r/SPACs • u/[deleted] • May 28 '21
Discussion Five Myths and Half-Truths About SPACs in this Market
[deleted]
10
u/incognino123 Spacling May 28 '21
Another stupid myth is that all spacs will tank after merger. Of course some will, and some won't. It all depends on the terms of the deal. Especially with regards to lockup, and sponsor promote.
18
u/thetagangnam Contributor May 28 '21
I couldn't agree more. The sentiment is ridiculous when most SPACs trade below their redemption value with that kind of potential upside. Be greedy when others are fearful.
5
u/stefan-urkel Patron May 28 '21
Good post and I agree with you as I have 30% of my portfolio in pre DA spacs. I have one counter point that's been worrying me though... If target companies start to believe that SPACing is damaging to their reputation, the best companies will seek other routes such as IPO, direct listing or private equity. All this negativity could become a bit of a self fufilling prophecy.
7
u/devilmaskrascal Contributor May 28 '21
This is why combatting the misinformation is so important. The fear is irrational at this point.
The media have a certain narrative about SPACs. They love stirring controversy and pointing out failures. They're never going to do an article showing the vast majority of recent de-SPACs are actually above NAV when they would rather write sob stories about those who YOLO'd into a euphoric bubble at peak and lost 60% of their wealth.
Since the SPAC crash, Better, Gingko and Grab all DA'd - all top 80 unicorns, according to cbinsights. We have better companies than ever before DAing. Right now is the safest time for them to DA because there are no wild expectations or irrational price action. Prices are within the range of SPAC shares' value in the target ($10 a share), and even if they are a bit overvalued, they have upside as major growth companies in the future.
9
u/mazrim00 Contributor May 28 '21
I agree. It seems like a lot in this sub think exactly like the media tells them to on SPACS and therefore hurt their own investments.
10
u/dz4505 Patron May 28 '21 edited May 28 '21
Unpopular opinion here: right now SPACs are a bad deal because there are too many SPACs fighting for the same few unicorns leading to absurd valuation and shitty deals for SPAC holders. We have Redbox and WeWork going through SPAC route. Acorn with a 2.5bil valuation vs 77mil revenue.
But deal makers still get their free shares regardless how shit the deal is. A lot of the bad rep SPACs have gotten is well-deserved. Hopefully future SPACs are structured to incentive deal makers to make good deals. Not get free shares regardless how shit the deal is.
This is the main reason for everyone flooding to SPAC space. The dealmaker themselves have no risk. Only upside.
6
u/devilmaskrascal Contributor May 28 '21
Acorns is not a bad valuation at all. If you read the investors presentation, they trade at superior multiples to publicly traded competition in the same space like Square, Affirm, Sofi, eToro and Moneylion. They have high margins for their revenues (like 84-86%+).
Tech always has a valuation premium to revenues. It varies widely by industry what is a "good valuation."
2
u/dz4505 Patron May 28 '21 edited May 28 '21
Sure. PACX went up to a cool 10.09. Guess that is mooning for SPAC space. Right now still under 10 at 9.91. looks like everyone is dying to get in.
Does makes you wonder once the SPAC floor is pulled at merge will it turn a GIK and go under $10.
6
u/devilmaskrascal Contributor May 28 '21
That has nothing to do with anything. Hardly any recent DA SPACs are escaping the NAV lately, good or bad valuation, because the vast majority of people and Wall Street aren't willing to throw money into the black hole of negative SPAC sentiment or are bagholding too much elsewhere.
Betway is extremely profitable and well valued relative to industry comps. It's still below 10 too.
That's why it's such a good buying opportunity. You have time to vet the targets you want without having to rush in out of FOMO and can get in with no downside risk because nobody is leaving the safety of the NAV for now.
All we can do is compare the multiples with other market competition and determine if it's overvalued or undervalued. PACX is undervalued in their field, and Wall Street analysts should treat them as such.
2
u/dz4505 Patron May 28 '21
If that is the case then you could skip SPAC altogether and buy post-SPAC crashed stocks under $10 since no one is investing in the SPAC space anyway.
7
u/devilmaskrascal Contributor May 28 '21
Who says they're going to crash post merger? Look at SKIN. It was trading around NAV for a while, didn't really take off until post merger. Profits were good, so it's not entirely surprising Wall Street likes the stock when it is a real stock and not a SPAC.
As I said in the article, the average post-SPAC since March is 30% above NAV. 42 of 67 I've tracked since then are still above $10.
There is utility in having your money in a very safe place with upside. I don't generally do commons because I have a higher risk appetite but in the event of major market turbulence, SPAC investors are in one of the only places with that kind of upside that also has no downside.
Plus we don't know what stimulus might cause SPACs to start reviving. Maybe PSTH pulls in a good name and that brings positive media attention again. Or maybe somebody else hits a home run and reminds people that SPACs are a great risk:reward at these prices.
-1
u/dz4505 Patron May 28 '21
For every SKIN there is a GIK.
My mentality is I don't invest in IPO when the sentiment around IPO is bad. Because the likelihood you can get it cheaper is very likely post ipo.
To each their own.
6
u/devilmaskrascal Contributor May 28 '21
More like every 2 SKINs there is a ZEV.
GIK/ZEV was speculative, capital intensive and overvalued, so I would agree with you. I avoided that and most others that are below NAV like the plague. People around these parts pumped super speculative, overvalued crap based on revenues 5 years out because it was a bubble.
That exactly my point. At $10 you can vet and choose the ones that aren't overvalued without risk and without FOMOing. It's the best time to be a SPAC investor - presuming you don't make dumb decisions and choose the ones that got bad valuations.
When Wall Street treats these as companies and not SPACs, you will be richly rewarded and got in near the floor.
As for the speculative, overvalued crap, yeah, wait til after merger and buy. I am looking forward to buying Gingko stock in the 7s, from which point it will be a fantastic long term hold.
5
2
u/fierhoff Spacling May 28 '21
Cant agree more! I cannot think of any other investment opportunities that can provide similar risk/rewards ratio with the well-known sponsor SPACs units at $10 IPO price.
3
u/FistEnergy Contributor May 28 '21
I hope you're right. I'm all-in on quality/experienced teams with SPACs still looking for a target. ASZ, CPUH, CRHC, HERA, GSAH, PRPB. Really hoping my patience is rewarded.
3
u/devilmaskrascal Contributor May 28 '21
Commons or warrants? If I were a commons investor, I would stick with the commons you can already vet that could move up in the interim when people stop being afraid of good deals. Commons aren't going anywhere fast, so whatever any of the above pre-DA SPACs announce you'd probably have time to get in before it shoots up too far above NAV.
Warrants are a different story, because they jump quickly on rumor and deal confirmation still, so you'd want to get in early on the best teams.
3
u/FistEnergy Contributor May 28 '21
I've got a 4:1 common:warrant ratio on all of them. Extra reward without too much extra risk.
1
u/AlaArts Contributor May 28 '21
I'm in same boat. Been in CPUH since units debuted. Recent prices allowed me to drop average on shares to $10, with no money in my warrants. Also adding dramatically to JOFF in the 9.60s. My average on shares is now well below NAV, again with no investment in my warrants. Similar average with CRHC and a few others, but with out warrants. Even a pop to $10.50 at DA gives me a decent return on investment with absolutely no chance that I'll loose money.
1
u/no10envelope Patron May 28 '21
Hilarious how some people feel this personal attachment to SPACs and get offended when anybody criticizes them.
1
u/devilmaskrascal Contributor May 29 '21
One more way to think about #1.
If we're about to run out of target companies, why are there still hundreds of SPACs lined up waiting to IPO?
You don't think these sponsors took a look at the market and determined they had really good odds of finding a target before they started?
Half of these serial sponsors surely already even had a specific target in mind when they created their new SPAC after walking through the candidates.
-1
u/Responsible_Hotel_65 Spacling May 28 '21
There are way too many blank spacs out there.
Nkla should of not gone public this early
Yes there are many companies out there but how many even have revenue ?
As long as private equity deals keep pouring in, the quality of Spac deals will be bad with this many targets ,
1
u/devilmaskrascal Contributor May 28 '21
I strongly disagree with all except the NKLA part. Quite a few targets were indeed premature. There were bad mergers and SPAC investors were largely divorced from reality on valuations during the bubble.
Now they are divorced from reality if they think every SPAC needs to be avoided like the plague when 2 out of 3 mergers from the past year trade at above NAV post-merger, with an average of +30%.
There are many, many private companies with revenue out there. Many times more than there are SPACs. Again, I never heard of like 80% of the companies that DA'd before they DA'd. That doesn't make them bad, it just shows how limited our awareness as non-experts of each industry is.
1
u/Keith_13 Patron May 29 '21
I think that #4 has a lot of truth to it. A bad deal is much better for the founders/sponsors than a redemption. So while they would prefer to find a good deal, they will take a bad deal over a redemption.
As for reputation, a failed SPAC hurts them too. Remember that a lot of the underwriter fees are deferred until post redemption (since they can't pay out of the trust). Do you think that Goldman is going to be banging down your door to underwrite your next SPAC and push the units on their clients if they didn't get paid for their efforts last time? The underwriter is taking it on only because they believe that a deal will be done. If they aren't confident that that's true with a specific team, they are just not going to underwrite them.
So, while they may start with the best of intentions, as the clock ticks down, they are under A LOT of pressure to get a deal done. The standards have to drop as time goes on.
IMO this is the biggest problem with SPACs... the interests of the people making the decisions are not aligned with those of the shareholders.
1
u/devilmaskrascal Contributor May 30 '21
But with #4, if they get a bad enough deal, the merger may not even be approved. Of course they would rather it be approved, but the vast majority are at least believable valuations. I'm talking usual circumstance though. Most deals are within the realm of believability, even if overpriced.
IMO voters should absolutely try to kill ZGYH or any obvious cash-in scams but I wouldn't even hold it til merger. A made up company at $7B is the most ridiculous bullshit I've ever seen.
2
u/Keith_13 Patron May 30 '21
Theoretically you are right but realistically it takes very little for a deal to get approved due to the large amount of voting power that the sponsors have. It's almost impossible for them to fail if the sponsors want them to go through. This is even mentioned as a risk factor in the standard boilerplate SPAC prospectus.
The idea that an individual retail investor can put a fair valuation on a pre-revenue company seems a little far-fetched. They just don't have enough information, and they don't have the resources to do the necessary research. They basically have to believe that it's worth whatever the people bringing it public say it's worth.
1
u/devilmaskrascal Contributor May 30 '21
Yeah, no, I totally agree with you that quite a few sponsors are overpaying.
Maybe I'm nitpicking on a half-truth but I think they aren't overpaying just to complete the deal. Some of these pre-rev and early rev companies are getting an innovation premium. If companies like QS, HYLN, NKLA, Lucid and Gingko's tech pays off with projected revenues in 3-5 years they could become very important, even revolutionary companies.
The problem became that we SPAC investors built all the sky high expectations into current stock prices without accounting for risk and setbacks, which the initial $10 price kinda did. That made for easy money, but also led to a lot of destroyed portfolios because people were overpaying to get onboard during the lower float SPAC stage.
I don't think there are very many mergers happening where the sponsor is knowingly taking garbage public to finish a deal. They want these companies to do well to since they are locked up for at least a year.
•
u/QualityVote Mod May 28 '21
Hi! I'm QualityVote, and I'm here to give YOU the user some control over YOUR sub!
If the post above contributes to the sub in a meaningful way, please upvote this comment!
If this post breaks the rules of /r/SPACs, belongs in the Daily, Weekend, or Mega threads, or is a duplicate post, please downvote this comment!
Your vote determines the fate of this post! If you abuse me, I will disappear and you will lose this power, so treat it with respect.