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.
But what is a SPAC? (It’s pronounced “spack,” by the way.) Why did EV startup Fisker go that route earlier this month? And will they continue to generate astronomical returns in the electric car space this year and beyond?
Imagine a slick talker from Manhattan in a fancy suit who comes to you and says, “I have a good track record investing in the stock market, and I want you to give me $500 million to go out and look for and buy something that investors will love to own as a public company. If I’m right, you will make a bunch of money but if I’m wrong, I’ll give you your money back with interest.” He continues, “All I need is a maximum of 18 months but if you get bored or need your money back, you can sell your investment for a minuscule profit or loss, if any.”
Sounds good, right? 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.
Elon Musk deserves a lot of credit for transforming a company that had shipped less than 150 units by the time he joined as CEO into a multi-billion dollar behemoth that is now the most valuable carmaker in the world. You can call Musk crazy, or a liar, but if a CEO is judged by the performance of his company’s share price, he’s executed.
That being said, it’s fair to wonder if Tesla’s blindspot detection actually works, and I don’t mean on the cars. Tesla essentially created the environment for its competition to raise as much capital is needed to level the playing field in the EV industry. Just this month, rival luxury EV truck startup Rivian was injected with $2.5 billion to complete the development of its first commercially available vehicle.
We have to think Rivian owes some gratitude to Musk for playing a part in enabling this massive venture financing round. Rivian’s CEO, RJ Scaringe, can honestly say “funding secured.” 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.
And 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 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.
(In the interest of full disclosure, we, the authors of this piece at the time of publication, are investors in EVSI, and we may at some point purchase securities in the companies named here. This story is meant to explain how SPACs work, not as investment advice.)
In order to cash in while this p…