Hippo Holdings (NYSE:HIPO), one of the latest companies in the burgeoning insurance technology sector has been awful. On a year-to-date basis, HIPO stock is down 63%.
Due to the broader underperformance of special purpose acquisition companies (SPACs) post-business combination, it’s been too easy for analysts to bash this interesting way to launch an initial public offering, but the numbers don’t lie.
Granted, the loss above is from the time of writing. By the time you read this, the number could very well be different. However, I’d be surprised if it’s all that much different.
At a time when post-merger SPACs have underperformed benchmark indices — and with CNBC reporting that a majority of shell company deals are trading under the pivotal $10 level — HIPO stock takes the cake and then some.
However, it’s also not fair to blast SPACs as entirely irredeemable. After all, the traditional IPO approach involves several major financial institutions running the books. Underwriters purchase shares of new issues of soon-to-be-public companies, who then turn around to distribute shares to their choicest clients, almost always institutional investors.
Unfortunately, this rarefied process often leaves out regular retail buyers, who usually have to gamble at the open in a secondary market transaction. These are the folks that are buying shares following an IPO pop. But by allowing anybody to purchase pre-merger-announcement SPACs, sponsors of shell companies facilitate democratization.
In the case of HIPO stock, regular folks can bank on relevant innovations. Of course, people who went the pre-merger route had no idea that Hippo would be the specific buyout target. But the IPO prospectus provided some clues as to what industries the sponsors were targeting.
However, when the dust cleared, all the ugly stereotypes of SPACs came pouring in.
A Reality Check for HIPO Stock
On paper, you wouldn’t expect HIPO stock to perform so poorly following approval of its business combination. As a home insurance specialist, Hippo leverages the power of artificial intelligence to deliver lightning-quick quotes and excellent rates to prospective clients.
Further, the company couldn’t have asked for a better backdrop. As a result of a supply shock that stemmed from the novel coronavirus pandemic, many homebuyers found themselves fighting in an ultra-competitive market.
With collective FOMO (fear of missing out) kicking, prices for homes skyrocketed.
Of course, that’s a perfect downwind catalyst for HIPO stock. If folks are going to pay a hefty premium atop of already hefty prices, they’re going to want to insure their acquisition.
It all sounded reasonable until both company-specific and industry obstacles started popping up.
Obviously, the major headwind is the big money pullout that our own Stavros Georgiadis mentioned. Hippo disclosed that the associated SPAC returned $192 million worth of raised funding. It’s possible, Georgiadis stated, that investors were concerned about the significantly widening operating expenses and net losses.
Typically with a tech-related growth stock, you overlook the lack of profitability because of the excellent projections for the top line. Over time, investors reason, the bottom line will catch up. But the devastating red ink in HIPO stock confirms that optimism is sorely lacking.
I’m not entirely sure if investors should adopt a contrarian position here. If you look at government statistics, you’ll see that the wealth gap between the elites and everyone else is widening significantly.
For instance, those in the 50th to 90th wealth percentiles saw their share of total net worth drop from 29.9% in the first quarter 2020 to 27.8% in Q2 2021.
So, who’s buying all these homes?
Hippo Needs a Robust Middle Class
Undoubtedly, many people in the middle class are buying homes during this mad rush, but I don’t think government data is lying to us. As the Washington Post noted last year, the affluent class have been taking advantage of record-low interest rates to acquire more property because why not?
But here’s the problem: when you only serve the rich, at some point you run out of rich people to sell to.
And I think that’s the biggest concern about the growth prospects of HIPO stock at a fundamental level. Both primary and secondary sources confirm it’s the wealthiest who have driven the bulk of this housing boom. But these are also nominally the smallest client demographic.
HIPO stock is an investment tied to service to the masses, not service to the fewest. Therefore, I’m not surprised that investors asked for their money back. Unless the fundamentals of wealth inequity change, it doesn’t seem like a viable opportunity.
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On the date of publication, Josh Enomoto 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.
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.