So-called special purpose acquisition company (SPAC) stocks and the businesses they've merged with have packed at least a year's worth of drama in the first five months of 2021. We started the year with investors caught up in a SPAC craze, sending the stocks soaring. That, in turn, fueled investor interest in new SPACs, pushing the stocks higher and higher.
The air has come out of the balloon in recent weeks, though, and in hindsight, some of the valuations at the peak look ridiculous. But the truth is, there are some intriguing businesses that have gone public via SPACs, and there'll be long-term winners that come out of this mania.
Here's why three Motley Fool contributors are watching AppHarvest (APPH +0.00%), Churchill Capital Corp. IV (CCIV +0.00%), and VG Acquisition Group (VGAC +0.00%) very carefully after the sell-off.
Image source: Getty Images.
This seedling has potential to grow
Lou Whiteman (AppHarvest): Full disclosure: There are few companies trading on U.S. markets that I want to see succeed more than AppHarvest.
The company, which went public on Feb. 1 via a merger with SPAC Novus Capital Corp., is a farm-tech start-up attempting to bring sustainable agriculture to the United States. It's trying to help solve a huge global need -- feeding an ever-growing world -- in a green way. As a bonus, AppHarvest is doing it in Appalachia, a part of the United States in desperate need of an economic boost.
The company is still in its early days, trying to gain a foothold in what is already a massive industry. AppHarvest posted just $2.3 million in revenue in its first quarter as a publicly traded company, selling 3.8 million pounds of tomatoes from its flagship facility in Morehead, Kentucky. By the end of 2025, AppHarvest intends to have 12 high-tech farms producing more than 40 million pounds of tomatoes annually.
So far, the stock has been caught in a tug of war between those drawn to the promise and those who worry about overpaying when there's still a lot that could go wrong. AppHarvest shares today are priced at a 48% discount from where they first started trading. That's actually an improvement over a few weeks ago when it was down 67%.
Image source: AppHarvest.
Even after the sell-off, AppHarvest still has a market capitalization of $1.85 billion, a ridiculous 800 times the revenue it has generated so far. That number is deceptive, though, since AppHarvest is rapidly expanding its footprint and has only started to generate sales. But it's going to take a lot more than produce from 12 farms to grow into the existing valuation.
There's also a lot of potential competition to worry about. While few large U.S. agriculture producers are experimenting with vertical farming today, if AppHarvest is able to prove the concept, a lot of massive companies have the resources to follow in their footsteps.
I'm convinced AppHarvest is going to change the world by moving the U.S. in the direction of sustainable farming. What has been less clear to me is whether the company will be a winner or a footnote in the transition. With the stock price lower and tomatoes now growing on the vines, the case is easier to make than it was in February.
AppHarvest is still risky enough that it should be limited to a small, speculative part of a well-diversified portfolio. But for those who understand the risk, this is an intriguing time to look at the stock.
There are EV start-ups, and there are companies like Lucid Motors
John Rosevear (Churchill Capital IV/Lucid Motors): Churchill Capital IV, the special-purpose acquisition company that's set to merge with Lucid Motors, spiked in February after the deal was officially announced. It has fallen a long, long way since -- about 64% as I write this on Thursday afternoon -- but electric-vehicle investors rushed to buy the stock for good reasons earlier this year, and those reasons are still good.
Sure, we've heard a zillion times that such-and-such electric-vehicle start-up is "the next Tesla." Lucid -- a well-funded start-up that will launch its first electric luxury sedan later this year -- comes closer to that description than most. Consider:
- Lucid's CEO, Peter Rawlinson, was chief engineer on Tesla's groundbreaking Model S. He knows what it takes to get a car like that to market, he's learned from Tesla's mistakes, and he's built a great senior management team featuring veterans of Apple, Ford Motor Company, Audi, Mazda Motor, and Ferrari, among others.
- Lucid already has a factory. The company's Arizona plant was designed to be built in stages, allowing Lucid to add capacity as demand grows. The first stage is done, and Lucid is gearing up to begin deliveries of its Air luxury sedan this fall.
- Lucid had planned to begin production about six months earlier, but it held off after one of its advisors suggested extra preproduction testing to ensure quality. That advisor? Only the most impressive auto executive of the past decade, former Ford CEO Alan Mulally. (I got to know Mulally a bit when he was at Ford. When he suggests something like that, you do it -- gratefully.)
- Lucid has genuinely innovative technology, honed in the Formula E electric-vehicle racing series over the past several years. Among other things, the company has an innovative battery module optimized for mass production, as well as proprietary motors and inverters and class-leading fast-charging technology: Top-trim Lucid Airs will be able to add 300 miles of range in just 20 minutes.
The Lucid Air will start at just under $70,000 (after tax credits) when it begins shipping this fall. Image source: Lucid Motors.
For now, Lucid is positioning itself at the high end of the market, above Tesla's offerings, with what it calls a "post-luxury" California-cool aesthetic. The Air, and a related big SUV that will follow, aren't opulent in the German-luxury-car sense. Instead, they're airy, with intricate details and powertrains that should offer effortless (and fast) performance.
Lucid isn't likely to become the world's largest automaker, but it's staked out a very profitable niche with some promising products. When Churchill Capital IV's stock was trading over $50, I had qualms; now, with its market cap around $6 billion, it looks like an intriguing buy.
This DNA business could be a goldmine
Rich Smith (VG Acquisition Corp): I admit that I'm very tempted to pick a "space stock" this week -- and there are plenty of space SPACs that have crashed to choose from. Regardless, today I'm going to pick "the one that got away" -- VG Acquisition Corp.
I suspect most investors were like me in thinking Virgin Galactic founder Sir Richard Branson would probably use his VG Acquisition vehicle to bring rocket company "Virgin Orbit" public, too -- right up until the moment VG Acquisition announced it would buy and IPO genetic-information warehouse 23andMe, instead. But while I was disappointed at missing the chance to invest in Virgin Orbit, I actually think VG Acquisition's new target will turn out to be an even better choice.
Consider this: While only No. 2 in genetic records related to family history (Ancestry.com has more of those), 23andMe possesses a database of 10.7 million genetic records focusing on prediction of genetic illnesses, a database far bigger than its nearest competitor in this space. Furthermore, 23andMe plans to grow this database to 16 million records by 2025. If it maintains its current 80% participation rate (customers who've both ordered genetic tests and granted permission for the data to be used for scientific research), that will grow the company's trove of genetic data by 50% to 12.8 million records in just four years.
Crucially, 23andMe paid nothing to acquire this data. It came free to the company, along with the service it provided and charged for, to prepare personalized DNA reports for its customers. Yet now, 23andMe can turn around and rent this data to drug companies, who'll pay for the privilege of using it to make new advances in medicine.
Four months ago, investors thought this opportunity was worth at least $16 a share, but today, this same opportunity can be invested in for the low, low price of just $10 a share. I call that a bargain.
