They actually have three things in common.
First, all four companies are on the cutting edge of emerging hypergrowth trends.
DraftKings is virtualizing casinos. Luminar is making self-driving a reality with best-in-breed LiDAR sensors. QuantumScape is pioneering a new generation of superior EV batteries. Virgin Galactic is flying paying customers into space for the first time ever.
Second, all four companies have been massive success stories on Wall Street.
Virgin Galactic stock is up 186% year-to-date. Luminar stock is up 300% over that same stretch, DraftKings stock is up 380%, while QuantumScape stock is up 479% since its SPAC deal.
Third, all four companies came public through SPACs – or special purpose acquisition companies.
By now, you’ve probably heard the term SPAC before. It seems to be in financial headlines on a daily basis these days… and with good reason.
Broadly, SPACs are just “blank-check,” publicly traded companies that exist for the sole purpose of merging with another company and bringing that company public. They essentially offer an alternative route for startups to go public outside of the traditional IPO process.
Importantly, SPACs do not involve banks, and therefore, tend to be cheaper, faster and simpler than IPOs.
As a result, many of today’s highest-quality startups are skipping IPOs and opting to go public through SPACs instead.
See: Draftkings, Luminar, QuantumScape, and Virgin Galactic.
Prior to 2020, these were some of the most exciting, innovative, and promising technology startups in the world. Now, thanks to the emergence of SPACs, you can invest in them as public companies today.
The investment implication here is simple and crystal clear.
If you want to invest in the future… in hypergrowth trends… in today’s most disruptive companies… one of the best ways to do so is through buying SPACs.
And that brings us to a discussion of how to actually invest in SPACs.
The way I look at things, SPACs have three stages:
- Pre-Announcement. This is when SPACs are just SPACs. You have a blank-check company, with a board, which has announced its intention to acquire some company in a certain hypergrowth industry – but has not yet announced which company.
- Post-Announcement, Pre-Merger. This is when SPACs are still SPACs, but on the cusp of becoming hypergrowth companies. The SPAC has announced a target company to acquire, and it has set a date for shareholders to vote on this merger.
- Post-Merger. This is when the SPAC ceases to exist, and officially turns into the target hypergrowth company. The merger closes. The ticker changes. The new hypergrowth company is officially public.
You can invest at any stage of the SPAC’s lifecycle. But the investment parameters, obviously, are different at each stage.
In Stage 1, you are effectively betting on the management team of the SPAC to make a splashy and promising acquisition. That’s a risky bet – but sometimes, it’s worth it, because many of these SPACs are run by some very impressive people, like VC investor Chamath Palihapitiya at Social Capital Hedosophia Holdings Corp. III (NYSE:IPOC).
Chamath’s two previous SPACs have brought Virgin Galactic and Opendoor (NYSE:IPOB) public, and have been huge success. Betting on Chamath’s third SPAC to be equally successful isn’t an awful bet.
Meanwhile, in Stage 2, you are basically betting on a combination of the target company’s long-term success and the SPAC’s ability to officially close the merger, because there is always some execution risk that the SPAC won’t close the merger and the target company remains private.
In Stage 3, all technical execution risks are removed, and you have a pure bet on the target company’s long-term success.
Historically, we have seen SPAC stock prices rise at each stage.
Normally, SPACs trade around $10 in Stage 1. Then, upon entering Stage 2, you typically see a jump-up in price, and another jump-up when they enter Stage 3.
In other words, the earlier you invest in a SPAC, the bigger the risk, but also the bigger the potential return.
No surprise there.
And that’s why I prefer Stage 2 investing in SPACs. It’s a happy medium where you know exactly what company you are investing in, but you are still plenty early to the party.
What are some of my favorite SPACs in Stage 2 right now?
Some interesting names include housing market e-commerce disruptor Opendoor, metal additive manufacturing pioneer Desktop Metal (NYSE:TRNE), car battery tech juggernaut Romeo Power (NYSE:RMG), LiDAR maker Aeva (NYSE:IPV), e-sports technology platform Skillz (NYSE:FEAC) and unique EV company Canoo (NASDAQ:HCAC).
In that group of high-quality Stage 2 SPACs, you are sure to find more than a few multi-baggers.
So, go ahead. Take a peek. And don’t be afraid to invest in the future.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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