It's been an incredible year for special purpose acquisition companies, or SPACs, which in 2020 have become a preferred vehicle for early-stage companies wanting access to public markets.
A SPAC, also known as a blank-check company, is a shell that goes public and then merges with an existing business. The alternative to a more traditional initial public offering has been used by a range of companies this year including DraftKings and Nikola.
Investors were initially enamored, with shares of DraftKings and Nikola both more than doubling after their SPAC mergers closed. But recent issues at Nikola have tempered the enthusiasm for these stocks, and reminded investors of the risks that can be associated with young companies.
It now appears the markets got ahead of themselves, and the SPACs were in a bubble. But that doesn't mean there aren't good companies with bright futures coming out of the excitement. Here is why we believe Kensington Capital Acquisition (KCAC), Hyliion Holdings (HYLN -3.43%), and Virgin Galactic Holdings (SPCE -5.78%) are SPAC stocks that have what it takes to be long-term survivors.
Forget Nikola, this is the best high-risk, high-reward automotive SPAC
Lou Whiteman (Kensington Capital): On paper, Kensington Capital appears to be just the sort of company investors should treat with caution following the Nikola debacle. The SPAC has a deal in place to merge with QuantumScape, a pre-revenue start-up developing a better battery for electric vehicles.
QuantumScape is working on a solid-state lithium-metal battery that in theory has a lot of advantages over the lithium-ion batteries currently in use. On paper the solid-state battery should be more stable and offer greater energy density than current generation of batteries. That means they should be safer and offer more miles per charge.
The higher energy density should also lead to a need for fewer batteries, reducing the weight of a vehicle and over time hopefully bringing down the cost.
There's a lot of "should" and "hope" written into that description, and indeed many have tried to push solid-state batteries forward without much success. QuantumScape's attractiveness comes from those who are backing it.
Bill Gates is an investor, as is one-time Tesla Chief Technology Officer J.B. Straubel. Straubel, who is on QuantumScape's board, called the design "the most elegant architecture I've seen for a lithium-based battery system," saying "the company has an opportunity to redefine the battery landscape."
QuantumScape also counts Volkswagen as an investor and customer. Volkswagen is positioning itself to be a leader in electric vehicles, creating a huge potential market for QuantumScape batteries. And post-merger QuantumScape will have more than $1 billion in cash and funding commitments, giving it significant runway to get up and running.
On the Kensington side, I'm encouraged that CEO Justin Mirro was involved in the due diligence leading up to the merger. Mirro is a longtime industry investment banker and one-time General Motors engineer who knows the auto business as well as anyone, and has a list full of contacts that can help QuantumScape go to market.
Mirro is expected to remain on the board following the deal's close.
Don't overlook this smart, nimble, and fully funded Nikola rival
John Rosevear (Hyliion): The fall of Nikola didn't just turn many investors away from SPACs, it also (to some extent) tarnished the idea of electric trucks as a potential growth industry.
That's too bad, because Hyliion has a smart approach to the problem of cleaning up diesel-powered big rigs.
Yep, it's a SPAC company -- it went public via a merger with SPAC Tortoise Acquisition last month -- but it's a real company, with a smart business plan and strong management.
What makes Hyliion so smart is that it's not out to disrupt the heavy-truck business. Instead, it has neatly inserted itself into the heavy-truck supply chain with a solution that can clean up existing trucks, right now.
Hyliion has two products. The first, shipping now, turns an existing diesel tractor-trailer truck into a more efficient hybrid. The second, coming to market soon, is a full powertrain that consists of electric motors and a small battery pack, along with a generator powered by natural gas that keeps the battery topped off. (Once costs come down, Hyliion says, that generator could easily be replaced by a hydrogen fuel cell, making the truck entirely emissions-free.)
Hyliion doesn't have a factory of its own -- a twist that removes a level of risk for investors. Instead, it has partnered with established auto-industry supplier Dana, which manufactures its products and ships them directly to truck manufacturers or aftermarket installers as required. Hyliion's products are compatible with trucks made by all six of the major semi manufacturers today.
Thanks to the deal with Tortoise, Hyliion has plenty of money in the bank -- about $560 million, enough to get its full powertrain to market without the need for additional cash. It's a nice business that is aiming, elegantly, to fill a big need in the market as truck fleets come under increasing pressure to go green.
This space SPAC still has wings
Rich Smith (Virgin Galactic): From about $10 before its IPO-via-SPAC last year, to a high of more than $37 a share before the coronavirus tanked the market, Virgin Galactic's nearly fourfold rise in stock price in the space of a few months once seemed both unprecedented and out of whack. At least it did until Nikola posted an eightfold increase in even less time this year, and then more and more SPACs came on the scene, and performed similar feats with regularity.
Of course, just as happened with those other SPACs, momentum traders eventually lost interest in Virgin Galactic once it stopped going up reliably day in and day out. With Virgin stock trading today for less than $22 a share (a meager 120% gain over less than a year), the question becomes: Does this business have enough going for it to turn Virgin Galactic into a growth stock once again?
I, for one, believe that Virgin Galactic will make it through the great SPAC shakeout just fine and resume growing, for three big reasons.
First: money. With nearly $360 million in the bank but a cash burn rate of less than $245 million a year, Virgin Galactic has a good 18 months ahead of it before it needs to raise more cash to get its business off the ground.
Second: time. Long before the money runs out, Virgin Galactic should begin flying paying customers to space and generating revenue to offset its expenses. At last report, founder Sir Richard Branson was planning to take his first flight aboard a Virgin spaceplane in the first quarter of 2021, after which commercial flights can commence. Call it six months -- nine at most.
And third: money, again. Virgin Galactic already has sold some 600 customers tickets to space at $250,000 a pop -- $150 million in assured future revenue. Another 700 customers have anted up $1,000 to save their place in line, to buy tickets on flights even further out. And according to Cowen & Co., there's a total addressable market of 2.4 million potential multi-millionaire customers out there after these customers have flown their flights.
With a market this big, and no competition yet in sight, there seems to be no limit to how high Virgin Galactic stock might eventually fly -- at least, once it conducts that very first commercial flight.