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Technology Stocks : Blank Check IPOs (SPACS)

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From: Glenn Petersen3/15/2021 9:42:06 PM
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Opinion: The Tesla bubble: Bets on electric cars and the rise of SPACs have led to a new version of the dot-com boom

Last Updated: March 15, 2021 at 4:33 p.m. ETFirst
Published: March 15, 2021 at 3:25 p.m. ET
By Therese Poletti

Investors take on the role of venture capitalists as they look for the next big thing, overvaluing young companies years before they could even begin to show the type of returns that would validate the valuation — sound familiar?

In the 1990s, after seeing young tech stocks surge, investors wildly bet on young companies with little to no revenue on promises that a huge sea change was on the horizon for the global economy.

In the 2020s, something similar is happening: Young electric-vehicle and autonomous-vehicle stocks have been surging following the meteoric rise of Tesla Inc. TSLA, +2.05% and Chinese rivals like Nio Inc. NIO, -1.25%, even though a fully electrified future for the automotive industry is years, or even decades, away.

This current unique bubble has been forming from a combination of a lot of cash looking for a home; the record number of special-purpose acquisition companies, or SPACs, going public; and investors looking for the next Tesla.
The most crucial ingredient in that recipe is blank-check companies focused on buying electric-vehicle makers, which give both seasoned institutional and individual investors the chance to role-play as venture capitalists.

“SPAC investors have been much more willing to speculate with the aim of buying ‘the next Tesla,'” said Matt Kennedy, senior IPO market strategist at Renaissance Capital, adding that the soaring returns in SPAC-land have attracted institutional buyers as well.

Some air may be leaking from the bubble, though. Tesla’s shares succumbed to the law of gravity in late February and early March, tumbling from their stratospheric heights and losing a stunning $277 billion in market value in a month. Those losses reversed, however, and as of Monday Tesla was worth basically the same as at the end of 2020 — eight times its valuation at the beginning of last year. Chinese rivals such as Nio, Li Auto Inc. LI, +0.82% and Xpeng Inc. XPEV, +0.63% were still down on the year, but had also bounced back from lows.

SPACs have continued to show rampant speculation throughout, as investors looked for the types of gains those stocks enjoyed in 2020.

“I think the electric-vehicle space is something where investors are chasing past returns,” said University of Florida Professor Jay Ritter, who has both invested in SPACs and shorted Tesla shares of late. “As with all bubbles, it’s hard to know where the turning point is going to be.”

Two cautionary examples of EV hype

Two EV companies are good examples of the caution needed by investors and the problems that exist in these early-stage ventures. Nikola Corp. NKLA, +0.24% was one of the early EV makers to get swept up and purchased by a SPAC, which then attracted an army of investors who drove prices sky high. But a short seller, Hindenburg Research, helped deflate that bubble. In September, Hindenburg published a detailed report, calling Nikola an “intricate fraud” and pointed out the company staged a deceiving video of a truck running on its hydrogen fuel-cell technology, when it was actually filmed slowly rolling down a hill, not running on its own power.

Nikola, which surged to a peak of around $66 last July, before Hindenburg’s report, closed at $15.85 Tuesday.

While Nikola could be in the vaporware camp, Lucid Motors Inc., is another story. It is seen as a legitimate potential Tesla rival, based in Newark, Calif., not far from Tesla’s Silicon Valley manufacturing site in Fremont. Lucid was founded by Peter Rawlinson, the chief engineer of the Tesla Model S, and is developing an electric luxury sedan that is expected to launch this year, as well as an electric SUV.

The mania around SPACs struck Lucid as well. After news leaked in January that Lucid was about to be acquired by a SPAC called Churchill Capital Group CCIV, +7.17%, shares in the SPAC surged to unreasonable levels as speculators jumped in. When the merger was actually announced in late February, it included an investment from Wall Street that valued the company far less than the public had, and its shares plunged.

There could be plenty more pain for speculators looking to get in on EV companies. In January alone, according to Dealogic, 90 SPACs filed to go public. While only a handful of those companies actually said they plan to focus on electric vehicles or batteries, many did not identify a target industry or market for acquisitions but did mention a sustainable focus — for example, Switchback II SWBK.UT, -1.03% of Dallas, which raised $275 million in its January IPO, said it intends to focus on companies in the “broad energy transition or sustainability arena targeting industries that require innovative solutions to decarbonize in order to meet critical emission reduction objectives.”

“Never underestimate the market’s ability to find products for people who have money. The market has more money than product right now. The shelf of near-ready IPOs was pretty bare, and laid more barren with COVID-19,” said Scott Galloway, a professor of marketing at New York University’s Stern School of Business, in an interview late last year. “So all of a sudden, there is good money looking for public companies. It’s incredible how fast this submarket has reformed around SPACS.”

Typical IPO buyers like Fidelity and Franklin Templeton are making large investments in SPACs through private investment in public equities, or PIPEs, the type of investment that pumped into Lucid as its SPAC traded much higher.

SPACs represent an unusual investment opportunity, because they take place in two phases. In the first phase, the blank-check company raises money in its IPO, the pre-acquisition phase, which can offer investors a good return. They also offer investors the ability to exit, with original funds intact, if a proposed acquisition is not to the liking of the investors.

So far investors have had an excellent run in SPACs in general, especially hedge funds, or the SPAC mafia, Ritter said. According to Dealogic, a total of 262 blank-check companies went public in U.S. markets in 2020, with a current average performance of 21.3% for those 2020 deals. So far for 2021 IPO SPACs, though, the current average performance is 1.95%.

Ritter was so impressed with the returns that he invested in a few SPACs himself in the aftermarket, after seeing his funds in an investment account earn barely anything in interest.

“There is investor enthusiasm. Even though supply has been exploding, investor demand has been growing even faster,” Ritter said, adding that most of the electric-vehicle companies have chosen to go public via a SPAC and not the standard, more costly, IPO process.

SPACs are typically a better investment in the pre-acquisition phase
, which can go as long as two years, the time limit set for companies to make an acquisition. Only early investors, though, are often able to receive the biggest security for their investment in SPACs. They usually receive a warrant with each share of the IPO, that entitles them to buy a share at a prearranged price. Public investors in the aftermarket deal don’t get this option, which is why hedge funds have zeroed in on SPACs as a sure thing.

Ritter noted that even though he drives a Tesla himself, he has been short the stock.

“When it got added to the S&P 500, I shorted more shares. So far it’s been a wealth-losing activity for me,” Ritter said, adding that he also believes many investors are hoping for a repeat performance of Tesla. “Investors tend to chase past returns. Fifteen years ago it was investing in real estate, which ended badly; 21 years ago the internet bubble was about to peak.”

EV SPACs as the new dot-com bubble

Just as the dot-com boom and bust of 1999-2000 was often compared with the tulip mania in the 17th century of the then-Dutch Republic, it is worth asking the same question about some of the different bubbles in the market today, from the GameStop Corp. GME, -16.77% insanity to the electric-vehicle hype.

During both the tulip boom and the dot-com boom, new and relatively unknown products were introduced, and prices (in futures contracts for tulips, stock prices for dot-com companies) reached staggering levels based on hype for potential demand that was not sustainable. Many companies like and Webvan ultimately collapsed, with business ideas that were ahead of their time, while others took advantage of the market mania, such as WorldCom, which deceived investors with one of the biggest accounting frauds in history. Others survived and thrived, such as Inc. AMZN, -0.25%, which has soared to unbelievable heights of over $1.6 trillion in market value.

As the global automotive industry goes through a similar seismic shift, investors are banking on a similar phenomenon, but with electric cars, and autonomous vehicles replacing gas-fueled combustion engines. This includes companies in China, where another crop of EV companies seek to unseat Tesla in the most populated country in the world. Currently, though, electric cars currently make up only approximately 2% of global auto sales. Estimates for the future vary broadly, from a low-end forecast of 10% to 20% of cars sold by 2030 to as much as two-thirds of the market in the same time frame.
With those predicted changes on the horizon, combined with Tesla’s gigantic stock gains in 2020, including its addition to the S&P 500 SPX, +0.65%, have led to some crazy bets on unproven or early-stage technologies once again.

In 2020, 15 private electric-vehicle companies were purchased by blank-check companies and are now publicly traded, according to Renaissance Capital, which tracks IPOS and has its own IPO ETF IPOS, -0.69%. But most of them don’t have a proven technology or business model, little or no revenue and no profits in sight.

“While this is an area with enormous potential, many of these companies are completely unproven, and investors have very little to go on in terms of their ability to win customers or scale manufacturing,” said Kennedy of Renaissance Capital.

The U.S. EV targets of the blank check companies, such as Nikola, Lucid and Fisker Inc. FSR, -1.96%, an electric-car startup in Los Angeles, have not manufactured a single electric vehicle for sale, or collected any revenue yet. But their market caps have soared, and the companies are promising huge gains in revenue in a short time period.

These stocks have not traded on profit or revenue, but on pure speculation. Fisker saw its shares soar nearly 40% after a memo of understanding with Foxconn Technology Group 2354, 0.14%, the manufacturer of Apple Inc.’s AAPL, +2.45% iPhones, to jointly produce more than 250,000 electric SUVs, possibly at FoxConn’s new factory in Wisconsin. The deal is for Fisker’s second model, and manufacturing would begin at the end of 2023, as it adopts a sort of Uber-like approach to contracting out high costs.

The history of Fisker shows why investors should be concerned. The original company, Fisker Automotive, went bankrupt in 2013, and its assets were purchased by a Chinese auto-parts company that has retained some brand rights and started up Fisker Inc. while saying goodbye to the founder who gave the company its name. Fisker’s first product, an electric SUV called the Ocean, is expected to be launched in late 2022.

These are the types of investments that are more appropriate for venture capitalists, who are used to betting on companies without revenue or profits or even a product. The list of companies targeted by SPACs looking at the EV market or the sustainable-energy arena also includes companies making electric batteries, charging-station makers, and other components for EVs and AVs, such as Lidar.

Velodyne Lidar Inc., VLDR, +9.88% makes technology that is used as part of the vision system in autonomous vehicles, and is now in the middle of a post-SPAC war. David Hall, who founded the Morgan Hill, Calif.-based company, and his wife are sparring with the investors who purchased Velodyne Lidar, and took the company public via a SPAC late last year. But since then, the Halls and Velodyne’s acquirers had a falling out.

Last month, the company named a new chairman and chief marketing officer following an investigation into the conduct of David Hall and Marta Thoma Hall, who held those positions, respectively, and terminated Marta Hall’s employment.

“The investigation concluded that Mr. Hall and Ms. Hall each behaved inappropriately with regard to board and company processes, and failed to operate with respect, honesty, integrity, and candor in their dealings with company officers and directors,” Velodyne said in a statement and regulatory filing in late February.

The two remain directors of the company that ousted them, as well as majority owners, with a 58.4% ownership of common stock in Velodyne.

“To be completely clear: I chose to resign from the board because I had numerous concerns about the strategic direction and current leadership of Velodyne Lidar,” David Hall said in a statement last week. “I firmly believe that the board has fostered an anti-stockholder culture and that Velodyne Lidar’s corporate governance is broken. Perhaps most unsettling was the board’s decision to rubber-stamp an increased compensation package for Mr. [Anand] Gopalan despite the Company releasing weak Q4 2020 earnings and missing year-end forecasts.”

Gopalan is Veloydyne’s chief executive.

A few weeks ago, Hall told The Wall Street Journal that the moves were a “well-played-out plan to hijack the corporation by the SPAC guys.” The Halls were not immediately available for an interview, their spokesman said.

The Velodyne saga is one that can often happen at startup companies that are not yet ready for prime time, when entrenched founders spar with their investors. One high-profile example that did made its way into the press in recent years was when VC investors pushed for the ouster of co-founder Travis Kalanick at Uber Technologies UBER, -0.27%, long before the company went public.

So while SPACs may represent the democratization of venture-capital investing, where average retail investors have a more even playing field with Silicon Valley venture capitalists, getting in at the very early stages of young companies, it is also the democratizing the huge amounts of risk that are typically borne by professional investors. But unlike venture capitalists, who spread out their investments across a group of at least 10 various young or high-risk companies, knowing that most will fail as they hope to hit one big winner, individuals have a lot more to lose.

“The SPACs we are seeing now are focused on somewhat VC-like companies. Many of these companies don’t have revenue, they don’t have positive cash flow or earnings. It’s kind of like a VC in a liquid form, via a SPAC,” said Robert Davis, a partner and chief investment officer of Round Table Wealth Management. “Not all these SPACs are going to be great.”

There is a lot of risk in many of these deals, especially in the “pre-revenue” bunch.

“This is a little bit like in the Middle Ages, alchemists would take base metal and turn it into gold,” said Sandeep Dahiya, associate professor of entrepreneurship at Georgetown’s McDonough School of Business. “SPACs are like that: ‘Here, give us your money and we will try to make you rich.’ Let’s see how that plays out.”

For most investors, especially the average retail investor who did not get in early like the hedge funds, it will likely not end well in the short term. Anyone who is betting on long-term returns will need to choose wisely, and be wary of the SPAC flavor of the day.

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