How Can You Value a SPAC Stock Before It Completes Its Merger?

Even after a SPAC announces its planned acquisition target to take public, investors typically don't have nearly as much information about the business as they would in a traditional IPO. And this can make it very difficult to analyze a SPAC that is yet to finalize its business combination. In this Fool Live video clip, recorded on May 17, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss how investors should think about these types of situations. 

Jason Moser: Preston asks, "How do you measure valuation of a SPAC stock once the merger has been announced and it's in the de-SPACing process?" As an example, he says, "I'm looking at IPOE with SoFi (SOFI -0.13%) specifically." Matt, we talk about SoFi here on the show. That's a company I know that you're following. What do you think here about Preston's question? How do you look? What's your perspective on evaluation of SPACs once that merger has been announced?

Matt Frankel: Well, it's definitely less of a science than evaluating the company that's been public for five years. When they announce a SPAC merger, you don't really get a big look at the books until they've been public. They'll tell you basics like, we earned this much revenue last year, that was this much growth, we're profitable, we're not profitable. But the big focus of SPAC merger announcements is projections. A lot of them, to put it very frankly, are not realistic. A lot of them will predict 35X revenue growth by 2023, or something to that effect with no clear explanation of how they're going to get there. Take the projections with a grain of salt especially if they make your eyes go this big, then take a step back, and don't worry about the projections too much. When I evaluate SPAC deals, I use SoFi as a good example. I ask myself, what are they doing better than the competition?

Think of who its competition is. You have Robinhood on the investing side. You have the legacy lenders on the loan side so what do they do better? With Robinhood, we've discussed many times that so far just does a better job of prioritizing, investing, educating the consumer. They make the lending process a lot easier than their competitors on the loan side. They do the best job of any financial company I know of, creating a sense of community, of creating customer loyalty, if you will. That's one of the big things I look at. I look at the total market opportunity, which I mean, investing is clearly a giant market opportunity but they're getting into some forms of lending, like auto lending. I've mentioned is an $800 billion market. Personal lending is about $200 billion market at last count. There's a bunch of big market opportunities there. I think they do things better than the competition. The current revenue, which is actual numbers, not their projections. The current revenue looks impressive and their current growth numbers look impressive. Another example, 23andMe (VGAC) is one I've talked about on the show. They just do what they do better than the competition. They have a bigger collection of consumer genetic information than anyone else. They are partnering with one of the biggest names in the business that develop the therapeutics based on information. Big competitive advantages like that. It's like the Buffett model. When Warren Buffett describes why he likes a stock, he doesn't go into a bunch of numbers. He describes the moat, the competitive advantages.

Moser: Yeah. Why he likes the business.

Frankel: Right. That's really when I look at when evaluating some of these SPACs, is what gives them the moat and what will give them the moat, and what will be able to build a durable market share. Because a lot of them are small with very little revenue yet.

Moser: Yeah. You're right.

Frankel: Hopefully, that was a decent answer.