With its merger target announced, what’s next for SPAC (special purpose acquisition company) VG Acquisition (NYSE:VGAC) stock? Backed by Richard Branson, many thought the blank-check company was set to merge with the billionaire’s privately-held Virgin Orbit.
But, instead, this SPAC went in another direction, with its plans to buy 23andMe. Shares initially popped on the news. But, as investors digest this deal announcement, the stock has slid lower. Some may see this as an opportunity to buy the dip.
Yet, while that’s been a profitable strategy with other SPAC (buy the pullback ahead of the deal close), that may not be the case here. Why? Given its lack of exposure to a large-scale trend (like electric vehicles, or online gambling), there’s little to entice short-term speculators.
And, with this SPAC paying top dollar for a business that looks more a turnaround story than a growth story, long-term investors may believe the valuation implied at today’s share price (around $13.45 per share) is a bit too rich.
As overall interest in blank-check stocks continues, shares may be able to hold steady at present levels. But, with the potential for shares to contract by more than 50%, steer clear.
VGAC Stock: What This SPAC Lacks
Shares may have initially popped on the news of the 23andMe deal. But, giving it a second look, investors are realizing there’s not much to be excited about here. Sure, the use of genetic testing in healthcare (a business this ancestry-testing company is pivoting towards) could grow substantially in the coming decades.
But, genetic testing pales in comparison to artificial intelligence, electric vehicles, and online gambling, when it comes to “megatrends.” Without this “megatrend status,” short-term speculators (who trade less on fundamentals and more on momentum), are going to be less inclined to bid it up.
As for long-term investors, VGAC stock doesn’t look too appealing either. Based upon the company’s growth prospects, and the tentative deal price, it’s easy to argue the SPAC is overpaying for what’s could be described as a mature business in the middle of a turnaround.
Not only does a potential lack of (both short-term and long-term) investor interest hurt its chances of heading back towards its highs. Over time, there’s a chance of severe valuation contraction, which could push the stock far below its $10 per share offering price.
Little Appeal for Buy-and-Hold Investors
Taking a look at the investor deck for the 23andMe deal, VG Acquisition makes the case why this proposed deal could pay off. Building on its success in ancestry-testing, it could strike success in the healthcare sector. Customer demand for personalized health and wellness services is on the rise.
Yet, as InvestorPlace’s Mark Hake broke it down on Feb. 11, the SPAC is paying way too much for this business. Why? Instead of paying a reasonable premium for a fast-growing business, it’s paying a rich premium for a company that’s trying to get back to its revenue high watermark.
At the current VGAC stock price, the deal price (net of cash) is around $5 billion. In other words, nearly 23x current sales. But, since Fiscal 2019, sales have dipped from around $441 million, down to $218 million. With the pivot towards healthcare, 23andMe expects to get back close to prior sales levels ($400 million) by Fiscal 2024.
Many growth investors may be willing to pay 23x sales for a business that’s on the rise. Yet, do you want to pay such a high multiple for whats more like a turnaround play? And, if “getting back to even” is the best 23andMe can offer, what happens if it falls short of expectations?
Bottom Line: High Risk, Little Potential for High Returns
Without exposure to a major investing trend, there’s not much here to grab the attention of short-term speculators. And, with financials that don’t exactly pencil out, long-term investors aren’t going to be keen in buying this, either.
So, what does this mean for VG Acquisition stock going forward? As “SPAC Mania” continues, it may be enough to keep shares steady at today’s prices. At least until the pending transaction closes. Once that happens, all bets are off how low it can go.
As our own Matt McCall pointed out on Feb. 1, a similar company, Ancestry.com, sold for $4.7 billion in 2020. With $1 billion in sales that year, the implied EV/Sales ratio for the deal was 4.7x. Multiply that by projected fiscal 2024 sales ($400 million), and you get a $1.88 billion valuation. Add in the nearly $1 billion in cash in its coffers. That gives us $2.86 billion, or around $6.43 per share (based on the post-transaction share count).
With more than 50% possible downside, and questionable upside, there’s little reason to dabble in VGAC stock at today’s prices.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.
