4 reasons why I just bought this SPAC share
I started buying SPAC stocks. I now have two: Holicity (NASDAQ: HOL) and Nebula Caravel Acquisition Corp. (NASDAQ: NEBC). I love the companies these stocks now represent (Astra and Rover), but I also like this new method that private companies are using to go public.
The process of listing a business through a SPAC, or special purpose acquisition company, is very different from an initial public offering (IPO). And while there are some well-known risks to buying a stock from the moment it goes public, the risk-reward calculation for buying PSPC stocks is not as clearly understood. These unknowns create a level of fear that prevents many people from investing in PSPCs.
I think this environment is a buying opportunity. Investors would be well served to seek out special purpose acquisition companies and make small investments in exciting rule breakers that are going public in this rule-breaking manner. Here are four reasons I buy PSPC stocks and why I bought one in particular.
1. I like the momentum of nothing-for-something
Let me start by saying that investing in a “blank check” business is ridiculous. Here is my attitude when the creation of a PSPC is announced: you annoy me, and your pre-business does not exist.
However – and this is important – my attitude changes completely once the reverse merger that PSPC will undergo is revealed. He went from nothing to something. The stock, which previously represented a worthless non-existence, is now merging with a real business that has income and possibly even profits. Now I’m excited. Now I am careful. Now I could invest.
It is therefore an important factor in PSPC investment. The empty shell of a nothing-burger can become, with the flip of a switch, Astra or Rover or 23andMe. Amazing companies are now going public through this route.
Certainly 23andMe is not public again. Anyone who “buys part of it” is currently investing in VG Acquisition Corp. (NYSE: VGAC). OK, but VGAC is no longer a blank check. This check has been filled out. It’s the difference between a billionaire giving you an IOU for an indefinite thing that might exist in the future and a billionaire writing you an actual check. This second thing has legal and financial validity, and is often a cause for excitement.
2. PSPC actions are underestimated
Part of the IPO process involves the management of the future public company in “roadshow” for bankers and all other people involved in promoting stocks. All this hype is one of the reasons why Snowflake (NYSE: SNOW) The IPO went from $ 80 per share to $ 120 before the shares even started trading on the public markets. And then the first exchange was $ 245 per share. In Silicon Valley, it’s called ‘leaving a billion dollars on the table’, and a lot of companies don’t like it. If you want to know why everyone and their mom are going public through PSPC now, I suggest it be Snowflake, Snowflake, and Snowflake. And we ain’t seen the stock unlock bloodbath yet I am expecting for this business.
Silicon Valley is angry with Wall Street because bankers keep listing amazing companies on the stock market, but undervalue them. Then the first trade on the day of the IPO is significantly higher than what the bankers have said your business is worth. In Snowflake’s case, the actual valuation turned out to be three times higher than what the bankers said. Unsurprisingly, many tech companies are now exploring the PSPC route to public procurement.
There will also be some hype in the PSPC market – you can’t avoid it – but there is one crucial difference. In the IPO market, you do the hype first, then you go to the stock market. In the SPAC marketplace – the back door to the public markets – you trade in the public markets first, and the hype is trying to catch up with you. You can actually find PSPCs that haven’t been all the rage yet.
If you’re a lover of old-fashioned stock research – what Peter Lynch called “looking for larvae under the rocks” – you must love investing in famous or semi-famous companies before many people even turn up. realize that they are now listed on the stock exchange. . In the SPAC universe, you can find a known company temporarily represented by an unknown ticker symbol. And the early risers catch the worms – and the larvae. (And sometimes we make money too).
3. PSPC stocks could be undervalued
When a SPAC is first created, its share price is typically $ 10 per share, and it will float around that price for a period of time until a deal is announced. In the case of Nebula Caravel Acquisition Corp., the blank check was made public at a price of $ 11 per share. Then the company announced its reverse merger plan with the pet company Rover a few weeks later. And the purse yawned.
So while I love the momentum of a day one pop – my other SPAC, Holicity, jumped almost 50% in value when its reverse merger with space satellite launch company Astra was announced – my rational brain loves these anonymous, hype. free merger announcements. Rover shares are currently under the price of non-existence of blank checks. Which is amazing to me because Rover is a fantastic company.
4. Why I bought Rover shares
If you haven’t heard of Rover, he operates a website where you can find someone to look after your dog. For pet owners, this is your next internet stop after finding a cute bed and breakfast. And like Airbnb, the pandemic has not been kind to this company. No one travels, so no one needs a dog sitter. In 2020, Rover’s revenue grew from $ 95 million to $ 48 million.
Management expects revenue to grow to $ 97 million in 2021 and $ 201 million in 2022. I suspect they’re on the right track – when the world reopens, Rover’s revenue will soar. And this business is going to be very profitable. This is because he simply operates the website that connects dog owners with dog sitters. It is not necessary to pay people to take care of the dogs. Rover needs to take care of its website, and that’s about it. This eBay The model of matching buyers and sellers is the reason Rover is expected to quickly reach profitability next year. The company expects 17% EBITDA (earnings before interest, taxes, depreciation and amortization) in 2022 and 30% profit margins going forward.
I love businesses like this – those that have the ability to benefit from network effects. The pet market in the United States represents a $ 95 billion opportunity. Right now, paying someone to take care of your dog is only a $ 9 billion market. As Airbnb has turned a lot of ordinary people into bed and breakfast providers, and Uber created a new class of taxi drivers, Rover offers easy entry to a nice side gig. Dog lovers can earn $ 1,000 a month without doing a lot of work. I expect this market to grow dramatically as more and more people use Rover to find dog sitters and also to advertise their own dog sitting services.
PSPCs are here to stay
I own two PSPC shares and I am keeping an eye on several more that will be made public through this channel. This is a new market opportunity, and in these early stages, it may take some time for people to determine what valuations are appropriate. Right now, I firmly believe that blank check PSPCs are little more than lottery tickets. But the PSPC actions that have confirmed deals in place are a very valid mini-market. And you can find fantastic deals there.
I have a nagging suspicion that Rover might be cheaper before I start to ride. Certainly, there is no excitement in the market right now for Nebula Caravel Acquisition Corp. It even looks like a black hole where you don’t want to put your money. But I’m extremely optimistic about Rover’s long-term outlook, and happy to be able to enter this stock in a low-information environment. If it costs less, I’ll buy more.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.