The Two Vehicles That Will Define The New Investing Age

Yesterday we discussed the principles (the Three Laws) that will define the New Investing Age

Today, we’ll discuss two types of vehicles that will define this transition. 

Despite the worst year the automotive industry and global economy have seen in decades, Tesla shares have still had a meteoric rise in recent months. The electric automaker’s stock price shot up six-fold in the last year to achieve a valuation just north of $300 billion. In doing so, Tesla has fostered an eruption in the share prices of electric vehicle-related companies, allowing them to raise much-needed capital, and oftentimes becoming publicly traded through SPACs, a mysterious financial instrument.

At its very simplest form, a SPAC is just a publicly-traded shell company that has only a bank account with $100+ million sitting there earning interest, whose sole purpose to fund an acquisition of a privately held company. A SPAC is a bet on the jockey, not the horse. And they’re about to play a huge part in the EV game.

Here’s the play made simple: Rising interest in EV investment, coupled with growing adoption / capital investment using SPAC IPOs.

Personal transportation electric vehicles combined with streamlined public offering capital vehicles.

Already, the combination is getting hot.

Just this month, Tesla  rival luxury EV truck startup Rivian was injected with $2.5 billion to complete the development of its first commercially available vehicle. Rivian’s CEO, RJ Scaringe, can honestly say “funding secured.”

So, it’s not much of a stretch to say that EV stocks are very firmly the next big thing.

Simultaneous with the spike of interest in publicly traded EV companies, we are witnessing a resurgence in the market for SPACs: “Special Purpose Acquisition Companies.” SPACs have been around since the mid-1990s, during which time they have come in and out of fashion as an expedited and less expensive way for a company to go public over a traditional initial public offering.

We are now in a market that is foaming at the mouth for everything SPAC. This most recent surge was sparked by the enormous SPAC successes of Nikola, Draftkings, and Virgin Galactic, whose shares each soared more than 400 percent from their IPO prices.

Wall Street sees fads come and go, gaining momentum and skyrocketing to a top, and then crashing and burning before anyone knows what happened. We all remember the causes of the Great Recession or the cryptocurrency craze of 2018-2019. The unique aspect of what is going on today is that we have two completely distinct fads—one based on a sector, and the other on a deal structure—taking off and converging with one another into a “super fad.”

But we should all be asking whether the combination of these two surging markets is sustainable, or will it eventually fall apart.

The Two Vehicles

In order to cash in while this phenomenon is hot, bankers are scrambling to jam electric carmaker startups into SPACs at lighting speed. More interestingly, however, are the share price explosions we are witnessing when these deals are announced and eventually completed:

You may be scratching your head thinking the above percentage returns can’t be right. We’re only halfway through the year, and all these companies have at some point more than doubled—or even increased eightfold.

On March 3, VectoIQ, a SPAC, and Nikola Motors, a privately held electric semi-truck company, announced their intention to merge in a deal valued at $3.3 billion. That seems like a very high number, especially for a company that has yet to break ground on a manufacturing facility. But in the weeks that followed, the stock went from $10 to $15, and then from $15 to $30, and in June, the stock price skyrocketed to around $60 and then peaked at $95 on June 9.

While part of the meteoric rise in the share price can be attributed to one or more “short squeezes” and an influx of new traders opening accounts on Robinhood and rushing into the most volatile trades they can find, it’s impossible to ignore that for a brief moment in time, Nikola was valued at over $30 billion—more than Ford or Fiat Chrysler. 

Is it overvalued? Most fundamental investors would argue yes, considering it has yet to build or sell a single truck. But at this moment, the investors, traders and the speculation gods are making an enormous bet that Nikola will execute on its business plan and build this truck of the future, a task that will be a lot easier to accomplish with $700 million of cash sitting in the bank. 

On July 13, 2020, Spartan Energy Acquisition Corp, a SPAC headed by Apollo Global Management, announced a merger with Fisker Inc., a privately held electric car manufacturer, in a transaction valued at almost $3 billion. 

Are you starting to notice a pattern? What’s interesting about this announcement is that Fisker has been around the block before, having gone through numerous failed attempts and even bankruptcy (and confusingly, the “original” Fisker now lives on as Karma Automotive; the “new” Fisker will sell cars based on Volkswagen’s new electric platform). 

From the sidelines, it’s hard not to wonder whether Apollo, one of the largest and most successful investment companies of all time, actually believes in the company and its potential, or if it’s just trying to cash in on the EV and SPAC frenzies while the iron is still hot. That being said, the completion of this transaction will provide Fisker with $1 billion to bring to market what it claims is the most sustainable and green EV on the market. The “Ocean” is made of recycled materials and comes standard with vegan interiors. 

Can it be the next great Tesla-fighter? Who knows, but Apollo thinks it’s worth a shot to try.

The Rapidly Emerging Electric Vehicle Industry

So which EV startup will be next to announce their engagement with Wall Street’s chosen 2020 vehicle to go public and secure capital beyond its wildest dreams?

Rivian is a Michigan-based EV company with some of the most notable investors in the space. In 2019 alone, it raised $2.85 billion from the likes of Amazon, Ford, Cox and T. Rowe Price. Since the company has plenty of cash and already has A-list investors, there doesn’t seem to be much of a reason for it to go public in the short term, let alone through a SPAC.

Faraday Future is a California based EV company that was launched with the backing of Chinese billionaire Jia Yueting. The company has an especially fraught past, with a long list of missteps including botched attempts at opening manufacturing plants, a multi-year going concern of the company’s solvency, resignations of multiple senior executives, massive layoffs and numerous delays of its product launches.

The company’s troubled history will be a very difficult hurdle for regulators to ignore in letting Faraday go public, and is, therefore, an unlikely contender for the next EV SPAC. 

Lucid Motors was founded in 2007 under the name Atieva and was originally focused on developing batteries and powertrains for other EV manufacturers. In 2017, the company rebranded to Lucid and announced that it would develop its own line of ultra-luxury electric vehicles, the first of which is a sedan named the Lucid Air.

The company says it has plans to open 20 showrooms across the US by the end of 2021. Peter Rawlinson, the company’s CEO and CTO, was formerly a VP of Engineering at Tesla, and has stated that “the Model S was a good first shot” but with the Air, he is “fixing all the mistakes.” If Lucid is trying to be the next iteration of Tesla, then surely going public is in its crosshairs. What better way than a SPAC right now?

Then there’s Lordstown Motors. It raised $5 million to acquire a former General Motors plant with the goal of bringing the first all-electric fleet centric pickup to market. The flagship model, called “Endurance” has a proprietary in-wheel hub motor system that reduces the number of moving parts and should, in theory, cut down the ongoing maintenance requirements of the vehicle. One interesting tidbit is that Steve Burns, the company’s founder and CEO, is also the founder and former CEO of Workhorse Group, a publicly-traded EV company with whom Lordstown can trace its roots back to. 

Given the company’s near term need to raise significant amounts of capital, and the CEO’s prior experience running public companies, it wouldn’t be too big of a surprise to see Lordstown become the next electric vehicle company to go public by way of a SPAC. In fact, some speculate this may already be in the works.

What’s Yet To Come

Time will tell what will come of these companies and the countless other EV startups trying to make their mark. For now, SPACs are providing a unique way to go public and raise the much-needed capital to bring the next era of transportation to fruition.

To profit from the ongoing craze, one might think to go out and buy shares of each of the transportation or energy SPACs that have yet to announce an acquisition, and that might work. But, at some point, investment in EV companies is going to become oversaturated and the well will dry up. Investors should ask what the next sub-industry to take off will be, perhaps as a result of what is going on right now. There’s still the problem of publicly accessible charging that needs to be solved, after all.

Tesla’s highly anticipated earnings report for the second quarter is coming out today, and it will be very interesting to see if the stock continues its journey towards $2,000 per share—a half-trillion-dollar market cap—all the while fostering a significant amount of investment into the space and its competition.

Regardless, one thing that is certain is that SPACs are back once again, and they are bigger than ever.

 That being said, I’d be remiss not to caution you to think twice before jumping in headfirst to investing in SPACs without advice from a financial advisor. Remember the Global Financial Crisis and crypto craze? At some point, the SPAC market is destined to pull back. 

While the companies will have plenty of cash sitting in the bank, investors could be left holding the bag.