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Why I'm Buying Another SPAC

By Travis Hoium - Apr 21, 2021 at 11:00AM

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The company that this SPAC is acquiring makes products that millions of new parents might soon be bringing home for baby.

Special purpose acquisition companies, or SPACs, have been hitting the market at such a furious pace, it would be hard for even the most attentive investor to keep up with them all. According to Statista, in the first three months of 2021, 296 SPACs had their IPOs (not their mergers with real companies), up from 248 in 2020 and 49 in all of 2019.

With so many SPACs launching, it can be hard to determine which ones are worth investing in and which ones aren't. That said, there are some great opportunities out there. Earlier this year, I highlighted Gores Holdings VI and its merger target Matterport as a company I'm excited about for the next decade. And last week, I stumbled across another SPAC that's merging with a potentially revolutionary company.

The SPAC is Sandbridge Acquisition Corp. (SBG) and its merger target is Owlet, a company that makes monitoring products for babies and expecting mothers. This could be a great growth stock for more than a decade. 

Owlet's product lineup.

Image source: Owlet.

What is Owlet? 

If you've had a baby in the past few years, you've probably seen Owlet's products. The company started with a wearable baby monitoring system with a pulse oximeter that can alert you if the baby's heartbeat or oxygen level go out of normal range.

For the many new moms and dads who find themselves getting up repeatedly at night to check that their sleeping babies are still breathing, Owlet's monitor can provide a bit of added peace of mind, and perhaps offer them a better night's sleep. 

To that original monitor, Owlet has added a baby monitoring camera that connects securely to your smartphones. And for mothers-to-be, it has in beta a pregnancy band that monitors fetal heart rate. And it has a thermometer, night light, and smart bed in development to add to the ecosystem. 

Ultimately, the data being captured by Owlet could be used to not only ease parents' minds but also to provide data for pediatricians. If you think data will be key to healthcare in the future, Owlet could soon be a key supplier of that data for the very youngest patients. 

What I like about Owlet's products and ecosystem is that they are easy to use and capture a stream of data that could be extremely valuable in the future. As someone who has used Owlet's products for years, I can say that they have been a lifesaver for our family, and I am excited to see the company expanding its ecosystem. In the interest of putting my lessons from 2020 to work, I jumped on the opportunity to invest in a company that makes products I like, and that is riding the massive trend toward digitizing healthcare. 

The merger will give Owlet a big infusion of cash

In the merger between Sandbridge Acquisition Corp. and Owlet, the latter will get $230 million in cash in trust and $130 million in a committed PIPE (private investment in public equity) for a total of $360 million. The post-merger company is expected to have a valuation of $1.4 billion (though that will, of course, depend on the stock price). 

As is common with SPACs, management has projected incredible growth rates over the next few years, and with just $75.2 million in expected 2020 revenue and a negative EBITDA margin of 11.3%, the financials will have a long way to go if they're going to justify Owlet's current valuation. But the company has made a strong start in building a brand that parents trust, and with an estimated total addressable market of $81 billion, it has plenty of room for growth. 

The opportunities are huge

Owlet has identified a few growth opportunities that underlay management's projections for $1.06 billion in annual revenue by 2025. Here are some that I think have the most potential. 

  • Clinical research and approvals: Owlet has two main routes to mass adoption. One would be the "car seat route" of getting legislation passed to standardize monitors. The other would be the "breast pump route," under which health insurers decide to cover Owlet monitors as standard devices for new parents. (If you've had a baby recently, you likely know that doctors can now prescribe breast pumps, and send them home with new moms free of charge, covered by their health insurance.) The second option seems like the more likely one. 
  • Owlet has focused almost entirely on the U.S. market thus far. But management plants to start expanding into Europe this year, Asia next year, and Latin America in 2024. These new markets could allow it to rapidly increase sales even without adding new products. 
  • As mentioned above, however, Owlet will likely be delivering new hardware in the next few years. These products will expand its ecosystem, making it more valuable and stickier for customers. 
  • Software solutions like the Dream Lab, which uses the data Owlet collects to advise parents about how to get their babies to sleep better, is another potential area for growth. Management also alluded to plans for a subscription service model for parents, although it's not exactly clear what it would cover.
  • Telehealth could ultimately be the company's biggest opportunity, integrating the data Owlet gathers in a way that can be easily used by pediatricians conducting telehealth visits. If these solutions could be integrated within the Owlet app, that could be a game-changer for parents. 

We don't yet know which of these products will hit the market or what will sell well. But Owlet has a solid foundation on which to build, and has lots of growth opportunities ahead to pursue with the infusion of cash that its SPAC merger will provide. 

Why I'm buying Owlet's SPAC

As a parent, I know how important it is to have reliable information about my child's health; for many parents, the cost of that information is almost irrelevant. Owlet's current offerings make more information available to parents about their babies' health than any other products I've seen. 

If Owlet is able to expand that lineup as management hopes, and if telehealth options improve, it could be not only a peace-of-mind provider, but a money- and stress-saver in every house with an infant. Illnesses don't always come on during office hours and it's can be hard to give an accurate description of an illness in just a few minutes with a doctor. Owlet can bring more data to those discussions and reduce wait times for meetings with experts.

Those are trends I want to invest in today, so I'm willing to overlook this SPAC's extremely high valuation now in the hope that in a decade, Owlet will be a standard part of most new parents' experience. 

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