Is the SPAC Bubble Over?

Is the SPAC bubble over? As the SEC cracks down on SPACs it looks like this way of going public is over. Before I get into things, let’s do a quick review of what a SPAC actually is. A SPAC is a merger between a private company and a publicly traded shell company. The acronym SPAC stands for Special Purpose Acquisition Company. This is the entity in the merger that trades publicly under a ticker symbol. When investors buy shares of the SPAC company, they are essentially funding the private company to go public. Rather than raising investments through numerous rounds of private equity, SPACs also raise money through public investment. 

What Is a SPAC Stock?

SPAC stocks generally trade around a pre-merger NAV or Net Asset Value price of $10.00.

This is the price of the SPAC shares when they first go public.

Of course, as we’ve seen SPAC stocks can go well below or well above the $10.00 mark.

After they merge and go public, they can also trade anywhere on the map, although it has typically been well below the $10.00 price level. 

A SPAC merger is an alternative way for a private company to go public.

In the past it has had less regulation and red tape than an IPO or Direct Listing, which has made it a popular way for smaller companies to raise vast amounts of capital in a short period of time.

But as we now know, regulation exists for a reason. In 2021, there were 613 SPAC IPOs, up from just 248 in 2020. In 2022, those numbers are way down again, so we can see that 2021 really was the peak of this bubble. So what happened in 2021 and is the SPAC bubble over? Let’s take a deeper look.

Is the SPAC Bubble Over: SEC Regulation for SPACs

Is the SPAC bubble over? The SEC has been stepping up its regulations on SPAC mergers, which is likely the single most important reason why they are no longer as popular.

Specifically, the SEC is putting more of the liability on the underwriters of the IPO. This means that private companies will have to be more forthright and honest in their investor presentations.

It also means it should contain the sky-high revenue projections most of them were using to lure investors in. It might not be a perfect system, but increased regulations might be the only way to protect investors. 

Is the SPAC Bubble Over and Are All SPAC Companies Bad?

Of course not! There are some companies which I’ll touch on later that are great investments.

But for the most part, a lot of these SPAC mergers are now trading for just a few dollars per share. Is the SPAC bubble over?

Sure, the 2022 market correction has been especially hard on the SPAC sector.

Most of these companies are not profitable and some are even pre-revenue.

The ongoing bear market has punished companies that have almost no cash flow and minimal product line.

Does that mean these are terrible companies to invest in? Absolutely not. It’s just been a systematic rotation out of these high growth stocks in a completely risk-off environment. Is the SPAC bubble over?

Many traders get confused between a poorly performing stock and a poorly performing company. In this current environment, there are tons of great companies that have had poor performing stocks.

Just look at stocks like Alphabet (NASDAQ: GOOGL) or Microsoft (NASDAQ: MSFT). I would say those are two of the best stocks you can own. But year to date, both stocks are down by over 26%.

These are two great companies but their stocks are just not performing well right now and that’s okay. Owning great companies for the long-term has been proven to be the safest investing style there is.

So yeah, you’re going to see a lot of SPAC stocks trading down 50% or even 70% this year. But what’s more likely? Every company that went public via a SPAC is terrible? Or is the market moving away from early growth companies? I’d say the latter, so it’s up to you to  be able to do your research and find the hidden gems.

SPAC Companies Going Bankrupt

Yes, unfortunately for those who were invested in these companies, a few have now gone bankrupt.

Perhaps even more shocking is that they went bankrupt just a year after going public.

SPAC companies are usually early-stage and offer a lot of risk.

They aren’t the safe investments many people thought they were in 2021. 

Is the SPAC bubble over? Recently, two electric vehicle startups have made headlines by filing or almost filing for bankruptcy. First, Lordstown Motors (NASDAQ: RIDE) nearly went bankrupt but were saved by a last minute buyout from Taiwanese company Foxconn.

More recently, Electric Last Mile Solutions (NASDAQ: ELMS) officially filed for bankruptcy. The ELMS stock lost nearly 70% in one day and is currently trading at less than $0.20 per share. That is how quickly these bankruptcies can happen. 

It was just last year when investors were piling money into SPAC stocks, hoping to hit it big. The EV sector saw this as an incredible way to raise capital. But we’ve seen how disappointing a lot of these companies have been.

Remember the electric truck maker Nikola (NASDAQ: NKLA)? The CEO Trevor Milton was alleged to have fraudulently created videos of trucks rolling down hills to sell to investors.

It’s been two years since Nikola went public, and it still doesn’t have any vehicles on the road. The stock, which peaked at $79.73 shortly after it went public, is now trading for about $5.00 per share. 

Are there any Good SPAC Stocks?

Of course! It might not seem like it now but there are some SPAC stocks that look promising and some that are even established companies now. Is the SPAC bubble over?

Remember, just because the stocks have been doing poorly, it doesn’t mean they will forever. Some of these stocks might just be trading at discounts of a lifetime! Here are some of the better pre-SPAC and post-SPAC stocks to check out.

SoFi (NASDAQ: SOFI)

SoFi is an online, personal finance company that offers loans, stock trading, and personal banking. The name is derived from the term Social Finance as the company tries to break down the barriers of traditional banking.

SoFi was brought public via a SPAC by venture capitalist Chamath Palihapitaya through the ticker symbol IPOF. While the stock did well at first, it has been hit by the current weakness in fintech stocks as well as the government’s decision to give student loan forgiveness to students. Is the SPAC bubble over?

Is SoFi’s stock dead in the water? Absolutely not! If you check the charts, it’s down 62% so far this year. Two of its biggest rivals in PayPal (NASDAQ: PYPL) and Block (NYSE: SQ) are also down by 63% this year. Most stocks trade down with the sector they are in so identify the strong companies that will bounce back in the future!

Lucid (NASDAQ: LCID)

Ah Lucid. The “Tesla Killer” hasn’t really been much of a challenge for Elon Musk’s company. Lucid got off to a hot start and hit an all-time high price of nearly $60 per share as its pre-merger stock, CCIV.

Currently, it’s trading at just above $16.00 per share. Lucid has had some progress as a company, as it prepares to build its second production facility in Saudi Arabia.

But a series of recalls has put a negative sentiment around Lucid’s high-end models. This is especially true given the fact that they were not able to fix the issues with an online software update like Tesla does. 

DraftKings (NASDAQ: DKNG)

DraftKings was actually an early SPAC merger, before the big rush in 2021. As the sports betting industry flourished with new legalization in multiple states across America, DraftKings saw its stock surge to an all-time high price of nearly $72.00 per share. Its stock is now trading at just above $11.00 per share.

It has been a tough road down for DraftKings stock holders, but there is some solace. Companies like Walt Disney (NYSE:DIS) have a major stake in DraftKings, and that’s always a positive sign for companies.

If it is able to leverage Disney’s sports broadcasts then there is a path back to relevance. Sports betting might take a dip during the recession, but it is an addictive form of entertainment. There will always be sports, and there will always be sports bettors.

Gores Guggenheim Inc (NASDAQ: GGPI)

Here is a pre-SPAC stock to keep an eye on. Gores Guggenheim is set to merge with the electric vehicle company Polestar later this year. I know, we just went through a bunch of EV startups that went bankrupt.

But Polestar isn’t a startup! It is already selling vehicles in Europe and has the backing of Volvo and Geely Motors as well. Polestar is targeting a US launch in the fall of 2022, and already has several models in development. 

Is the SPAC Bubble Over Final Thoughts

Is the SPAC bubble over? For now, it seems unlikely that SPACs will ever be as popular as they were in 2021. Increased regulation from the SEC has cut down on the questionable companies going public.

Furthermore, a slew of poorly performing post-merger stocks have put a damper on the entire industry. Some of these companies will end up being great bargains five or ten years from now. As always, before you invest in these cheap stocks, make sure you do your due diligence into the business. 

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