape is a 10-year old company working on a different kind of battery design, a solid-state lithium ion cell with a polymer separator between anode and cathode. The claim is it can be recharged in a few minutes, rather than hours, and be safer than current batteries. QuantumScape has some big backers, including Volkswagen (OTCMKTS:VWAGY), which has bet its future on electric cars.
The question of whether Quantumscape can do what it says came up again in February. That’s when Scorpion Capital, a short-selling specialist, questioned the thesis. It charged the technology won’t work outside a lab. It also claimed CEO Jagdeep Singh is pumping up the company’s prospects ahead of a lock-up expiration.
The report also came out as QuantumScape raised another $100 million, giving Volkswagen stock at a price of $36.57 per share, an implied profit of over $1 billion.
Despite the Scorpion’s sting, there are still people who believe in QuantumScape. Our Chris Lau is one, and our David Moadel is a second. And some dude named Bill Gates is a third.
SPACs Facing Backlash: Virgin Galactic (SPCE)
Virgin Galactic was one of the SPAC businesses’ original stars. But now it has fallen to Earth, as its key supporters have abandoned it.
First out the door was Chamath Palihapitiya, who took it public and served as chairman. The next parachute to open was that of Richard Branson, who had come up with the whole idea of letting tourists touch space in a plane. He was followed by Cathie Wood, whose ARK Space Exploration & Innovation (NYSEARCA:ARKX) ETF sold most of its shares.
I likened the problem to that of Geoworks, a graphical user interface that emerged 30 years ago to challenge Microsoft (NASDAQ:MSFT) Windows. It looked like Windows, it had applications, and it ran on the computers people already had, without upgrades. But it wasn’t Windows. The project failed.
There’s still a good idea at the heart of Virgin Galactic, a new 19-seat design that could take people halfway around the world in a half-hour, just like the International Space Station does. But that will be another company.
Overall, all Virgin Galactic has is a Ferris Wheel.
Clover Health (CLOV)
Clover Health was once Social Capital Hedosophia II. It was the second of Chamath Palihapitiya’s SPACs to come public. Now the company, currently selling Medicare Advantage or “Medigap” health insurance plans in eight states, is a battleground.
On one side is Hindenburg Research, a short-seller. They accuse Clover of “upcoding,” sending Medicare fraudulent diagnoses to rip off the government. On the other side are the small traders at Reddit r/WallStreetBets, the discussion thread on Reddit that made Gamestop (NYSE:GME) famous.
If Clover was doing bad things, and Palihapitiya knew it, he needs a lawyer. Hindenburg itself is not backing its story with money. They have learned that being right on a short call doesn’t guarantee a profit on it. Then there is Clover’s new friend, Walmart (NYSE:WMT). They are offering to service its Georgia customers through their Walmart health centers. If Walmart sees profit in Clover, who are we to argue?
Personally, I wouldn’t get into Clover until questions like this are answered.
SPACs Facing Backlash: Fisker (FSR)
Since its peak in late February, Fisker has lost half its value. Despite a manufacturing contract with Magna International (NYSE:MGA), and a leasing proposition on its Ocean car, CEO Henrik Fisker is being compared to Preston Tucker. His company challenged the Detroit “Big Three” in the 1940s and lost, but it made a great movie.
Fisker has already failed. His first effort to build a hybrid car in the 2000s went under despite government help. Now he’s touting the idea of big electric car incentives, but only for models priced at $55,000 or less. Guess how much the Ocean sells for?
Seeking to dent the impact of a Goldman Sachs sell call, Fisker has also found a second manufacturing partner. It’s Hon Hai Precision of Taiwan, better known as Foxconn. Foxconn wants to build the cars at a Wisconsin location that became controversial during the Trump years. Some analysts think it’s all talk.
Star Peak Energy Transition (STPK)
Star Peak Energy Transition is a SPAC that is taking a company called Stem public.
Don’t be confused. We’re not talking about a pot company. We’re not talking about an education company. This Stem does utility-grade electricity storage with enormous batteries and a software program dubbed Athena, which manages the grid.
That said, it’s Athena that’s the secret sauce. While most of the company’s revenues now come from its battery farms, Athena is cloud-based subscription software that could have enormous profit margins. CEO John Carrington has called this “AI-driven energy storage.”
STPK peaked at around $50 per share in February but was trading in late April at $14. As the shares peaked, Carrington made his bull case at Greentech Media, now Wood MacKenzie. Climate change is real. The Administration is demanding action. Renewable power is highly variable. Batteries are needed to manage this renewable grid. Stem’s software will be how they do it.
Given the recent performance of STPK, maybe Citron should have stayed short.
At the time of publication, Dana Blankenhorn directly owned shares in MSFT and BAC.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at firstname.lastname@example.org, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.