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Where is Chamath’s Jet Now?
On Wednesday, rumors swirled on Discord that “SPAC King” Chamath Palihapitiya’s private jet had touched down in Greenville, South Carolina. Perhaps Mr. Palihapitiya was visiting Peachoid, a 135-foot statue of a giant peach that many locals believe looks more like a “full moon” than a fruit (my family once lived in the area).
But social media was convinced that the SPAC King landed in the Carolinas to visit a takeover target:
Epic Games.
The developer of Fortnite and other popular online games has more than 200 million users playing in its virtual worlds. Plus it’s already raised $1 billion to fund its Metaverse development. Epic is in pole position to beat the tech giants at their own game.
That means Mr. Palihapitiya’s latest fund — Social Capital Hedosophia VI (NYSE:IPOF) could become the next winner in the world of SPACs. Social media is already buzzing with Metaverse investment ideas: A merger with Epic Games would certainly send the stock up 2-5x overnight.
On the other hand, if Mr. Palihapitiya was only visiting the Carolinas to see Pechoid (and IPOF gets liquidated), the adventure would only have cost 4%.
In the story of Epic Games and the Giant Peach, everyone wins.
The One SPAC Swirling on Social Media
Want to front-run upcoming SPACs?
Check social media.
Rumors of Lucid’s (NASDAQ:LCID) merger with Churchill Capital IV swirled six weeks before the merger was announced. And SPACs from Opendoor Technologies (NASDAQ:OPEN) to SoFi Technologies (NASDAQ:SOFI) saw similar news leaks in the weeks leading up to their official announcements.
Secretive investment-bank-led IPO listings, these are not.
The rumor mill has also provided ample opportunity for investors to profit… provided they sell out in time. An investment in one of the above companies would have returned anywhere from 20% to 500% had investors bought in ahead of the official merger announcements.
A Sixth Sense
That’s precisely what makes IPOF a stock to watch.
Social Capital Hedosophia VI, the sixth fund in Chamath Palihapitiya’s series, is one of the few remaining megacap SPACs still searching for a target to take public. And given Bill Ackman’s Pershing Square Tontine (NYSE:PSTH) experience, we know that regulators will force IPOF to spend its $1.2 billion cash pile in one single transaction.
In other words, IPOF has two options:
- A massive acquisition. SPACs typically take a 10-20% stake in a merged company, which means IPOF is looking for a target with a >$10 billion valuation.
- Liquidation. Like most SPACs, IPOF has a cash pile that virtually guarantees a $10 share price minimum pre-merger. If the fund fails to find a merger target, investors simply receive $10 back.
In other words, it’s a “heads-I-win, tails-I-don’t-lose” situation, provided you’re buying in at $10. If the firm indeed merges with Epic Games, the retail buzz could temporarily send shares to $20… $50 or beyond. And if IPOF fails to find a merger target by its October 2022 expiration date, investors would get their money back.
Post-Rumor SPACs Continue to Drop
In September, Goldman Sachs conducted a study of 172 SPACs. The short-term results were as expected — the average SPAC outperformed the market in the months leading up to their merger announcements.
But the long run was uglier.
“In the six months after deal closure,” the strategists noted, “the median SPAC underperformed the Russell 3000 by 42%.”
The story has only gotten worse. Since the report was published, SPAC performance has continued to sag further. Over the weekend, the sentiment of Lucid Motors on Stocktwits, a stock messaging board, hit its lowest point in months.
“A lot of bears here,” noted one user. “$LCID If this gaps up on Monday then I am buying puts,” wrote another.
Inflated Expectations
Much of this misery stems from overly-rosy expectations. Venture capitalists have long been known to treat startup PowerPoint presentations with suspicion; SPAC investors are only just beginning to learn that lesson.
Consider Virgin Galactic (NYSE:SPCE), one of the earliest high-profile mergers.
In its 2019 presentation, the spaceflight startup estimated it would produce $210 million revenue by 2021 and fly 646 passengers to space annually. So far, it’s generated just $3 million in revenue this year.
Electric vehicle (EV) SPACs have taken a similar tack. In March, no fewer than five EV firms promised to reach $10 billion in revenue within five years, a task that took Facebook (NASDAQ:FB), Tesla (NASDAQ:TSLA) and Amazon (NASDAQ:AMZN) over a decade to achieve.
Some patient investors will still find it worthwhile to wait out the storm. Low-cost SPACs like TalkSpace (NASDAQ:TALK) and Clover Health (NASDAQ:CLOV) are still high-growth plays in good industries. But the next time SPAC investors get a glossy presentation promising billions in returns, they might think twice about a buy-and-hold strategy.
Knowing When to Take Profits
“Our favorite holding period is forever,” famed investor Warren Buffett wrote in his 1988 letter to investors. “We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint.”
But times have changed.
Since the 1960s, the average holding period for stocks has dropped from eight years to just five months.
“For years mom-and-pop punters, commission-free investing and more machine-trading have contributed to the trend,” observed analysts at Reuters. “But 0% interest rates, trillions of dollars of central bank and government stimulus and high levels of uncertainty caused by the pandemic have added to the momentum.”
With the rise of SPAC swarm trading, investors have yet another reason to dump shares quickly. In a world where billions of dollars trade hands over one man’s visit to a South Carolina town, only those with the keenest “sell” trigger have a chance to get out before the stampede.
P.S. Do you want to hear more about cryptocurrencies? Penny stocks? Options? Leave me a note at moonshots@investorplace.com or connect with me on LinkedIn and let me know what you’d like to see.
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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.
