Now That SPACs Have Fallen, Are Any Worth Picking Up?
Table of contents
Mark Twain once said that it’s easier to fool people than to convince them that they’ve been fooled. Perhaps that’s because of loss aversion, a psychological concept where we feel the pain of losses twice as hard as the joy of winning. In the investment world, this translates into investors who refuse to acknowledge their thesis has gone sour. One way to avoid this dilemma is by only investing in firms that are showing strong revenue growth. When growth stops, something went wrong with your thesis.
When startups take venture rounds, they may not yet have demonstrated traction so the terms at which they can raise money aren’t favorable. Teams with dreams have little leverage at the negotiation table. But in later-stage rounds valuations can soar as investors ascribe a higher value to the possibility of future growth. Looking at these valuations can provide an indicator of intrinsic value. It’s something we discussed in our recent piece on Avoiding Value Traps in Beaten Down SPACs. Today, we’ll talk about trying to find value in beaten-down special purpose acquisition companies (SPACs).
Discounted SPACs
Thanks to the competent public relations team and research department over at PitchBook we were able to get our hands on pre-SPAC funding rounds for 45 of the 99 disruptive tech SPACs we’ve covered over the years (only one of which we invested in). Ten of these SPACs are currently trading at a discount to their last pre-SPAC funding rounds as seen below (companies’ names link to our past research).
| Last Round | Valuation Last Round | Date Last Round | Market Cap 04/13/22 | Discount | |
| Velodyne (VLDR) | Series B | 1780 | Dec-18 | 436 | -76% |
| Metromile (MILE) | Series E | 450 | Jul-18 | 158 | -65% |
| View (VIEW) | Series G | 1000 | Jun-17 | 372 | -63% |
| 23andMe (ME) | Series F | 2750 | Dec-20 | 1605 | -42% |
| Volta (VLTA) | Series D | 780 | Jan-21 | 467 | -40% |
| Sema4 (SMFR) | Series C | 979 | Jul-20 | 651 | -34% |
| Shapeways (SHPW) | Series E | 170 | Apr-18 | 114 | -33% |
| Planet Labs (PL) | Series D | 1600 | Aug-17 | 1329 | -17% |
| Butterfly Network (BFLY) | Series D | 1000 | Sep-18 | 854 | -15% |
| Markforged (MKFG) | Series D | 738 | Mar-19 | 733 | -1% |
In each of the above cases, you’re now able to buy an asset at a discount to what institutional investors were able to pay several years ago. You’re also getting quite the bargain considering the $10 per share each of these firms solicited from people who didn’t heed our early warnings about How SPACs Reward Everyone Except Retail Investors. Here’s the performance of each company since their SPACs debuted:
| Sema4 | -88% |
| Shapeways | -84% |
| Butterfly Network | -78% |
| Volta | -77% |
| Metromile | -73% |
| View | -71% |
| 23andMe | -64% |
| Velodyne | -61% |
| Planet Labs | -57% |
| Markforged | -44% |
A company that can’t increase its valuation over time might not be producing something people want to buy. So, we would be wise to eliminate companies on the list that haven’t achieved meaningful revenues yet. Surprisingly, none of the companies on our list are pre-revenue which means we’re able to calculate a simple valuation ratio for each.
| Last quarter revenues | Simple Valuation Ratio | |
| Volta | 8 | 14 |
| Butterfly Network | 19 | 11 |
| Planet Labs | 32 | 10 |
| View | 12 | 8 |
| 23andMe | 57 | 7 |
| Markforged | 27 | 7 |
| Velodyne | 18 | 6 |
| Shapeways | 8 | 4 |
| Sema4 | 58 | 3 |
| Metromile | 30 | 1 |
All the above tells us is that none of these are excessively overvalued and Metromile is trading at a rock bottom valuation. Maybe that’s a good place to start.
Broken Business Models
Metromile
Insurance companies better feel comfortable discriminating against customers in order to maximize profits or you can be sure some insuretech companies will. If young Hondurans with face tattoos have a meaningfully higher chance of wrapping their 64 Impalas around a telephone pole, you don’t insure them because it raises the rates for the other 99.95% of your customer base. Using big data to make smarter insurance decisions was a genius idea until it wasn’t. Here’s what we said last summer:
Not being able to use someone’s driving habits or personal information as input to making underwriting decisions leaves Metromile up a creek. They simply become a company that counts the number of miles you drive and little more than that.
Credit: Nanalyze, July 2021
Since we penned that prose, shares of Metromile have fallen 83% compared to a Nasdaq loss of 8% over the same time frame. When most of your revenues come from the State of California where gender discrimination is mandatory, don’t expect a business model that tries to treat people fairly to get very far. Regulatory risk is what shot Metromile in the foot, and they’re now firmly in the death zone with a market cap of just over $150 million.
Velodyne
Broken business model or broken business? That’s a question shareholders of Velodyne have been asking since the founder went on the offensive against a company he happens to be the largest shareholder in. Here’s what we had to say about that in our recent piece on 8 LiDAR Stocks for Investors to Keep on Their Radar.
When the founder of Velodyne, who also happens to be the largest shareholder, puts up a website called “Save Velodyne” and begs investors to oust Velodyne’s Chairman of the Board who (according to the company website) is also their Chief Financial Officer, you’re best served avoiding that baby mama drama.
Credit: Nanalyze, March 2022
One criticism Velodyne’s founder has regards the company’s inability to grow revenues at the rate they forecasted in their glossy SPAC deck. That’s a good segue into talking about 23andMe.
23andMe
If growth stalls for one year, just do what everyone else does – blame it on the Rona. Maybe you can get away with a two-year pandemic hangover, but after that you should be called on it. Several years of declining revenue could be a sign that your business model is broken – like this chart from 23andMe.
Spend your retirement pouring money into a fixer-upper but don’t try that move with tech stocks that have lost their way. 23andMe spent a ton of money acquiring customers and then tried to sell them genetic horoscopes. From a piece we published about a year ago:
Frankly, some of this stuff seems like drivel. Genetics tests for migraines and sleep apnea seem pointless, no matter how you try and spin them. 23andMe emphasizes how 76% of the people who take their tests “report taking a positive health action.” The list reads like someone’s goals for the New Year. Just over half the 1,046 people surveyed said they “set future goals to be healthier.” Haven’t we all.
Credit: Nanalyze, February 2021
Management probably has some turnaround story they’re trying to spin but pass on that in favor of the largest genetic testing company out there – Invitae – which is trading at bargain-basement prices compared to a year ago.
Volta
Volta is an electric vehicle charging company that mostly makes money through paid media advertising – what it calls Commerce and Behavior – displayed on its charging station kiosks installed at retail locations. In our last piece on 6 Electric Vehicle Charging Stocks For Green Investors, we said, “if we wanted to invest in an advertising company, we’d buy Google.” While electric vehicle charging business models are still being flushed out, we believe people will likely glue their faces to a smartphone when their vehicles are charging. When advertisers figure this out, Volta’s business model will go pear-shaped. Sure, they’re working on other sources of revenue, but we don’t need any fixer-uppers in our portfolio.
View
Here’s what we said about View back in 2020:
Or, it could be that View has an over-engineered product that’s not economically viable aside from vanity projects, and which has become a money pit for investors who continue to throw money at the story in hopes that it finally comes to fruition.
Credit: Nanalyze, December 2020
Today, we see a company that’s struggling to grow revenues at the pace they predicted, lending even more credibility to our above words. A quick look at their SEC filings shows a company that’s being threatened with delisting by Nasdaq while their executive team squabbles over compensation and critical financial reports are delayed because of misstatements in warranty-related accruals. Once that mess is cleaned up and their reports are accurate and up to date, it’s still probably not something worth looking until we see revenue growth that looks like their lofty projections.
Sema4
Speaking of lofty projections, Sema4’s glossy SPAC deck promised us $265 million for 2021. What they actually realized was $212 million, a disappointment of 20% which doesn’t do much to instill confidence in their 2022 revenue estimate of $360 million. We last looked at the company in a piece titled Sema4 Stock – AI-Powered Precision Medicine in which we said the following:
Our biggest concern is that 86% of Sema4’s 2020 revenues come from offering direct testing for women’s health use cases. That story sounds a lot different from the precision medicine vision we imagined earlier.
Credit: Nanalyze, June 2021
Of course, in that same article, we said that “we don’t believe Sema4 is overvalued at $10 a share” so take everything we said with a grain of salt. As for where we left it, the stock was listed in our catalog as an “avoid” and we would “check in a year from now to see if they hit that 2021 revenue target of $265 million.” That hasn’t happened so we’re moving on to focus on bigger and better things.
Size Over Beauty
Shapeways doesn’t have a broken business model, it’s just one that’s already being used by a much bigger company – Protolabs. Here’s what we wrote in our piece on Why We’re Long Protolabs Stock But Not Shapeways Stock:
Protolabs already has the business model that Shapeways wants to have, so we’re going with the lower risk option and choosing Protolabs over Shapeways. Size over beauty.
Credit: Nanalyze, April 2021
And that’s about all the negative things we have to say for today. Let’s move on to looking at three fallen SPACs that might be worth picking up.
Three Stocks We Like and Love
By now you might be wondering if there’s value to be found among this list of names and we think there is. Two stocks we’ve spoken favorably about are Butterfly Network and Markforged, a company we recently praised in our piece on Metal 3D Printing Stocks: DM vs VLD vs MKFG. The former provides medical device exposure of which we have enough of and the latter is just too small for us to consider investing in right now, plus we’re betting on distributed manufacturing instead of printer manufacturers.
Then there’s Planet Labs, a stock we love, which means we’re holding shares of it in our own tech stock portfolio. Regular readers know they’re owed a Planet Labs update once the company files a 10-K which (checks the SEC database again) hasn’t happened yet.
Just because we like/love these firms doesn’t mean you should too. Our methodology takes a risk-averse approach, and our decisions are always documented so you can review our past research and see how we arrived at the conclusions we have. Speaking of which.
Conclusion
We’ve been bashing SPACs long before it became the trendy thing to do. Of the 99 SPACs we’ve covered, over a third are trading under $5 a share – a 50% discount to what shares were initially offered at. There may be some opportunities to find value if we can avoid landmines which represent broken business models that were peddled off to unsuspecting investors while institutional investors laughed all the way to the bank. Investors are best served avoiding companies that can’t grow revenues regardless of how cheaply valued they appear.
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Great article. I’m just sad you missed my favorite Babylon Health (BBLN) on your cheaper-than-private-rounds list.
Hey Martin,
We took a look at this. Babylon’s pre-SPAC round info wasn’t provided with the dataset provided to us by Pitchbook, but we were able to dig it up manually. Long story short, BBLN is trading at roughly the same valuation as their $550 million Series C which closed in August of 2019 and was led by the Saudis. Looks like they hit their revenue projections for 2021 so we may come back around to take another look at the firm.