Fireside Chat: The Future of SPACs Is Bright Despite Early Chaos


Editor’s Note: This article is part of Joanna Makris’s Behind the Wall series, where she provides retail investors with the insider scoop on the hottest technologies and trends from today’s business leaders, industry experts and money managers.

SPACs join company on puzzle pieces and handshake, 3d render
Source: NESPIX / Shutterstock.com

This week, my Fireside Chat aims to get the lowdown on special-purpose acquisition companies (SPACs). I had a lively conversation with Kris Tuttle, founder of SPACvest, a research service that provides analysis and commentary on the post-SPAC market.

Tuttle is a longtime equity investor, having been both a widely recognized technology sell-side analyst and Director of Research at investment banking firms Soundview and Adams Harkness. He is also the founder of IPO Candy, a research service centered on the IPO markets.

In today’s conversation, Tuttle gives a good overview on where we are in the SPAC investing cycle right now and how he evaluates these stocks. He shares with us what’s hot (and what’s not).

Read on to learn about SPAC valuations and management financial guidance shenanigans. Discover why a certain American magazine aimed at men is cool again. And see how cannabis point-of-sale (POS), the cloud-based systems that track inventory and transactions, virtual reality, next-gen ultrasound and more are all the hottest plays in tech.

Also find out why EV charging companies are “glorified extension cords.” And uncover a “sleeper stock” that is trading at a mere $2.

With all of those teasers in mind, let’s dive in to the chat!

How do you feel about SPACs? Are they the new dotcom bubble? Or are they the future for IPOs?

Kris Tuttle: Well, they were a bit of a dotcom bubble for a while. There were some number of months where you could only describe it as “free money.” Because they are SPACs, they split into warrants and common, and I got involved with them, just as we follow IPOs. And it was just a retail explosion, the SPAC world. You could just buy anything and make money. And things got, as you know, kind of crazy with some of the names…some of the more popular names like Virgin Galactic (NYSE:SPCE) [and] Draft Kings (NASDAQ:DKNG). These were sort of the catalyst names.

Having said all that … that has kind of ended. And if anything, the pendulum may have swung a little bit too far in the other direction, as just about everything that’s live now is trading at or below cash trust value.

So, I think we’ve kind of come, you know, somewhat full circle. In terms of the future, I think SPACs have proven that they’re another tool in the toolbox for looking at your path as a company. Traditional IPO is still right for the Warby Parkers and these kind of companies, but for some larger, sort of industrial names, SPAC is still kind of an attractive way to potentially do it. And I think, if there’s a bit of hair on your story that may not appeal to retail, sometimes a SPAC is kind of a way to kind of get past that. So I think like M&A, SPAC IPOs are here to stay, but hopefully it’ll be a little bit more of a normal process, without the kind of crazy volatility that we had during that sort of “bubble” phase.

Critics of SPACs talk about these companies as having very loose disclosures, very liberal accounting and limited financials. What are some cautionary elements you use when you look at SPACs and, and how would you caution investors and guide them in this space?

Yeah. That’s a polite way of saying it. I mean, we’ve worked with companies that have just outright pretended like they never gave guidance … in live Q&A. I’ve worked with CEOs who’ve said, “um, I don’t know what you’re talking about. We never gave guidance.” And then I would follow up with a question, unfortunately, it’s on Zoom where [I’ll say] “well, I have your slide deck here from February, and this is the guidance you gave.” But of course, they won’t address those questions anymore.

So it’s … it’s really bad. I mean there are disclosure issues and outright lying in some of these cases

So, there’s a few things that you want to do. I mean, first of all, you probably need to do some of your own research on these names. I tend to go towards companies that have existing brands and businesses that I’m familiar with. So, that’s a good first step. I’m also looking at the underwriter. Underwriters aren’t perfect, but a Goldman Sachs (NYSE:GS) or Morgan Stanley (NYSE:MS) is a little more likely to have done the work than, you know … I don’t want to pick on anybody … but there are others out there.

But even with quality companies, you should not be relying on 2025 projections. That’s ridiculous. Or those that say we’re relatively cheap compared to some group of the highest multiple companies you can find in the market. So, unfortunately, as you pointed at the beginning, this really has kind of become a stock picker’s space. So doing your work, finding the right companies, management teams and, and real businesses, that’s the only way to really protect yourself.

So, what are some of the metrics that you look at in terms of financials or evaluation? How do you differentiate a good [SPAC] from a bad one?

Well, it definitely starts with the management team and the product. So, one name that we own a fair bit of is called Weed Maps [WM Technology (NASDAQ:MAPS)]. It’s in the cannabis space. I’m not an avid cannabis investor by any stretch, but it’s clearly a thing. I’ve known the company for a long time. It’s a technology platform, like Square (NYSE: SQ) or Toast … Point-of-Sale (POS) online. I don’t want to go too far … it’s not Shopify (NYSE:SHOP), but if you’re in the cannabis business and you’re dealing with a recreational market, you need all of this compliance and Point-of-Sale software. So they have a real product with a real competitive moat with a really good management team. And that’s the starting point. It’s not the cheapest stock in the world. If anything, it’s priced pretty well. But this is a big potential market.

So those are the absolute starting points in terms of the names that make it into our model and real money portfolio.

What are some other names you’re liking right now?

There’s a company called Matterport (NASDAQ:MTTR), which, if you’re familiar with the next generation of virtual reality…Matterport actually uses the technology to capture the insides of all the buildings and all the rooms and all the mechanicals that go online and they are used to do a whole range of applications. So they’ve got some really leading-edge technology. They’ve been signing contracts with real estate agencies and governments. And it’s kind of one of these, you know, very futuristic companies, but [with] strong technology, strong management, et cetera … We’ve also owned Genius Sports (NYSE:GENI), which is a kind of sports tech, entertainment and betting brand working with most of the big leagues and minor leagues.

You might have seen Sportradar Group AG (NASDAQ:SRAD) go public today, a regular-way IPO that’s another great company in the space.

A consumer brand name that people might remember is the old Playboy Group (NASDAQ:PLBY), which … you know, I didn’t love initially, because it was very expensive. They have a brand which is kind of scorned here in the U.S. [But in] other geographies, particularly Asia, it’s still viewed as cool. But they’re really trying to be an e-commerce company. And, you know, I think they have a lot of potential. So those are ones we have owned.

There’s two new ones that we just started buying that I think are pretty interesting. One is a name you may remember. The company is called Rockley Photonics (NYSE:RKLY), The founder is Andrew Rickman, who started Bookham [Technology] back in the eighties or nineties prior to the big photonics wave. Anyway, these guys have pivoted to produce what they’re calling the “ultimate spectrometer chip.” Basically it’s a vastly more powerful sort of solution than you can get with LEDs to do all kinds of biometric measurements. It can sense everything from blood pressure to alcohol concentration, to glucose, et cetera. They’re working allegedly with the Apple’s (NASDAQ:AAPL) of the world on the next generations of the watch and those sorts of things. It’s a high risk situation and they won’t be commercial for a while, but if it works, I suspect they [will] probably get acquired before they go full commercial … There’s another interesting sort of tech play … a handheld ultrasound company called Butterfly Network (NYSE:BLFY).

Ultrasound has been held back by these big machines. They’ve got a really powerful hand held device that pairs with your iPhone or Android phone. And it’s opening up a huge market for that kind of price point — new applications, home care, all that kind of stuff. That’s been just sitting around pretty much since de-SPACing, maybe it’s, you know, $12-ish, $13-ish dollars a share. So, those are two pretty new names that we’ve been adding to pretty aggressively.

A lot of companies in the SPAC world are claiming to be technology disruptors in massive addressable markets … claiming hockey stick kind of revenue ramps. And many of them are in the EV space, both on the car side and the infrastructure side. I did want to ask you about Lucid Motors, which is one that’s of tremendous retail interest. And your thoughts on that [stock] as potentially the next “Tesla killer.”

Well, Lucid (NASDAQ:LCID) has definitely got the best EV story out there. The best management team. The most attractive car. And their vehicle is actually rolling. Now, people are driving it and saying great things about it. So they deserve some credit for that.

In terms of “the Tesla killer” — it gets a lot of clicks, I’m sure for reporters, but the company is the first to tell you that they’re not a Tesla killer at all. They are going for a tiny — like 0.5% share of the luxury car market. Yes, they’re gonna have multiple models, but, they’re not a Tesla killer whatsoever.

The question is how well are they going to execute in terms of delivering cars at scale? I think they can sell every car they can ship. The question is, how many can they ship? The current valuation I guess, is around $31 billion, which, you know, still seems high to me given that they haven’t started the commercial ramp yet and half of their projected revenues in 2023 and into 2024 are based on the Gravity — an SUV which we haven’t even seen yet.

So you know, it’s definitely an interesting company. I’m puzzled by why they’re launching so many models when they probably can sell everything that they can make for the next five years — if it holds up as well at scale, as people are saying from the test drives.

But it’s ultimately a really niche product. So it’s, it’s gonna be like, you know, more like a Porsche or a Ferrari. Well, maybe that’s a little too high end … but it’s really gonna be a niche positioning in terms of where the company lives and what part of the market they’re gonna get.

Ultimately, you know, they may get acquired by someone who has a hole in this area, but not a strong brand … like a Kia or a Hyundai (OTCMKTS:HYMTF) or somebody that’s got a robust business, and they’re gonna have their own EVs, but this would get them a different level of cache in the EV space.

So, not terrible. I’m neither long nor short it … but I [wouldn’t] be inclined to do either [at] current prices.

And talking about kind of head scratching, puzzling valuations, the EV charging space also seems to be characterized by some pretty incredible numbers. I’m very curious about your take on Chargepoint and EVgo and what you think about that space in general.

I mean, I’ve gone through all the interviews and shows with management, and I have never been able to get excited about the charging space. If you look at it, the low-end chargers are essentially glorified extension cords that they’re selling online for $800 for people to put in their garages. And you know, that’s already very competitive. There are 10 of them, and [soon] there’ll be 20. And they’ll [cost] $100 in a year.

And at the high end, it’s gonna be very fragmented. I see utilities and other outfits doing most of the high-end DC charger installations. And again, the long-term business model is ultimately a commodity. So I have never, as much as I’ve looked at them, been able to get interested [enough] to do any deeper research or want to own any of them.

So, we talked about what’s overvalued. Do you have any sleeper stocks that no one knows about right now and that you’re looking at that could be interesting?

Well, you know, there’s one that is a very traditional name that we’ve owned for a while, but I think it’s gonna be a great stock. Part of the reason is it’s kind of a “ho hummer” company called Aersale (NASDAQ:ASLE). I think it’s around $13. Anyway, they’re in the commercial aircraft maintenance and supply business, which obviously got decimated in 2020. But it’s roaring back. They’ve got like 30% EBITDA margins and climbing strong growth. They might earn $1.20 this year with the stock at $13. So it’s kind of a $20 stock in terms of how undervalued it is right now. And if some of their new products take off next year, [it] could be a $30 or $40 stock. But it’s fundamentally cheap at something like 10 times earnings.

There is a very small, what I would describe maybe as a backdoor play in the SPAC world … a company I’ve known for a little while. It’s actually close to where I live here in Kentucky called American Resources Corp. (NASDAQ:AREC). It’s got like a $2-and-some-odd share price on it, but they are building a pretty big business around supplying high-grade coal products to the steel industry. But they’ve also got some processes to get rare earths out of abandoned coal mines, which they plan to supply to the EV market. So it’s a very interesting speculative story.

But the SPAC angle is that they launched their own SPAC. So they’re the sponsors of a hundred-million-dollar SPAC, which will do a combination at some point, and as the sponsor shareholder AREC will get those shares. And so you’ve kind of got a double value sort of situation in this name, with a good team [and] high insider ownership. So, you know, it’s definitely sort of more counter to the market. But it’s a great little story that I don’t believe anybody covers or writes about.

Your comments and feedback are always welcome. Let’s continue the discussion. Email me at jmakris@investorplace.com.

On the date of publication, Joanna Makris did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Joanna Makris is a Market Analyst at InvestorPlace.com. A strategic thinker and fundamental public equity investor, Joanna leverages over 20 years of experience on Wall Street covering various segments of the Technology, Media, and Telecom sectors at several global investment banks, including Mizuho Securities and Canaccord Genuity.

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