4 Reasons I Just Bought This SPAC Stock

I’ve started buying SPAC stocks. I now own two of them: Holicity (NASDAQ:HOL) and Nebula Caravel Acquisition Corp. (NASDAQ:NEBC). I love the companies these stocks now represent (Astra and Rover), but I also love this new method that private companies are using to go public.

The process of taking a company public via a SPAC, or special purpose acquisition company, is very different from an initial public offering (IPO). And while there are well-known risks to buying a stock as soon as it IPOs, the risk-reward calculation for buying shares of a SPAC isn’t as clearly understood. Those unknowns create a level of fear that keeps many people away from investing in SPACs.

Investors looking at big screens of stock charts going down and red tickers indicating losses

image source: Getty Images

I think this environment is a buying opportunity. Investors would be well-served to research special purpose acquisition companies and make some small investments in exciting rule-breakers that are going public in this rule-breaking way. Here are four reasons why I’m buying SPAC stocks, and why I bought shares of one in particular.

1. I love the momentum of nothing-to-something

Let me start off by saying that investing in a “blank check” company is ridiculous. Here’s my attitude when the creation of a SPAC is announced: You’re boring me, and your pre-company doesn’t exist.

However — and this is important — my attitude completely changes once the reverse-merger that SPAC will undergo is revealed. It has gone from nothing to something. The stock, previously representing worthless nonexistence, is now merging with an actual company that has revenue and maybe even profits. Now I’m excited. Now I’m paying attention. Now I might invest.

So that’s an important factor in SPAC investing. The empty shell of a nothing-burger can become, with a flip of a switch, Astra or Rover or 23andMe. Amazing companies are now going public via this route.

Granted, 23andMe is not public yet. Anyone who “buys a piece of it” now is actually investing in VG Acquisition Corp. (NYSE:VGAC). OK, but VGAC is no longer a blank check. That check has been filled in. It’s the difference between a billionaire giving you an IOU for some indefinite thing that might exist in the future and a billionaire writing you an actual check. That second thing has legal and financial validity, and it is often a reason for excitement. 

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2. SPAC stocks are under-hyped

Part of the IPO process involves the management of the soon-to-be public company going on a “roadshow” for the bankers and all the other people who are in the business of promoting stocks. All this hype is one reason the Snowflake (NYSE:SNOW) IPO jumped from $80 a share to $120 even before shares started trading on the public markets. And then the first trade was for $245 a share. In Silicon Valley, this is known as “leaving a billion dollars on the table,” and many of the companies it happens to don’t like it. If you want to know why everybody and their mother is going public via SPAC now, I would suggest it’s Snowflake, Snowflake, and Snowflake. And we haven’t yet seen the unlocking-of-the-shares bloodbath that I’m expecting for that company.

Silicon Valley is mad at Wall Street because the bankers keep bringing amazing companies public, but undervaluing them. Then, the first trade on IPO day is substantially higher than what the bankers said your company was worth. In Snowflake’s case, the real valuation wound up three times higher than what the bankers said. Not surprisingly, a lot of tech companies are now exploring the SPAC route to the public markets instead.

There’s going to be hype in the SPAC market, too — you can’t avoid it — but there’s one crucial difference. In the IPO market, you hype first, and then you go public. In the SPAC market — the backdoor to the public markets — you’re trading on the public markets first, and the hype is trying to catch up with you. You can actually find SPACs that haven’t been hyped yet.

If you’re a lover of old-fashioned stock research — what Peter Lynch called “looking for grubs under rocks” — you have to love investing in famous or semi-famous companies before many people even realize they’re now publicly traded. In the SPAC universe, you can find a known company temporarily represented by an unknown stock ticker. And early birds get the worms — and grubs. (And sometimes we make money, too). 

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3. SPAC stocks might be under-valued

When a SPAC is first created, usually its stock price is $10 a share, and it floats around that price for a while until a deal is announced. In the case of Nebula Caravel Acquisition Corp., the blank check came public at $11 a share. Then the company announced its plan for a reverse-merger with pet-focused company Rover a couple of weeks later. And the stock market yawned.

So while I like the momentum of a first-day 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 blank check nonexistence. Which is amazing to me, because Rover is a fantastic company.

4. Why I bought shares of Rover

If you haven’t heard of Rover, it operates a website where you can find somebody to look after your dog. For pet owners, it’s your next internet stop after you find a nice bed-and-breakfast. And like Airbnb, the pandemic has not been kind to this company. Nobody’s traveling, so nobody needs a dog-sitter. In 2020, Rover’s revenues dropped from $95 million to $48 million.

Management forecasts revenue will jump to $97 million in 2021 and $201 million in 2022. I suspect they are on the right track — when the world reopens, Rover revenue is going to spike. And this company’s going to be highly profitable. That’s because it simply operates the website that connects dog-owners with dog-sitters. It doesn’t have to pay people to look after dogs. Rover has to look after its website, and that’s about it. This eBay model of matching buyers with sellers is why Rover should quickly achieve profitability next year. The company forecasts 17% EBITDA (earnings before interest, taxes, depreciation, and amortization) in 2022, and 30% profit margins down the road.

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I love companies like this — ones that have the ability to benefit from strong network effects. The pet market in the U.S. is a $95 billion opportunity. Right now, paying somebody to look after your dog is only a $9 billion market. As Airbnb turned large numbers of ordinary people into bed-and-breakfast providers, and Uber created a new class of taxi drivers, Rover provides an easy entry to a nice side-gig. Dog-lovers can make $1,000 a month without doing much work. I expect this market to grow dramatically as more people use Rover to find dog-sitters, and also to advertise their own dog-sitting services.  

SPACs are here to stay

I own two SPAC stocks, and I’m keeping my eye on several others coming public via this route. It’s a new market opportunity, and in such early stages, it can take people a while to figure out what the appropriate valuations are. Right now, my strong opinion is that blank-check SPACs are little more than lottery tickets. But SPAC stocks that have confirmed deals in place are a completely valid mini-market. And you can find some fantastic deals there. 

I have a nagging suspicion that Rover might get cheaper before it starts going up. Certainly, there’s no excitement in the market right now for Nebula Caravel Acquisition Corp. It even sounds like a black hole where you don’t want to put your money. But I’m extremely bullish on Rover’s long-term prospects, and happy that I’m able to get into this stock in a low-information environment. If it gets cheaper, I’ll buy some more.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

View more information: https://www.fool.com/investing/2021/02/25/3-reasons-i-just-bought-this-spac-stock/

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