They’ve been making headlines in recent months, and for plenty of reason. The SPAC, or special acquisition company, is exactly what its name suggests: a company formed specifically to make an acquisition. In essence, a SPAC is a shell company, flush with funds, that is formed to seek a merger target. The target company is typically a small- to mid-cap player that wants to go public, but lacks cash. The SPAC provides the cash.
It sounds like a great deal, doesn’t it? And for the SPAC’s investors, it can be. SPAC shares are sold in $10 units that include a warrant for future purchases at a locked-in price; the result is a return of 10% or more at reduced risk for investors in the SPAC. But according to a Wall Street Journal investigation of SPAC mergers completed between January 2019 and June 2020, the combined entity lost 12% of its value in its first six months of public trading.
As usual in the stock market, there is a mix here of risk and reward. The risks, however, have not dampened the increasing popularity of SPAC mergers in the past year. There were 59 of these deals completed in 2019 – but 2020 saw 248 of them, for a 320% increase. The average SPAC merger in 2020 was worth $334 million, compared to $72 million in 2010.
For good or bad, Wall Street’s analysts still expect the SPAC train to keep rolling. Banking giant Goldman Sachs is on record predicting a total of $300 billion worth of SPAC merger activity by the end of 2022. The bank’s head of US equity strategy, David Kostin, explains the stance, saying, “Increased retail trading activity has boosted interest in early-stage SPAC targets. SPACs have low opportunity cost for investors when policy rates are near zero.”
The professional analysts aren’t just commenting on the trend; they are looking at the new tickers entering the market, too, and publishing their ratings. Turning to the TipRanks database, we’ve pulled up the latest on two such stocks that some of the analysts have tagged as potentially strong investments.
The Southern California electric vehicle maker got its start in 2016, and announced the completion of a SPAC merger with Spartan Energy on October 30, 2020. The stock has gained 64% in trading since then.
The quick gains for Fisker show both the growing popularity of electric vehicles in the market, and the particular strengths of Fisker’s approach. The company has a focus on solid-state battery technology, a developing alternative to the current lithium-ion batteries. Solid-state promises longer range, faster charging, and lower weight in EV battery backs. The company has numerous patents on solid-state battery tech, intended to lock in its niche for other industries, such as consumer electronics.
Fisker has also announced its all-electric Ocean SUV model. The vehicle will compete with Tesla’s Model Y, with similarly modern styling and lower starting price. The Ocean is slated to hit the markets in 2022.
Cowen analyst Jeff Osborne is optimistic about the future of the EV market, and Fisker’s place in it.
“[We] believe Fisker is well-positioned to win share in the changing auto space as the industry undergoes a paradigm shift away from ICE vehicles toward EVs. The auto industry continues to move toward an electrified future with an increasing number of government mandates ordering countries and auto producers alike to pivot toward an EV-centric future. Consequently, we believe Fisker’s flagship Ocean vehicle – which is a premium EV with an affordable starting price of $37,499 – is well-positioned to take share in the large and growing EV market,” the 5-star analyst opined.
In line with these comments, Osborne rates FSR an Outperform (i.e. Buy), and his $22 price target suggests the stock has ~45% upside potential in 2021. (To watch Osborne’s track record, click here)
Overall, the recent reviews on FSR, breaking down to 3 Buys, 1 Hold, and 1 Sell, give the stock a Moderate Buy consensus rating. Shares are priced at $15.21 and the average price target of $19.75 implies a one-year upside of 30%. (See FSR stock analysis on TipRanks)
Opendoor Technologies (OPEN)
Opendoor is an online residential real estate platform, offering buyers and sellers the ability to connect directly, without need for a realtor. Opendoor operates in major urban areas across the US, including such rapidly growing cities as Atlanta, Houston, and Nashville.
In December of last year, Opendoor announced the completion of its business combination merger with Social Capital Hedosophia II, with trading beginning on the NASDAQ under the OPEN ticker on December 21. Opendoor finished the trading day with over 544 million shares outstanding and a market cap exceeding $15 billion.
The online real estate market is expected to be profitable, and Opendoor’s model, which allows institutional buyers to purchase home from individual sellers, particularly so. The company is projected to sell 24,000 homes next year, and 38,000 the year after. In revenue numbers, Opendoor is predicted to reach $10 billion annually within three years.
Covering the stock for Oppenheimer, 5-star analyst Jason Helfstein noted, “Opendoor currently holds a dominant lead in iBuyer market share, and we believe the company will continue to realize unparalleled scale efficiencies as it expands into new markets.”
Helfstein added, “We forecast OPEN growing annual number of homes sold at a 26% CAGR ’19-‘25E. However, we anticipate a 48% y/y decline in number of homes sold in FY:20, following the 3/19/20 pause on home offerings due to COVID-19 related uncertainties. We conservatively set our average revenue per home estimates at 1% CAGR ‘19-‘25E, though see upside to these estimates as the company scales its adjacent services offering.”
All of the above prompted Helfstein to kick off his OPEN coverage by issuing a bullish call. At his $34 price target, shares could be in for ~23% gain over the next twelve months. (To watch Helfstein’s track record, click here)
All in all, OPEN has 2 Buy-side ratings given in recent weeks. These are partially balanced by a single Hold, making the analyst consensus view a Moderate Buy. OPEN shares closed today at $27.70, and have a 17% upside potential based on the average price target of $32.50. (See OPEN stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.