Hundreds of businesses went public during the SPAC boom of 2020 and 2021, and to be fair, some of them are doing quite well and delivering for investors. However, the majority of ex-SPACs have been beaten down tremendously in the recent market declines, and some look like trouble could be on the horizon.
Two in particular I'd stay away from right now are property technology company Latch (LTCH +13.10%) and genetics business 23andMe (ME +0.00%). Both are losing money at an alarming pace and don't have clear paths to profitability, which isn't exactly a good combination in today's economic climate. Here's why even though I bought shares of both of these companies initially, I wouldn't put another dollar into either stock right now.
Latch's SaaS business hasn't lived up to expectations
Latch went public through a merger with a special purpose acquisition company (SPAC) sponsored by commercial real estate heavyweight Tishman Speyer. And the idea of the business had a lot of promise. Latch would sell proprietary smart home hardware to commercial property owners and collect high-margin subscription revenue for its building "operating system" after it was installed.
OTC: LTCH
Key Data Points
However, the business hasn't performed to expectations. At the time of Latch's public debut, the company had projected $38 million in software revenue in 2022. It generated just $3 million in the first quarter and is expecting $14.3 million to $15.3 million for the full year. The company's losses are also significantly more than expected, creating doubt that Latch will ever achieve profitability before it runs out of money. The company has taken some big steps to reduce expenses recently, but it may not be enough.
To be fair, I'm still a fan of Latch's products, and Latch was certainly not the only ex-SPAC that made projections that didn't pan out. Commercial real estate has tons of room for technological innovation, and Latch's hardware-software ecosystem is a unique approach. Plus, Latch actually has more cash on its balance sheet right now than the entire market cap of the company, so there's a value case to be made. However, until Latch shows that it can get its cash burn under control and the high-margin software side of the business starts to show serious momentum, it's tough to justify investing even with a negative valuation of the business.
23andMe needs to show a path to profitability
23andMe hasn't performed quite as poorly as Latch, and there are quite a few things to like about the business. Its consumer business, which includes its well-known genetic testing kits and its relatively new telehealth business, and makes up the bulk of 23andMe's current sales, grew revenue by 17% year over year in the most recent quarter. The company now has 13.1 genotyped individuals in its data library, about eight times as many as any of its peers. Plus, 23andMe's subscription health business has gained traction, with 425,000 subscribers.
OTC: ME
Key Data Points
However, the bad outweighs the good, especially in the current market climate. The long-term thesis with 23andMe involves the company using its genetic knowledge and data to develop pharmaceuticals. And while there are some very promising applications 23andMe is pursuing, including two candidates in phase 1 clinical trials, drug development costs a lot of money, and the company's bottom line reflects that fact.
23andMe posted a $90 million net loss in the latest quarter, more than double its loss in the same quarter a year ago, due to rising expenses. For the full year, the company is expecting a net loss of $360 million at the midpoint of its guidance. Meanwhile, 23andMe has $479 million in cash on its balance sheet, so if it can't get the cash burn under control, the company could end up in a difficult financial spot.
It's not a great time to own money-losing businesses
Let's be perfectly clear. I own both of these in my personal stock portfolios. They're relatively small positions I bought in 2021, shortly after their respective public debuts. However, it was a different economic climate at the time, and the combination of rising rates and declining investor appetite for speculative growth companies has caused me to reconsider.
I own a few other ex-SPACs that I'm still very bullish on, such as SoFi Technologies and Nextdoor Holdings. But in the cases of Latch and 23andMe, I find it difficult to see any good reason to put any more money into either company until they make significant progress toward profitability and executing on their vision.
