Is the SPAC bubble over? As the SEC cracks down on SPACs, this way of going public is over. Before I get into things, let’s quickly review what a SPAC is. A SPAC is a merger between private and publicly traded shell companies. The acronym SPAC stands for Special Purpose Acquisition Company. This entity in the merger 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.
Table of Contents
- What Is a SPAC Stock?
- Is the SPAC Bubble Over: SEC Regulation for SPACs
- Is the SPAC Bubble Over and Are All SPAC Companies Bad?
- SPAC Companies Going Bankrupt
- Are there any Good SPAC Stocks?
- SoFi (NASDAQ: SOFI)
- Lucid (NASDAQ: LCID)
- DraftKings (NASDAQ: DKNG)
- Gores Guggenheim Inc (NASDAQ: GGPI)
- Is the SPAC Bubble Over Final Thoughts
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 trade anywhere on the map, although it has typically been well below the $10.00 price.
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 quickly.
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 were way down again, so we can see that 2021 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 that I’ll touch on later that are great investments.
But for the most part, many SPAC mergers are trading for just a few dollars per share. So is the SPAC bubble over?
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 with almost no cash flow and minimal product lines.
Does that mean these are terrible companies to invest in? Not. It’s been a systematic rotation out of these high-growth stocks in a risk-free environment. So is the SPAC bubble over?
Many traders confuse a poorly performing stock and a poorly performing company. But unfortunately, tons of great companies have had poor-performing stocks in this current environment.
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 not performing well right now, which is okay. Owning great companies for the long term has been proven to be the safest investing style there is.
So yeah, you’ll 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 risks.
They aren’t the safe investments many people thought they were in 2021.
Is the SPAC bubble over? Two electric vehicle startups have recently 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.
Electric Last Mile Solutions (NASDAQ: ELMS) recently officially filed for bankruptcy. The ELMS stock lost nearly 70% in one day and is trading at less than $0.20 per share. That is how quickly these bankruptcies can happen.
Last year, 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, allegedly fraudulently created videos of trucks rolling down hills to sell to investors.
It’s been two years since Nikola went public, and he still has no 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 some SPAC stocks look promising, and some are established companies. So is the SPAC bubble over?
Remember, just because the stocks have been doing poorly doesn’t mean they will last 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 IPOF ticker. While the stock did well at first, it has been hit by the current weakness in fintech stocks and the government’s decision to give student loan forgiveness to students. So is the SPAC bubble over?
Is SoFi’s stock dead in the water? Not! If you check the charts, it’s down 62% this year. Two of its biggest rivals PayPal (NASDAQ: PYPL) and Block (NYSE: SQ), are also down by 63% this year. Most stocks trade down with their sector, so identify the strong companies that will bounce back in the future!
Lucid (NASDAQ: LCID)
Ah, Lucid. The “Tesla Killer” hasn’t been much of a challenge for Elon Musk‘s company. Nevertheless, 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. However, lucid has progressed as a company preparing 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 that they could not fix the issues with an online software update as Tesla does.
DraftKings (NASDAQ: DKNG)
DraftKings was 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 stockholders, but there is some solace. First, companies like Walt Disney (NYSE: DIS) have a major stake in DraftKings, and that’s always a positive sign for companies.
If it can 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 several 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. 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 questionable companies going public.
Furthermore, many poorly performing post-merger stocks have damaged the entire industry. As a result, some companies will be great bargains five or ten years from now. Before investing in these cheap stocks, do your due diligence in the business.