As the market has soured on more speculative stocks, especially those that aren't profitable, SPACs in particular have fallen out of favor. Many companies that went public this way are trading well below their IPO prices, and a lot have declined 80% or more from the all-time highs they hit in a frothy market.
Simply put, many of these businesses probably should not have become publicly traded companies, and the market has come to that realization and cast their shares aside. But there are also some promising companies that have been lost in the fray. With a lot of the air now out of the market, we may be arriving at the point where some of these beaten-down former SPACs are worth considering.
There are no absolutes in investing, and just because a company came public via SPAC doesn't mean it can't be a good investment going forward, especially at the right price. So investors can benefit from being cautious but open-minded when looking for opportunities in the SPAC realm. Let's take a look at two that offer intriguing buying opportunities for risk-tolerant investors.
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1. Nextdoor Holdings
Nextdoor Holdings (KIND 1.51%) is one of many former SPACs that has fallen 80% from its all-time high, which it set in November . Nextdoor is a neighborhood-focused social network that connects neighbors, businesses, and public services across the United States and internationally.
The company has quietly grown to 37 million weekly active users across 11 countries and says that it is now used in one in three U.S. households. CEO Sarah Friar previously served as CFO at Block (then known as Square), which exhibited incredible growth at that time and achieved the type of mass adoption that Nextdoor aspires to attain. The company's localized focus offers a unique advertising opportunity to small and mid-sized local businesses (SMBs) that can hone in on a very specific, localized target market.
Nextdoor has been growing at an impressive rate. In the most recent quarter, it increased revenue by 48% year over year and ARPU (average revenue per user) by 12%, while also growing weekly active users by 33%. The ARPU of $1.39 is growing but still much lower than that of larger social media peers, which shows that there is room for it to grow over time.
It has been a difficult year so far for the stock, but there have been some positive signs recently. A director bought $19 million worth of shares at prices between $3.13 and $3.55 in a large show of insider buying, and the company also announced a share buyback program that authorizes it to buy back up to $100 million worth of shares over the next two years. Both actions can be seen as signals that directors and management believe that the shares are undervalued.
The sell-off of Nextdoor looks like an example of a good company getting thrown out with the bathwater. I view Nextdoor as a buy for risk-tolerant investors (although it is less risky now after the sell-off) thanks to its high-quality management team led by Friar, its unique proposition as a neighborhood-focused social media network, and its growing user count, revenue, and average revenue per user.
2. Owlet
Like Nextdoor, shares of Owlet (OWLT 6.48%), a digital parenting platform, are also down 80% from their 52-week high.
What is a digital parenting platform? The Utah-based company makes internet-enabled products, which allows parents to monitor their babies' health and sleep metrics. The stock has fallen thanks to the market souring on more speculative stocks. The sell-off was exacerbated when Owlet ran into an issue with the FDA, which ruled that it was marketing its Smart Sock product as a medical device, thus needing FDA approval, which it does not have.
Owlet revised and relaunched it as the Dream Sock and plans on seeking FDA approval for a new version of the Smart Sock. While the products cannot claim to be medical devices, the company says that its platform "aims to give parents real-time data and insights to help parents feel calmer and more confident," and I think there is value in that aim.
The company is also expanding into new, related products like a "smart crib" and other sleepwear accessories. Products like the Dream Sock and Dream Duo (which packages the Dream Sock with an HD camera) seem well-received by customers and have positive average ratings of 4.5 on Amazon. The company's products are also available at major retailers like Target and Best Buy.
As more digitally native millennials (not to mention zoomers) become parents for the first time, the market for Owlet's internet-enabled, health-monitoring products should continue to expand. Millennials and Gen Zers are used to using internet-connected, wearable devices to check their own heart rate after a run, the number of steps they've taken in a day, and to make phone calls, so it seems likely that using such devices to help take care of new additions to their families will feel like a natural fit.
The current market cap of just $250 million (down from over $1 billion) means that the company is trading at just about three times annualized first-quarter sales, which does not seem prohibitive. Note that the relaunched Dream Sock was not back at all retailers until later in the quarter, so revenue in future quarters could be higher.
Overall, I view Owlet as a speculative investment for risk-tolerant investors, but one that could also pay off thanks to the company's growing fleet of connected products having appeal to new millennial and Gen-Z parents, which will increase as a demographic over time.
Keep an open mind
SPACs have been one of the hardest-hit parts of the market in the current sell-off. Many of them are down deservedly. But investors can find some diamonds in the rough that could pay off over the long term by keeping an open mind and looking for opportunities such as these.
