SPACs vs. IPOs: Which Should Investors Prefer?

With companies waiting later and later to go public in many cases, like Airbnb (ABNB 1.02%) and Uber Technologies (UBER -0.23%) did, it can be difficult for everyday investors to get in on the ground floor of growth opportunities. In this Fool Live video clip, recorded on Oct. 18, Fool.com contributors Matt Frankel, John Rosevear, and Danny Vena weigh in on the SPACs vs. IPOs debate.

Danny Vena: ProShopGuy says, "With IPOs becoming public at larger and larger market caps well over $1 billion, do you prefer IPOs versus micro-caps under $1 billion? I can start that off and honestly, I don't necessarily decide if I'm going to invest in accompany based on whether or not it's an IPO, or a market cap, or a mega cap, or a mid-cap. I look at what the opportunity is and whether or not the company can capitalize on that opportunity. When it comes to IPOs, I tend to lag a little bit, I will wait until there's some data out there generally till they have a couple of quarters as a public company before I think about investing unless there's a compelling reason otherwise. But what do you guys think?

Matt Frankel: I would agree with that and I would say that over the past decade, the trend has definitely been for companies going public later and later in the game, I think of Uber, how long they waited to go public. I feel like the SPAC because this is the SPAC and IPO show, I feel like the SPAC boom, if it has one really positive effect, it's bringing back the more early-stage IPO. You're seeing a lot more companies being able to go public at these earlier stages, which is against the trend we've been seeing in the past several years. A lot of them have been in the automotive industry, like John said. A lot like the two that I'm about to talk about are just earlier stages then could these types of companies have been going public. If there's one thing about the 500 SPACs that have gone public in the past year or so that is a positive change in the market for IPO investors it's that.

Vena: John, any two cents you want to add?

John Rosevear: Well, I'm going to fall back on Foolish fundamentals, which is that I look for great businesses at not insane prices and it's prices $400 million market cap or $30 billion market cap. I'm not so concerned, I'm looking for opportunities everywhere. I don't tend to gravitate to a specific stock. I have big old industrial cyclical giants in my portfolio, and I have small nimble emerging technology companies in my portfolio.

Again, I'm just looking for something where I can say, OK, I see why this company has an advantage and it's doing everything right and so forth. I would not actually get into that much with SPACs, you always have to wonder a little bit, at least in autos, we've had a couple of unfortunate experiences where because when a SPAC does a merger they can publish projected future financials and so forth where we've seen that some of those projections were not actually based on what we thought they were based on.

Vena: On reality.

Frankel: On reality.

Rosevear: Indeed so there is an extra level of caution. The other company I want to talk about as Lucid (LCID 2.25%), which has been patient in coming to market. It did come to market via SPAC deal earlier this year. But it's a company that we had been tracking myself and my Foolish colleagues who obsess over the auto business for like four or five years now. They were a company that was not a moonshot, "we're going to build electric truck someday" to just cite an example out of thin air. We have a factory, they have actually begun production. Their SPAC it will close a few months ago and they have begun production of their electric luxury sedan and that will be deliveries to customers are expected to happen like next week. To circle back, the type of company matters less than the quality of company and the quality of the opportunity to me.

Frankel: I would definitely agree with that, with the caveat that there are a lot of companies that have gone public recently that, like Airbnb, I would've loved to invest in Airbnb three years ago. I would've loved to invest in Uber in 2014 when I first took a ride in Uber. You're letting people in at the late stage of the opportunity so that's my only issue with that trend and you're absolutely right, the SPAC trend has brought some negatives in addition to positives. The projections being one thing, every company going public by SPAC thinks they're going to 20X their revenue next year. Yeah. Good and bad.

Rosevear: In electric vehicles. We get the whole thing where they compare themselves to Tesla (TSLA 0.21%). They forget that all of the established global automakers are also going to be building electric cars. So, yeah OK. You're in a space that Tesla is not. Well, guess what? Volkswagen is coming for that space. What do you think of that? You say, well, we didn't mention that in our presentation. There's a lot of that selective thinking.