2020 became known as the “Year of the SPAC “as the structure gained institutional support while shattering IPO and M&A records. But with success comes fresh challenges. For those considering launching new SPACs, it may become harder to entice IPO investors who have a myriad of choices and the cost of insurance can be difficult […]
In the last few days, electric vehicle stocks have witnessed some sharp correction. I am not surprised given the fact that EV stocks went ballistic during the last year. There is also no reason to panic with various estimates pointing to an inflection point in the EV industry. I see the correction as a good opportunity to accumulate some quality stocks. Stock-price action aside, the electric vehicle industry is in top-gear. To put things into perspective, by fiscal year 2022, there will be 500 different EV models available globally. This implies intense competition. However, the number of passenger electric vehicles (on-road) is expected to increase at a CAGR of 31.4% in the next decade. This growth will allow multiple players to survive and create shareholder value.InvestorPlace - Stock Market News, Stock Advice & Trading Tips 8 Stocks to Buy for March Let’s discuss seven electric vehicle stocks that have an exciting product line-up for the year: Tesla (NASDAQ:TSLA) XPeng (NYSE:XPEV) CIIG Merger (NASDAQ:CIIC) Churchill Capital (NYSE:CCIV) Niu Technologies (NASDAQ:NIU) Electrameccanica Vehicles (NASDAQ:SOLO) NextGen Acquisition (NASDAQ:NGAC) Electric Vehicle Stocks: Tesla (TSLA) Source: Grisha Bruev / Shutterstock.com Any discussion on electric vehicles stocks is incomplete without TSLA stock. After peaking at about $900, TSLA stock recently declined below $700. The correction seems like a good opportunity to accumulate the stock. Tesla has an exciting product line for the next two years. This is likely to ensure that the company’s sales volumes continue to keep the markets happy. Tesla Cybertruck is likely to hit the markets toward the end of the year. Elon Musk believes that the company will be “able to do a few deliveries toward the end of this year.” However, volume production is likely in the coming year. With more than 500,000 pre-orders, the markets will be looking forward to see the final version of Cybertruck. Further, Tesla has already started taking pre-bookings for Tesla Model S Plaid. With deliveries starting toward the end of the year, the premium model boasts of three electric motors and has more than 1,100 horsepower. Of course, Tesla Roadster is in the pipeline along with Tesla Semi. These models are likely for delivery in FY2022 or FY2023. With Tesla Semi, the company will make its first move in the commercial EV segment. Overall, Tesla has a promising line-up and TSLA stock looks attractive after the recent correction. The EV industry is positioned for a multi-decade growth and Tesla is well positioned to benefit. XPeng (XPEV) Source: Andy Feng / Shutterstock.com XPEV stock has been sideways to lower in the last two months. With strong growth likely through the year, the stock is attractive at recent levels around $35. For Q3 2020, the company reported vehicle deliveries of 8,578, which was higher by 265.8% on a year-on-year basis. Further, for Q4 2020, the company guided for more than 10,000 vehicle deliveries. Strong growth is a key factor to be bullish on XPEV stock. Specific to new vehicle development, I see the following growth triggers. First, the company selected Livox, which is a leading manufacturer of lidar equipment. Xpeng will be the first EV company to deploy “automotive-grade lidar technology” in the current year of production. Second, the company’s third model is slated for launch this year with mass production toward the end of the year. The launch of this sedan model is another growth trigger for the company. It’s worth noting that the G3 and P7 have already been delivering robust sales numbers. In addition, XPeng launched the G3 smart electric SUV in Norway. The current year is likely to be a year for further expansion in Europe. 8 Stocks to Buy for March XPeng is scheduled to report Q4 2020 results on March 8. It’s very likely that the company’s numbers will exceed analyst estimates. That’s another potential trigger for renewed rally. CIIG Merger (CIIC) Source: NESPIX / Shutterstock.com In November 2020, CIIG Merger announced a business combination plan with Arrival. The latter is in the manufacturing of commercial electric vehicles and has ambitious plans for the next few years. I believe that CIIC stock is among the top electric vehicle stocks to consider for the year. Arrival is planning to commence electric bus production in the fourth quarter of 2021. The company is in advanced discussions for orders and deliveries are likely toward the end of the year. Furthermore, Arrival expects to begin production of electric vans and large electric vans in FY2022. For this, the company already has an initial order of 10,000 vans from United Parcel Service (NYSE:UPS). Therefore, starting with the current year, the company has a good product pipeline. It’s important to note that the SPAC business combination ensures that the company has $660 million in gross cash proceeds. One differentiating factor for Arrival is micro-factories. These factories require a lower capital expenditure and can be constructed in six months. In the next two years, the company plans for micro-factories in the U.S. and European Union. Hyundai (OTCMKTS:HYMTF) and Kia Motors are among the investors in the company. The strategic investment and partnership will enable joint development of vehicles using Arrival’s platform. The partnership underscores the company’s credibility and can be a long-term growth catalyst. Overall, CIIC stock has been in a range of consolidation below $30. With the business combination likely to close toward the end of Q1 2021, CIIC stock is worth considering. Electric Vehicle Stocks: Churchill Capital (CCIV) Source: Pasuwan/ShutterStock.com As I write, CCIV stock is lower by 33% in pre-market. The sharp correction comes after Lucid Motors confirmed the business combination plan with Churchill Capital. I did warn in one of my recent articles that CCIV stock will “sell-off” on news. However, I would keep the stock on the radar to accumulate on dips. Lucid Motors has some big plans for the year. In December 2020, the company completed construction of its first factory with an initial production capacity of 30,000 vehicles. With phased expansion, capacity is likely to ramp up to 40,000 vehicles. The company intends to begin production and deliveries of Lucid Air Dream Editions in Spring. Lucid Air Pure will be up for production in FY2022. In anticipation of the launch, Lucid Motors is also establishing 20 Lucid Studios through the United States. The initial model will be showcased to consumers through these studios. Lucid Motors has guided for revenue of $2.2 billion for FY2022. The company says revenue is likely to surge to $22 billion by FY2026. Besides Lucid Air, the company’s top-line growth is likely to be fueled by new models in FY2023 and FY2025. 8 Stocks to Buy for March With ambitious growth plans, CCIV stock is attractive for the long term. Niu Technologies (NIU) Source: Shutterstock Among electric vehicle stocks, NIU stock has been relatively unnoticed. The stock has, however, moved higher by 355% in the last year. Niu Technologies is a provider of smart electric two-wheeled vehicles. For FY2020, the company sold 600,892 e-scooters, which was higher by 42.6% year-over-year. With sales in 46 countries, the company is positioned for sustained growth. Entry to new markets will continue to trigger growth. As an example, Niu Technologies is eying entry to India, which has a big addressable and under-penetrated EV market. Further, the company has new products set for the year. One of the products is the RQi electric motorcycle. According to the company, “RQi can achieve a top speed of 160 km/h and can return up to 130 km of range in a single charge.” Additionally, TQi, which is a self-balancing three-wheeler, will be launched in the second half of the year. EUB-01, an electric bicycle, is another product likely to be launched in FY2021. Therefore, with an exciting product pipeline, Niu Technologies is positioned for sales volume and top-line growth. I would expect NIU stock to continue trending higher after some consolidation. Electrameccanica Vehicles (SOLO) Source: Luis War / Shutterstock.com SOLO stock, which recently was trading around $6, is another interesting name among electric vehicle stocks. The stock trades at a market capitalization of just $568 million. Electrameccanica is manufacturing a single-seat electric vehicle called SOLO. The soft launch of SOLO is underway in the United States. As of February 2020, the company had 20 retail locations for marketing and sale of the Solo EV. In the coming years, the company plans expansion outside the United States. An attractive factor about Solo EV is the pricing. With a true cost of ownership of $20,283, the electric vehicle is likely to attract attention from consumers. I also like the fact that Electrameccanica is pursuing an asset-light model. For manufacturing, the company has a strategic partnership with Zongshen Industrial Group. 8 Stocks to Buy for March Depending on the demand for the company’s EV, a manufacturing or assembling facility is likely in the coming years. Overall, SOLO stock is attractive after a sharp correction. The EV industry has multi-year tailwinds and the company has a differentiating factor. Electric Vehicle Stocks: NextGen Acquisition (NGAC) Source: Shutterstock In another recent business combination, truck maker Xos will go public through a $2 billion SPAC deal with NextGen Acquisition. NGAC stock surged higher on this news. As an overview, Xos is another player in the commercial EV segment. The company’s full suite of Class 5 to Class 8 electric vehicles are expected to be launched in the current year and FY2022. The company expects to deliver 116 EVs in the year. The delivery of EVs is likely to increase to 33,674 by FY2025. It’s worth noting that Xos has an order backlog of 6,000 commercial EVs. This includes orders from clients United Parcel Service, Loomis, UniFirst and others. I expect the order backlog to swell as companies shift toward electric vehicles. Similar to Arrival, the company is also working on flex manufacturing, which involves a $45 million capital expenditure per facility. These facilities can be constructed in a year. Once these factories operate at full utilization, EBITDA margin can be robust. With the deal just being announced, the business combination is at least two quarters away. However, NGAC stock will be attractive for exposure on correction. In addition, if the company announces further additions to the order backlog, the stock can move higher. On the date of publication, Faisal Humayun was long XPeng. Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored more than 1,500 stock specific articles with focus on the technology, energy and commodities sector. More From InvestorPlace Why Everyone Is Investing in 5G All WRONG Top Stock Picker Reveals His Next Potential Winner It doesn’t matter if you have $500 in savings or $5 million. 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The structure of special purpose acquisition companies (SPACs) like Pershing Square Tontine (NYSE:PSTH) is relatively simple. Investors own PSTH stock until the company announces a plan to merge with an existing business. If they like the deal, they stick around. If they don’t, they get their money back. Source: Pasuwan/ShutterStock.com Admittedly, that standard structure hasn’t quite played out with PSTH, at least for retail investors. Pershing Square Tontine’s own initial public offering (IPO) saw it issue units at $20, which included one share and one-ninth of a warrant to buy more shares at $23. But PSTH opened its first day of trading at $22. Investors who didn’t get into the IPO, which was oversubscribed, have had to pay a premium. That said, the SPAC also has an innovative structure in which shareholders who elect to participate in the merger get more warrants: two-ninths of a warrant, also exercisable at $23. That incremental value offset some of the premium paid to the $20 redemption price (which is itself unusual, as most SPACs price at $10).InvestorPlace - Stock Market News, Stock Advice & Trading Tips The details are unique, but the core argument for PSTH stock was somewhat similar to most SPACs. As one hedge-fund manager who bought units at around $21 noted, it’s “heads I win, tails I don’t lose much.” 8 Stocks to Buy for March But the problem is that PSTH is now at about $29 and is still without a merger announced. That rally gives Pershing Square Tontine the same problems facing so many other SPACs at the moment. PSTH Stock: Don’t Ignore Dilution Essentially, a SPAC is a big pot of money. Right now, Pershing Square Tontine has about $4 billion in its pot, after selling 200 million units at the $20 price. But here’s the catch: the pot doesn’t have $20 per share in it. All SPAC structures reserve shares and/or warrants for initial purchasers and the SPAC sponsor. The latter, in this case, is an affiliate of hedge fund Pershing Square. PSTH stock is no different. It has 200 million shares outstanding. But the units at IPO included 22.2 million warrants. There are 44.4 million “tontine” warrants (referring to a formerly popular investment plan) granted for investors who stay through the merger close. Another 6.21% of the post-merger shares outstanding are subject to warrants given to the sponsor and the directors of Pershing Square Tontine. Those warrants are exercisable at $24, though they must be held for three years after the merger closes. Suddenly, the share count is ballooning in a hurry. What Dilution Means for PSTH Between the higher share price for PSTH stock and the higher share count, the math becomes problematic. Assuming the stock simply holds this level, there are effectively 266.6 million shares outstanding, including in-the-money warrants. (We’ll assume that no one redeems their shares for $20, as that move would make no sense). Those 266.6 million shares cover a cash pot that totals $5.53 billion. ($4 billion from the IPO, plus $1.53 billion from exercise of 66.6 million warrants at $23). But those 266.6 million shares, with PSTH at yesterday’s close of $28.87, right now are being valued at $7.69 billion. What the current stock price says is that Pershing Square and its head, Bill Ackman, are going to create some $2 billion in equity value. But even that’s not correct. Pershing Square Tontine has entered into forward purchase agreements to sell as much as $1 billion in additional units. These units include one-third of a warrant. That $1 billion is added to the cash pile, obviously. But so are 66.6 million more shares, as the incremental 50 million units create 50 million new shares and 16.6 million new warrants. So, now there are 333.2 million shares and a cash hoard of $6.53 billion. At $28.87, those shares are worth $9.69 billion. And we haven’t covered the 6.2% ownership coming to directors and sponsors at $24 three years after close. Too Good to Be True SPACs sometimes look like magic: either you like the deal or you get your money back. There’s no risk. It seems too good to be true. But the math here shows why it is too good to be true. The problem with pricing a pre-merger SPAC at a premium is that when the details are considered, the redemption price already is a premium to the actual cash in the SPAC. And, again, that’s all a SPAC is: a pot of cash, plus optionality on a deal. The problem with the pre-merger rally in PSTH stock is that the optionality is trading at a huge price. Simply to support the current price, Pershing Square Tontine needs to get a merger target who will give it roughly $10 billion in equity value in exchange for roughly $6.5 billion in cash. That’s a huge ask. And it’s even bigger when you consider the relatively narrow universe the SPAC is targeting. Finding a Target As Ackman said back in July, PSTH is “a unicorn looking to marry another unicorn.” There aren’t many unicorns out there, however. Airbnb (NASDAQ:ABNB) and Doordash (NYSE:DASH) — two potentially logical targets — just went public. Lucid Motors might have made some sense, but it’s tying up with Churchill Capital Corp IV (NYSE:CCIV) in another deal that highlights the risk in pre-merger SPAC rallies. So, there simply aren’t a lot of private companies out there worth $30 billion or more, which is roughly what’s contemplated by PSTH’s sheer size. Maybe the only 2020 IPOs executed at that valuation range were Airbnb, DoorDash and Snowflake (NYSE:SNOW). This is another broader issue for SPACs. The sheer explosion in their popularity has brought an awful lot of private companies to the public markets. How many of the best choices are left? Pershing Square Tontine has to find one of those choices. It then needs to convince that ‘unicorn’ — which already has the option of going the traditional IPO route — to hand over substantial equity value in exchange for capital it can get elsewhere. And even if it does all that, PSTH stock still doesn’t necessarily gain. It seems like too much to ask. On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article. After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. More From InvestorPlace Why Everyone Is Investing in 5G All WRONG Top Stock Picker Reveals His Next Potential Winner It doesn’t matter if you have $500 in savings or $5 million. Do this now. #1 Play to Profit from Biden's Presidency The post Pershing Square Tontine Has the Two Big SPAC Problems appeared first on InvestorPlace.