The stock market remains excited, but the cause isn’t what most investors believe. A valuation bubble bursts and unfortunately this process is far from over.
Pleasure in technology (ENJ
Another SPAC bites the dust. Continue.
At the height of the pandemic two years ago, SPACs were all the rage. The entire world economy was shutting down and so-called blank check companies seemed to offer exciting prospects for growth. Unfortunately, the promise never came true.
Traditionally, companies have gone public years after struggling in venture capital hell. Startups are being forced to raise multiple rounds of funding to stem the tide of red ink while executives steer the company toward profitability. The IPO is the reward for management success. It’s also a sign that Wall Street investment bankers are willing to vouch for the credibility of the underlying company.
The opposite is true for most SPACs.
The structure of SPACs bypasses validation. A stock market promoter/financier applies for a public listing on a major stock exchange. The goal is to circumvent Securities and Exchange Commission requirements by holding only cash. A direct listing occurs when this blank check company merges with a running corporation. There is no underwriter. No one does due diligence on behalf of investors.
There were 248 and 613 SPAC deals in 2020 and 2021, respectively. Many young companies have been pushed into the public market with little more than an idea and a selling point. Investors shouldn’t be surprised that the process ended badly. It was all a scam.
Speak with Bloomberg Technology A year ago, Ron Johnson, managing director of Enjoy, told a different story. the previous Apple
It was always a difficult question.
Based in Palo Alto, California, the company’s business was supplying cell phones on behalf of AT&T (T)british telecom, Rogers Communications (RCI), and Apple, and then have Enjoy agents sell additional products or services. The model was never profitable. By the end of 2021, gross margins settled at -34.5% in the red with losses of $158 million.
Nevertheless, in October 2021, Enjoy managed through its SPAC merger with Marquee Raine Acquisition Corp. to raise $250 million. The transaction valued the money-losing company at $1.2 billion. Nine months later, the company files for bankruptcy.
Unfortunately, many other SPACs follow a similar path. Bloomberg found in June that 65 of those companies will need to raise more capital within the next year just to keep the lights going. Of the 613 SPACs listed in 2021, 78 are now trading at $2 a share or less. 25 of these are trading at less than $1, the threshold to remain listed on the Nasdaq exchange.
Collaborative Investment Series Trust (DSPC) is an exchange traded fund tracking SPACs. The ETF is down 67.7% year-to-date and 78% over the trailing 12 months.
The valuation bubble has burst.
Wall Street investment traders and broadcasters blame investor losses on the SEC, but that’s like blaming the police for crimes. It is wiser to follow the money. Many SPACs should never have become public companies. Wall Street, financiers, and greedy executives took advantage of a loophole to shove these stocks to unwary investors. The financial press breathed life into SPACs with breathless stories of rising prices.
Enjoy Technology’s story is a tough but extremely important lesson for investors. Valuations are important, especially for unprofitable companies. Many SPACs never come back.
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