SPAC Stocks

What Are SPAC Stocks?

9 min read

The SPAC stocks craze has tailed off since the peak in 2021 when it seemed like there were new mergers every day. But there are still plenty of companies that are choosing to go public via a SPAC merger. So aside from being a funny-sounding word, what exactly does SPAC stand for? SPAC is an acronym for Special Purpose Acquisition Company. It is a vehicle to bring private companies to the public market. The private company merges with the SPAC company to create the new publicly traded entity.  Is there a SPAC stock we should look at?

Chart by TradingView.

So how exactly does this work? The SPAC or shell company is used to raise funds by selling shares to investors. There is also a round of private investors who want to get in below the ground floor.

Once the entity has raised enough funding through both the public and private markets, it can choose a date to start trading as a stock. Last year we saw a record number of companies go public via a SPAC merger with 613.

It is still a viable method for private companies to go public, but as I’ll discuss later, there can be some speed bumps along the way. 

Although SPAC stocks have seemly slowed down in 2022, there are still many companies that can go public. As a result, we could see more of these types of stocks coming in the future.

Remember, the trend is your friend. So make sure if you’re going to trade a SPAC stock, that you place the trade once a trend is established. Trying to guess will get you into trouble.

What Is a PIPE Investor?

When talking about SPAC mergers, you’ll often hear about a PIPE investor. It’s easy to be confused with all of these different acronyms. PIPE stands for Private Investment into Public Equity.

This is actually not specific to SPAC mergers but plays an important role in bringing the company public. PIPE investors raise a bulk of the initial capital for the company and make it easier to list on the public market. 

Who are PIPE investors? Usually private equity firms or even wealthy individuals who believe in the company. There has been some controversy about the way in which these private companies present the opportunity to PIPE investors. Evidently, these presentations are not always regulated, so some companies were artificially enhancing their numbers. 

Another important thing to know about PIPE investors is there is a PIPE lockup expiration date. PIPE investors are locked into their investments until a certain date, usually, six months after the company goes public. This can be a volatile time period for the stock price, as there can be a large amount of selling. 

What Is the NAV Price?

This is another common acronym that is used by the market for SPAC mergers. The NAV stands for the Net Asset Value. For SPAC stocks, the company raises capital at a price of $10 per share. That is why you commonly see pre-merger SPAC stocks trading for around that $10 mark. After the merger, the stock does not need to adhere to that $10 floor price, as we have seen with many of the SPAC stocks from last year. 

How Else Can a Company Go Public?

Before the SPAC outburst in 2021, this method was actually quite uncommon for companies to use. You could say that venture capitalist Chamath Palihapitiya was one of the catalysts as he organized several SPAC mergers. Other well-known investors like Bill Ackman also brought companies public through SPACs. But even though there were 613 SPAC mergers in 2021, there were still a record 968 traditional IPOs as well. 

Initial Public Offering (IPO)

Still the most common method for private companies to reach the public markets. An IPO is the issuance of new shares to public investors. The price of these shares is set by investment banks which gauge the demand for the company’s stock. IPOs are important events for companies, as it allows them to raise capital to further build their business. It can also be a time to reward early private investors and executives of the company. An IPO is still arguably the preferred method of going public and is always an exciting first day for investors. 

Direct Listing

Some companies will choose to go public via a direct listing instead. In a direct listing, there is no underwriter to create the price for the stock. There are also no new shares created like in an IPO.

A direct listing is the sale of existing private shares of the company. Public investors are essentially buying those shares from insiders of the company, rather than the bank. Is there a better method?

It’s hard to say. Direct listing offerings are normally cheaper than IPO pricing, and the company can save some money in not hiring an underwriter. 

This could be a more economical way of going public for investors also. We like saving money when we’re going to buy a stock.

And direct listings take out some of the extras.

What Is A Good SPAC Stock?

Of course, a good stock is always a subjective answer. What is a good company to one investor isn’t necessarily going to be good for another. With that being said there are some companies that are clearly doing better than others at this point. Here are some post-merger SPAC stocks to add to your watchlist.

SPAC Stock DraftKings (NASDAQ: DKNG)

DraftKings went public via a SPAC in April of 2020 before the major SPAC rush in 2021. The company is one of the major players in the sports betting industry, and has official partnerships with the MLB, NFL, NHL, NBA, and numerous other professional sports leagues. DraftKings is also one of the leaders of the daily fantasy sports industry, which is legal across most of the US. Majority owners in DraftKings include the Walt Disney Company and Vince McMahon of the WWE. 

Lucid Group (NASDAQ: LCID)

Dubbed early on as the ‘Tesla-killer’, Lucid went public via a SPAC merger in July of 2021. The luxury EV-maker is run by current CEO, Peter Rawlinson, who is a former executive and engineer with Tesla. The stock was picked up by the Reddit community and saw some major volatility even before Lucid went public.

Lucid has since officially delivered its first few hundred Air Sedan vehicles at the end of 2021. The stock has come under some criticism as the company has a $50 billion market cap despite minimal revenues. In late 2021, the Air Sedan won the MotorTrend 2022 Car of the Year award. 

SPAC Stock SoFi Technologies (NASDAQ: SOFI)

You might recognize the name SoFi when you watch the Super Bowl later this month. The company has the exclusive naming rights to the new Los Angeles NFL stadium and has been working hard to prove its legitimacy. SoFi stands for Social Finance, and is a financial technology company that helps users with its products and services. It also recently acquired a national bank charter, which will help beef up its loans and credit segments. SoFi is probably the most successful SPAC merger that Chamath has brought to the public markets. 

Is There a Bad SPAC Stock?

I will preface this by saying that almost every post-merger SPAC stock has been beaten down by the recent growth sell off. Quite a few of them are trading well below $10 per share right now, so there were a lot of choices for this list. These two stand out above all the rest right now though, and I think you will agree.

Nikola Motors (NASDAQ :NKLA)

Nikola came public via a SPAC merger in June of 2020, and took its shareholders for a roller coaster ride. The clean energy truck maker took advantage of the frothy market for EV stocks at the time.

Just  a few days after it went public, Nikola’s stock surged to an all-time high price of $93.99 per share. Just two months later in September, Nikola was at the center of allegations of being a fraudulent company.

This is when the infamous video of Nikola rolling its trucks down the hill took place. Founder Trevor Milton was ousted from the company, and the stock has steadily fallen to its current levels in the single digits. 

Lordstown Motors (NASDAQ: RIDE)

Another EV-maker who went public through a SPAC merger, Lordstown Motors followed a similar path to Nikola. Lordstown took over a former General Motors production plant to build its next generation electric pickup trucks. Just eight months after it went public in June of 2020, the company was at risk of bankruptcy. It reported to the SEC that it did not have enough money to start production of its vehicles. One week later, the CEO and CFO resigned on the same day. The stock peaked above $30 per share, and is now trading at just above $3.00 per share, with a market cap of just $600 million. 

Is A SPAC Stock a Good Investment?

At this current point in time, it’s difficult to make an argument for SPAC stocks in general. Aside from the few strong companies, a majority of them are trading well below $10 per share. On top of that several have been accused of fraudulent activity and not even being able to sell a product. Of course, like anything in investing we cannot paint the entire SPAC sector with the same brush. But in my opinion, there has been enough controversy with these mergers that it’s not worth risking your money on. As always, do your due diligence and research on any stock or company you want to invest in.

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