Analyzing Six Disruptive Technology SPACs
You’d be hard-pressed to find a Wall Street analyst incapable of telling you what stocks to invest in. Much rarer is the analyst that tells you what not to invest in. This is especially true in the world of tech stocks, where everything is focused on telling great stories. Today’s youthful investors seem more interested in an exciting story than what red flags there might be. One red flag is when a company chooses to go public using a special purpose acquisition company (SPAC), a vehicle that does retail investors no favors.
With SPAC deals being announced left and right, we have a hard time keeping up. A few we’ve invested in – Desktop Metal, Ginkgo Bioworks (a very small position), Spire Global – while the rest we’ve left alone. The biggest problem with SPACs is they don’t provide enough information to make an informed investment decision. They all spew forth glossy investor decks detailing some blue-ocean opportunity, followed by the mandatory “my revenues estimates are bigger than everyone else’s revenue estimates” slide. Unsurprisingly, the SEC has “issued a number of warnings over SPAC marketing and investor communications.” That’s according to a recent Reuters piece which says the SEC is mulling “guidance to curb SPAC projections.”
Until the SPAC music stops, mergers continue to be announced. Our editorial queue is now jam-packed with SPACs that we ought to cover for any number of reasons, even though we know they’re probably total shite. So today, we’re going to do a rapid-fire round with six SPACs that are involved in some area of disruptive technology we cover.
|Redwire||GNPK||Pure-Play Space Infrastructure|
|Enovix||RSVA||3D Silicon Lithium-Ion Battery|
|Arbe Robotics||ITAC||4D Imaging Radar|
|Cellularity||GXGX||The Next Evolution in Cellular Medicine|
|Humacyte||AHAC||Universally Implantable Regenerative Human Tissue|
|Arrival EV||ARVL||Electric Buses and Vans|
It’s a good look into how overworked and underpaid MBAs go about evaluating companies that come across our desks using our tech investing methodology.
Invest in What You Know
The King of SPACs, Samir Nagheenanajar, recently said that nobody listens to Warren Buffet anymore. Says the SPAC promoter who claims he is helping “democratize finance by leveling the playing field,” all while keeping a straight face. Not so, says an article by Bloomberg yesterday, implying that just one person is sure to come out ahead when the SPAC dust settles.
The truth is, the SPAC King only hopes nobody listens to Warren Buffet, because the Oracle of Omaha recently called SPACs “a killer,” and criticized free stock trading app Robinhood for encouraging gambling. Said Robinhood in response, “There is an old guard that doesn’t want average Americans to have a seat at the Wall Street table so they will resort to insults.” This is the same company that pushes their users towards “cryptocurrency investing.”
Buffet also advises to only invest in what you understand, which brings us to our first SPAC – a company called Cellularity. In the first few slides of their glossy SAPC deck, we learn that Cellularity is advancing the discovery of the placenta as a limitless, renewable source of neonatal cells. After that, the deck goes downhill fast.
It’s typical for most pharma companies to expect the audience should have a medical degree to understand what they’re talking about. While some SPACs provide too little information, Cellularity provides too much information that your average investor won’t be able to understand. If an investment deck doesn’t use the word “revenue” once, they’re not speaking the same language as investors.
The Importance of Revenue Growth
Our ideal tech stock is a software-as-a–service (SaaS) based business growing revenues at a double-digit compound annual growth rate (CAGR) and selling into a market with a big juicy total addressable market (TAM). When a company is not growing revenues, they’re not capturing TAM, which means someone else is. We don’t invest in pre-revenue companies, and we don’t invest in companies with token revenues. One of today’s SPACs, Enovix, is developing a new type of lithium-ion battery that’s better than what’s on the market today. This $1.5 billion company is expecting $7 million in revenues this year from non-recurring engineering revenue. Next year, that number jumps to $11 million. Then in 2023, it suddenly rockets to $176 million. Here’s how their forward-looking revenue estimates measure up against another energy storage SPAC we’re avoiding.
Pointless, which is what we think about investing in companies that aren’t expecting meaningful revenues this year or the next. The same holds true for our next SPAC.
Arbe Robotics is developing a 4D radar system which it said can replace LiDAR for self-driving cars. Well, all self-driving cars except those built by Elon Musk, a man who called LiDAR a fool’s mission. The assumption is that all those LiDAR companies that SPAC’d their assets onto the market lately were too early to the game. The real opportunity is what Arbe offers, you’ll just have to wait a bit for meaningful revenues to start flowing in.
Again, it’s a case of everything starting to hockey stick several years down the road, which means there’s no rush to invest now. We’ll always sacrifice some upside by waiting for a company to show real revenue traction. Arbe now has to file quarterly statements with the SEC, which means investors will be able to keep close tabs on progress made towards their stated goals.
One last thing that stood out in the deck. The TAM for automotive radar isn’t really that big in 2020 – $4 billion – and expected to reach $11 billion by 2025. There are a lot of companies trying to get a piece of that pie.
The Importance of Having a Product
A common occurrence in the SPAC world is the “team-with-a-dream.” It’s usually some lofty ambition with a value proposition that’s easy to understand – like universally implantable regenerative human tissue that can address a $150 billion TAM. There’s just one catch. The product won’t be ready until 2023. As every project manager knows, getting a development team to meet their go-to-market deadlines is painfully difficult. Assuming that they do, here’s what the company says will happen.
We’re not sure what that mess is either, but it seems like we’re expected to believe that suddenly half a billion dollars of revenues will materialize once the final product is complete. Many venture capital firms don’t invest pre-revenue, and retail investors shouldn’t either. Even if a company has a product, they still need to demonstrate product-market-fit, meaning that someone is willing to pay for the product at a price that will lead to a profitable business. There have been too many “build it and they will come” failures in the tech world to take a punt on a product that hasn’t been built yet.
Waiting For the Dust to Settle
As these SPAC deals come flying in fast and furious, you get the sense that SPAC managers just want to get deals done before the music stops. It makes some seem rushed, like Redwire. Last year, a private equity firm called AE Industrial Partners created a company, Redwire, that started rapidly acquiring other companies. According to Crunchbase, there were four acquisitions in total.
Even an established conglomerate couldn’t integrate companies quick enough such that all the numbers can be aggregated and reported on accurately in such a tight time frame. The Redwire deck telegraphs a general confusion about what this combined entity does. They provide all these space-related products that all the major space players need and buy. They have actual revenues, and they might even be quite meaningful and well-diversified.
It seems vaguely similar to another space stock we looked at recently, MDA. There could be some promise here, but we need to see all those acquisitions integrated, along with some proper filing documents that will help us assess what we’re getting into with this stock. We’ll come back in one year’s time for a second look.
If you were selling your house, would you take it off the market if someone bought it using a non-binding agreement? Probably not, because the whole purpose of a contract is that it’s legally binding. So, when someone tells us they have a “non-binding agreement,” it means eff all. When a company argues that non-binding agreements “demonstrate clear demand that will lead to binding orders,” that’s pure speculation. And that’s what Arrival EV wants you to believe. They have an order from UPS for 10,000 vehicles “subject to amendment and cancellation by UPS.” So, what they have is pretty much nothing that’s binding. They go on to say:
Arrival has also received non-binding memorandums of understanding from 16 customers expressing strong interest in the Arrival Van and Arrival Bus.
Have we already forgotten about the Workhorse Group fiasco? We’re not just picking on Arrival here. It seems to be a norm for electric vehicle SPACs – of which there are loads now – waving around non-binding agreements like Willy Wonka’s Golden Ticket. What both have in common is that they’re make-believe. Maybe Arrival will prove to be an exception to the rule.
It’s a sad state of affairs when companies are allowed to mislead naïve investors into thinking that speculating will free them from their Starbucks jobs while helping save the planet and distribute wealth. The only pockets being lined are those of the hedge fund managers who are making a killing. People like Buffett actually help distribute wealth by promoting timeless best practices for investing. That’s more than we can say for those companies providing platforms that encourage speculation, while trying to convince everyone that they’re helping people “take control of their financial futures.”
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