Special purpose acquisition companies (SPACs for short) have become all the rage these days. Earlier this month, Virgin tycoon Richard Branson filed with the Securities and Exchange Commission to create VG Acquisition Corp., which hopes to raise $460 million through a SPAC – the purpose of which is, yup, to acquire other companies. SPACs are publicly traded, as is the case with Spartan Energy (NYSE:SPAQ). A SPAC called SPAQ: Why, how clever! And it would be clever times two if Spartan could enrich owners of SPAQ stock through buying companies such as…
Well, why offer a general description when in this case we can be very, very specific? The electric vehicle company Fisker is days away from completing a reverse merger with Spartan Energy that would allow it to trade publicly. That could be a good thing – very good – as the EV sector has heated up of recent thanks to companies such as Nio (NYSE:NIO), Tesla (NASDAQ:TSLA) and Workhorse Group (NASDAQ:WKHS).
But it’s been far from all sunshine and roses on Electric Avenue, especially when you look at the smoldering wreckage up the block that is Nikola Corp. (NASDAQ:NKLA). It’s dropped close to 60% since Sept. 8 amid broad-ranging fraud allegations contained in a bombshell report by Hindenburg Research, which ultimately forced founder and chairman Trevor Milton to step down.
Now what, you may ask, does that have to do with SPAC stock, Fisker or any of the aforementioned companies? The answer: everything. Yes, everything. Read on as I explain why.
SPAQ Stock and its Pre-Revenue Play
At present, all the EV companies I’ve mentioned above, including Nikola, are what pedantic investor “experts” like to call “pre-revenue.” I’d just rather call them what they are: companies that make less profit than your kid’s lemonade stand.
That should concern anyone out there who’s read Benjamin Graham’s The Intelligent Investor, or followed the investment career of billionaire Warren Buffett, or dated someone because of their potential rather than the reality. Yes, yes, yes: Electric vehicles have a vital and brilliant future on a planet besieged by climate change. You’d be a fool to deny it.
But a company that does not make money – sorry, you irrational exuberance types – is a company that does not make money, which means it does not make money and furthermore, does not make money. And so the “value” in the investment simply isn’t there. You are buying into a money loser, no matter how bright its prospects may seem or in fact be.
The bet across all corners of the EV sector is that these pre-revenue lemonade stands – oops, EV companies – will ramp up to a point where they perfect manufacturing infrastructure and corner some section of the consumer and/or commercial market. Sometimes, this strategy can work. Tesla’s profitable quarters are like UFO sightings, but the faith of investors has allowed it to make large technological leaps. Amazon (NASDAQ:AMZN) failed to turn a profit for years.
Talking Up Talk
But without profit all you can bank on is progress. And in the case of Fisker, that’s been up and down. In an attempt to kickstart its luxury Ocean SUV, Fisker pursued a partnership with Volkswagen (OTCMKTS:VWAGY) to access its modular electric drive matrix platform. But those talks broke down in July and have only restarted recently, with a definitive outcome expected before the end of 2020.
Which way will all this talk go for Fisker, which will have completed its reverse merger with Spartan? All answers are speculative at best, all too fitting for a speculative investment that’s, indeed, so far based on talk.
InvestorPlace contributor and Wall Street vet Chris Tyler points out, and rightly so, that Spartan has rallied while the broader market has soured of recent. He adds that SPACs in general appeal to momentum traders who are fans of new technologies in growing markets.
But the news about Nikola should have us all concerned. Yes, letting one allegedly bad apple rot the bunch works to an investor’s detriment. That acknowledged, the accusations that Nikola managed to fool a lot of investors, and GM, into buying an illusion can’t help but put me on alert for smoke and mirrors.
Lots of Registrants But No Sales as Yet
SPAQ stock is riding, in part, on the happy news that Fisker has recorded more than 33,500 registrations on its custom-made app. Unfortunately, 33,500 registrants on an app may in the end equate to 33,410 window shoppers.
So that figure, as far as my investment dollars are concerned, is close to worthless – especially since the first Fisker Ocean won’t be delivered until 2022. If all goes well. Two years! And the last time I checked, we’re in a pandemic. Which is a great time to market a new luxury product, given spiraling unemployment and all. In more practical terms: If all the nightclubs, restaurants, theaters, office buildings, airlines and – you fill in the rest – go belly up, who’s going to buy these amazing new vehicles?
That’s right: not a single one of those post-revenue employees.
Don’t Bet Just Yet
If you as a reader would say I’m being unduly harsh here, you could have a point. And I would l love to be wrong. But as much as I’m a student of the market, I am also a student of life. Nikola seems to have proven (if the alleged improprieties are true) that it’s very easy to fool people when the EV sector is brand new and the shells of sexy vehicles make for some pretty sweet eye candy. Not much if anything, it seems, was under the hood of Nikola.
Extending that sort of anxiety across the whole sector is unfair but still, be careful. Where Spartan is concerned, are talking about navigating uncharted roads in unrealized vehicles; we can’t say that about Tesla or Nio or Workhorse.
Promises in this case may hold up; let’s hope they do, as a speculative bet on SPAQ stock could turn huge. But as for me, I don’t see enough data. I don’t see any profits. I don’t see any Oceans in America’s driveways. I’m going to wait and see.
On the date of publication, Lou Carlozo did not have (either directly or indirectly) any positions in the securities mentioned in this article.