PSPCs are in a bubble, but these 3 actions will get by
It has been an incredible year for specialist acquisition companies, or After-sales service, which in 2020 became a preferred vehicle for start-up companies wishing to access public markets.
A SPAC, also known as a blank check company, is a shell that goes public and then merges with an existing business. The alternative to a more traditional initial public offering has been used by various companies this year including DraftKings and Nicolas.
Investors were initially won over, with shares of DraftKings and Nikola more than doubling after their SPAC mergers closed. Corn recent problems at Nikola tempered the enthusiasm for these stocks and reminded investors of the risks that can be associated with young companies.
Now it looks like the markets got ahead and PSPCs were in a bubble. But that doesn’t mean that there aren’t good companies with bright futures that come out of the excitement. This is why we believe Kensington Capital Acquisition (NYSE: KCAC), Hyliion Holdings (NYSE: HYLN), and Virgin Galactic Holdings (NYSE: SPCE) are PSPC stocks that have what it takes to survive in the long term.
Forget Nikola, this is the best high risk, high reward automotive PSPC
Lou whiteman (Capital Kensington): On paper, Kensington Capital seems like the kind of company investors should treat with caution following the Nikola debacle. PSPC has reached an agreement to merge with QuantumScape, a pre-revenue start-up developing a better battery for electric vehicles.
QuantumScape is working on a lithium-metal solid-state battery which in theory has many advantages over the lithium-ion batteries currently in use. On paper, the solid-state battery should be more stable and offer greater energy density than the current generation of batteries. This means they should be safer and offer more miles per charge.
The higher energy density should also result in a need for fewer batteries, reducing a vehicle’s weight and hopefully lowering cost over time.
There is a lot of “should” and “hope” written in this description, and indeed many have tried to advance solid-state batteries without much success. The attractiveness of QuantumScape comes from those who support it.
Bill Gates is an investor, just like once You’re here Technical Director JB Straubel. Straubel, who is on the board of directors of QuantumScape, called the design “the most elegant architecture I have seen for a lithium battery system”, saying that “the company has the opportunity to redefine the landscape of the battery “.
QuantumScape also counts Volkswagen as investor and client. Volkswagen is positioning itself to be a leader in electric vehicles, creating a huge potential market for QuantumScape batteries. And after the merger, QuantumScape will have over $ 1 billion in cash and financing commitments, giving it an important lead to get up and running.
On the Kensington side, I’m encouraged that CEO Justin Mirro was involved in the due diligence leading up to the merger. Mirro is a long-time industry investment banker and General Motors engineer who knows the automotive industry as well as anyone and has a comprehensive list of contacts who can help QuantumScape get into the market.
Mirro is expected to remain on the board after the deal closes.
Don’t overlook this smart, agile and fully funded Nikola rival
Jean Rosevear (Hyliion): Nikola’s downfall not only turned many investors away from PSPCs, it also (to some extent) tarnished the idea of electric trucks as a potential growth industry.
It’s a shame, because Hyliion has a smart approach to the problem of cleaning large diesel rigs.
Yes, it’s a SPAC company – it went public through a merger with SPAC Tortoise Acquisition last month – but it’s a real company, with a smart business plan and solid management.
What makes Hyliion so smart is that he’s not here to disturb heavy-duty activity. Instead, it has fitted itself perfectly into the heavy-duty truck supply chain with a solution that can clean existing trucks, right now.
Hyliion has two products. The first, shipped now, turns an existing diesel tractor-trailer into a more efficient hybrid. The second, soon on the market, is a complete powertrain which consists of electric motors and a small battery, as well as a generator powered by natural gas that keeps the battery charged. (Once costs were reduced, Hyliion says, this generator could easily be replaced with a hydrogen fuel cell, making the truck completely emission-free.)
Hyliion doesn’t have its own factory – a twist that removes a level of risk for investors. Instead, it partnered with an established supplier to the automotive industry Dana, which manufactures its products and ships them directly to truck manufacturers or aftermarket installers as needed. Hyliion products are compatible with trucks manufactured by today’s six major semi-trailer manufacturers.
Thanks to the deal with Tortoise, Hyliion has a lot of money in the bank – around $ 560 million, enough to bring its entire powertrain to market without needing the extra cash. It’s a great company that elegantly aims to meet a great market need as truck fleets come under increasing pressure to go green.
This SPAC space still has wings
Rich Smith (Galactic Virgo): Starting around $ 10 before its IPO-via-SPAC last year, at a high of over $ 37 a share before the coronavirus rained down on the market, the nearly four-fold rise in Virgin Galactic’s share price in the span of a few months seemed to both unprecedented and unbalanced. At least that’s the case until Nikola posts an eight-fold increase in even less time this year, and then more and more. PSPC has entered the scene, and performed similar feats with regularity.
Of course, just as happened with these other PSPCs, momentum traders eventually lost interest in Virgin Galactic once it stopped reliably rising day after day. With Virgin shares now trading at less than $ 22 a share (a meager 120% gain in less than a year), the question becomes: does this company have enough strengths to transform Virgin? Galactic in one growth stocks once again?
For my part, I think Virgin Galactic will get through the great PSPC upheaval very well and resume its growth, for three main reasons.
First: money. With nearly 360 million dollars in the bank but a cash burn rate of less than 245 million dollars per year, Virgin Galactic still has 18 months before it has to raise more cash to start its activity.
Second time. Long before the money runs out, Virgin Galactic is expected to start sending paying customers into space and generating revenue to offset its expenses. At the latest report, founder Sir Richard Branson planned to make his first flight aboard a Virgin space plane in the first quarter of 2021, after which commercial flights can begin. Call it six months – nine at most.
And third: money, again. Virgin Galactic has already sold some 600 customer tickets for the space at $ 250,000 apiece – $ 150 million in future insured revenue. Another 700 clients bet $ 1,000 to save their place in the queue, to purchase tickets on even more distant flights. And according to Cowen & Co., there is a total addressable market of 2.4 million potential multimillionaire customers there after those customers have made their flights.
With such a large market and no competition in sight, there doesn’t seem to be a limit to how much stock Virgin Galactic could possibly fly – at least, once it takes that very first commercial flight.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.