While hardly anyone enjoys the pressure of hard-sales tactics that car dealerships deploy to close deals, the incentive is understandable from an objective perspective. If the customer walks out the door, there’s a good chance they won’t be walking back in. And that’s one of the biggest challenges that Gores Guggenheim (NASDAQ:GGPI) faces. The omicron variant of the novel coronavirus gives investors plenty of time to assess GGPI stock.
If you think about it, extra time is anathema to special purpose acquisition companies like Gores. For one thing, most SPACs have about two years to identify and complete a business combination. So right off the bat, SPACs are under pressure to deliver. As well, investors in blank-check firms can walk away at the redemption price (usually $10) if a proposed deal isn’t to their liking.
In fact, a recent New York Times article mentioned that SPAC redemption rates have been around 50% this year, as opposed to 20% last year. Those are a lot of people who decided to absorb either opportunity costs or real costs rather than approve the underlying target merger.
Now, GGPI stock is a different animal, to be fair. Gores Guggenheim will merge with Polestar, an electric-vehicle manufacturer with a strong relationship with Volvo (OTCMKTS:VLVLY). Since EVs are the future — at least according to expert sources like McKinsey & Company — betting on Polestar via the Gores reverse merger seems sensible.
On many levels and without the ongoing pandemic, it very well could be. Still, as a SPAC, there’s added pressure to move GGPI stock along to transition to whatever ticker symbol Polestar has in mind. The more time you give to people to think about SPACs, the more they may realize how risky they are.
Omicron Stops the Clock on GGPI Stock
Before I come under the critics hard gaze, let me just say that SPACs represent a matter of free choice. This is one of the few ways that regular retail investors can participate in near-ground floor private-equity-ish opportunities. If anything, SPACs allow more options for the little guy. That’s something to consider before you make any final decision on GGPI stock.
Nevertheless, the circumstances surrounding the Covid-19 pandemic — particularly the resurgent omicron variant — puts a troubling cloud over GGPI stock. It’s not just about the possibly added risk that the merger will not complete, which is always a risk for any SPAC. Rather, the underlying EV sector could face enhanced scrutiny, something that might not have happened without omicron’s interference.
Let’s be frank for a moment. If we’ve learned anything about SPACs this year, it’s that you can’t always trust that the folks involved in the deal have done their due diligence. Just look at Lordstown Motors (NASDAQ:RIDE).
Once regarded as a groundbreaking EV firm with an aim to mainstreaming electric pickup trucks, Lordstown’s SPAC-based initial public offering fell apart due to myriad issues. Arguably, the company’s woes would have been discovered if the team sponsoring the deal would have conducted due diligence. Instead, as another New York Times report revealed, there may have been an astonishing due-diligence failure.
Invariably, then, time is of the essence when it comes to SPACs, especially for the risk-on variety. Like the pushy car salesman, the seller of the deal is incentivized to close it as quickly as possible. Too much of a cool-off period and you invite the prospective buyer to rethink the pros and cons of the purchase.
Unfortunately, the omicron variant represents a powerful timeout, not just for GGPI stock but for most other investments.
Supply Chain Concerns Will Weigh Heaviest
As I mentioned in a prior article about GGPI stock, the main challenge that omicron imposes on the broader automotive sector is the supply chain crunch for semiconductors.
It’s a complicated narrative but in short, cars and EVs use low-margin semiconductors. When automakers cancelled their chip orders last year, the semiconductor firms were ecstatic because they could focus on higher-margin consumer electronic goods, such as smartphones. Although the automotive industry is now begging for chips, the chipmakers themselves may not want to play ball.
Who can blame them? And it’s also possible that the semis would prefer working with their established automotive partners as opposed to EV startups. Either way, that’s another Covid-related headwind that the omicron variant is allowing investors to think long and hard about.
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.