Back in July 2019, widely followed space tourism company Virgin Galactic (NYSE:SPCE) started a revolution.
The company announced that it would be going public. But not through a traditional initial public offering (IPO). Rather, by merging with a special purpose acquisition company – or SPAC, for short – backed by former Facebook exec Chamath Palihapitiya.
SPACs are not a new concept. They were invented in 1993 as an alternative route for companies to go public.
They are basically just shell companies with no real operations, which exist for the sole purpose of merging with and bringing public another company with real operations.
The upside therein is that SPAC mergers are basically the “direct-to-consumer” version of IPOs. They don’t have as many middlemen in the process, and are therefore typically quicker, cost less money, and require less legal oversight than IPOs.
How SPAC Stocks Became the New IPO
Despite these tangible upsides, however, SPACs were for years shunned on Wall Street as “taboo.” If you were a legitimate company with legitimate operations, you were going to IPO. That’s just how things were done.
But Virgin Galactic choosing the SPAC route in July 2019 permanently disrupted that status quo.
Virgin Galactic is a very high-profile, well-funded, strong company with lots of buzz, talent, and potential. This is not a local mom-and-pop operation. It’s the real deal.
And that company chose the SPAC route over an IPO.
The taboo sentiment surrounding SPACs started to erode. They were, for the first time ever, starting to look legitimate.
Then, five months later, online sports betting giant DraftKings (NASDAQ:DKNG) elected to go pubic through a SPAC merger over an IPO, too.
And both DraftKings and Virgin Galactic’s SPAC mergers went exceptionally well, with early shareholders and the companies both making a lot of money.
The SPAC Revolution had begun.
Over the course of 2020, it seems that every small company with a great idea tried to go public through a SPAC merger, and tap into the higher-valuation and easier-funding benefits that come with being a public company.
Some of these companies are absolutely amazing companies. Virgin Galactic and DraftKings are two such examples. Those are world-changers. Long-term, they’re great investments.
But some of the other companies that chose the SPAC route have been, well, not so great. I’m talking companies with a history of fraud, or little-to-no chance of long-term success.
Are We In a SPAC Bubble?
Still, investors gobbled up all of these SPACs – both good and bad – mostly because a lot of the companies offered great underlying stories, and also because companies going public through SPACs can offer long-term financial projections – whereas SEC regulations prohibit IPO companies from doing the same.
As you can imagine, plenty of companies abused those financial projection privileges, and forecasted themselves as taking over the world. Investors ate it up, almost without a concern for valuation at all.
In other words, thanks to an overflooding of the market and loose regulations, the SPAC Revolution led to a SPAC Bubble.
That SPAC Bubble has burst in 2021, as rising Treasury yields and fears of inflation have quelled animal spirits and put a damper on growth-related investments.
Since mid-February, the Defiance NextGen SPAC IPO ETF (SPAK) has dropped 15%. Many of individual SPACs have dropped 20%, 30%, or more.
Many investors are taking this SPAC Bubble bursting as a signal to avoid SPACs.
But, if anything, it’s the opposite. Now is the time to buy high-quality SPACs, just as 2001 – right after the dot-com bubble bursting – was the time to buy internet stocks.
Two Big Reasons to Buy SPAC Stocks Today
- SPACs = IPO 2.0. SPACs are the future. IPOs will become obsolete. That’s because IPOs have simply too many middle-men and too many profit-takers. They’re highly inefficient. They’re slow. And they eat up a lot of money that doesn’t need to be eaten up. SPACs fix all of those problems, by streamlining the public listing process. They remove the middle-men. They remove the profit-takers. And so, they’re fast, cheap, and easy. They just need more regulation to avoid “bad actors”. Once we get better regulation – and we will, soon – then SPACs will be better than IPOs in every single way. They will inevitably become the standard for going public.
- Some of the most innovative world-changers have gone public through a SPAC merger. When I look at the SPAC market, I see a lot of questionable companies. I also see some of the most innovative companies in the world – companies that are fundamentally changing the way we live and the way the world works. Those companies are great long-term investments.
So, yes, there is a SPAC bubble. Yes, that bubble is bursting. But, no, this is not the time to run away from SPACs.
Much like 2001 was the year to buy-and-hold high-quality internet stocks, 2021 is the year to buy-and-hold high-quality SPACs.
Which SPACs am I referring to? Consider this list of 10 of my favorite SPACs to buy right now amid the SPAC selloff:
- QuantumScape (NYSE:QS), a battery manufacturer that is lightyears ahead of everyone else when it comes to making solid-state automotive batteries that could create a new class of EVs that can drive for thousands of miles.
- Luminar (NASDAQ:LAZR), a self-driving technology company that is making the world’s most capable and affordable LiDAR sensors, that could one day be outfitted on almost every car on the road.
- DraftKings, an online sports betting titan that is the unrivaled leader in the burgeoning iGaming market.
- Virgin Galactic, a space tourism company that will one day be flying thousands of people into space every single year.
- Desktop Metal (NYSE:DM), a revolutionary 3D printing company whose breakthrough Single Pass Jetting technology is the key to making 3D printers useful on factory floors.
- Canoo (NASDAQ:GOEV), the most innovative electric vehicle company that has created a proprietary, modular EV skateboard platform which could represent the future of car designs.
- Berkshire Grey (NASDAQ:RAAC), a small technology company creating advanced AI-powered robotic solutions to automate warehouse operations.
- Momentus (NASDAQ:SRAC), a space technology company whose breakthrough water propulsion platform represents the future of how we will move things in space.
- Stem (NYSE:STPK), an energy storage company with an AI-powered energy management solution that will unlock a new era of intelligent energy management.
While this list reveals nine of my top SPAC stocks, which will score investors big returns, it doesn’t reveal the best SPAC stock to buy today.
My 10th pick — the best SPAC to buy right now — is a company that reminds me of a young Amazon. And it’s worthy of a sperate introduction, as I think buying this stock today could be like buying AMZN stock back in 1997 … before it soared thousands of percent.
Which stock am I talking about?
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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