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Investors looking to buy the Fisker SPAC should be patient
Years from now, 2020 may be considered the year of the SPAC on Wall Street. The latest special acquisition company to capture the attention of investors is Spartan Energy Acquisition (NYSE:SPAQ) stock.
Spartan is planning to merge with electric vehicle maker Fisker in the near future. There’s certainly nothing inherently wrong with investing in a SPAC. And there’s nothing inherently wrong with investing in EVs, either. But given that SPACs and EVs are two of the hottest mania on Wall Street at the moment, investors should be extremely cautious about buying SPAQ stock.
SPAQ Stock Is Overhyped
EV stocks have been on fire in 2020, with so many traders on the hunt for the “next” Tesla (NASDAQ:TSLA). Unfortunately, the more Wall Street gets whipped into a frenzy over a stock or a trend, the worse an investment that stock or trend tends to be. And SPAQ stock is the hottest SPAC on the market today.
There’s a long history of high-tech initial public offerings that made for terrible investments, at least as they started out their publicly traded life.
The best recent example is the Uber (NYSE:UBER) IPO back in 2019. At the time, many young traders saw ridesharing as a winning long-term trend. And they saw Uber as a can’t-miss investment. Founder Travis Kalanick (remember him?) saw his IPO priced at $45 only to close its first day of trading at only $42. It’s now nearly a year and a half later, and Uber shares are trading at $35.49. Ridesharing competitor Lyft(NASDAQ:LYFT) has performed even worse since its debut last year.
Snapchat parent company Snap (NYSE:SNAP) has had a huge run in the past year, gaining nearly 200%. However, Snap was a major IPO disappointment back in 2017. The stock opened at $24 in its first day of trading back in March 2017. By September 2018, it was trading under $10. Three months later, SNAP stock was down roughly 80% to under $5.
Snap eventually recovered, but it struggled mightily in its first year of trading. Overhyped IPOs Alibaba (NYSE:BABA) and Facebook (NASDAQ:FB) experienced similar patterns. True, both stocks ended up being huge long-term winners. But Facebook and Alibaba shares were down 38.4% and 12.8%, respectively, in the six months following their first days of trading.
Lockup-Period Pressures
SPAQ stock bulls may believe the examples I mentioned above are purely anecdotal. However, eight of the 10 largest tech IPOs of all time were down between 25% and 71% in the 12 months following their first day of trading.
One of the biggest reasons for this underperformance is insider selling. When companies go public via an IPO or a SPAC, management wants to take advantage of the publicity the brand gets. One way a company like Fisker could damage its brand is if SPAQ stock crashes as soon as the Fisker merger is complete.
Companies prop up their stock price in the first few months following a SPAC merger via “lockups” that prevent insiders from selling shares in the public market. These lockup periods for SPACs typically last between 180 days and a year from the initial merger date.
After the lockup period expires, company insiders are free to sell shares at will. Most insiders don’t rush to dump their shares at the first opportunity. But for tech startups like Fisker, founded just 13 years ago, relatively young insiders have the change to become instant millionaires just by selling their shares. Even if they believe in the company’s long-term success, that is an extremely strong temptation.
Fisker Likely Overvalued
So far I’ve discussed a couple of general reasons to avoid overhyped listings like Spartan. However, there are also some industry-specific reasons to be skeptical of SPAQ stock.
Fisker expects to generate just $600 million in revenue in 2022. Investors need to understand just how small that number is. In the most recent quarter alone, Tesla generated $8.7 billion in revenue. General Motors (NYSE:GM) generated $137.2 billion in revenue in 2019.
To put that in perspective, Fisker is hoping that two years from now its business will be 0.4% the size of GM’s.
Fisker management is brilliant for going public in the middle of an EV bubble. That’s the best time for companies to come to the market. Sell your company when its valuation is at its highest. But it’s obviously not a good time to be buying.
SPAQ stock buyers that got in after the stock spiked following the Fisker news a few months ago already understand the power of hype. The stock is now down 40% since July 10.
“I think buying new offerings during hot periods in the market … I don’t think it’s anything the average person should think about at all,” legendary investor Warren Buffett once said.
I wholeheartedly agree.
How To Play It
SPAQ stock may take off once the Fisker merger is wrapped up. But with so much noise associated with EVs and SPACs in the market these days, buying an overhyped SPAC EV company with virtually no sales in the current climate is a gamble, at best.
“You can go around making dumb bets and win … It’s not something you want to take as a lifetime policy, though,” Buffett has said.
If you genuinely believe SPAQ stock will be the next Tesla, be patient for now. There’s nothing wrong with watching the stock from the sidelines for a year and picking a good entry point once the excitement has died down. That strategy has worked since July. It will likely continue to work at least between now and the company’s lockup expiration.
And remember — investors who bought Tesla a year after its IPO paid a split-adjusted price of about $5.52. Those investors missed out on the risk associated with the first year of trading. Nine years later, they are doing just fine.