By Therese Poletti
In the 1990s, after seeing young tech stocks surge, investors wildly bet on young companies with little to no revenue on promises that a huge sea change was on the horizon for the global economy.
In the 2020s, something similar is happening : Young electric-vehicle and autonomous-vehicle stocks have been surging following the meteoric rise of Tesla Inc. /zigman2/quotes/203558040/composite TSLA -0.15% and Chinese rivals like Nio Inc. /zigman2/quotes/204905836/composite NIO -3.47% , even though a fully electrified future for the automotive industry is years, or even decades, away.
This current unique bubble has been forming from a combination of a lot of cash looking for a home; the record number of special-purpose acquisition companies, or SPACs, going public; and investors looking for the next Tesla. The most crucial ingredient in that recipe is blank-check companies focused on buying electric-vehicle makers, which give both seasoned institutional and individual investors the chance to role-play as venture capitalists.
For more: The explosion in electric-vehicle funding, valuation and trading in one chart
“SPAC investors have been much more willing to speculate with the aim of buying ‘the next Tesla,'” said Matt Kennedy, senior IPO market strategist at Renaissance Capital, adding that the soaring returns in SPAC-land have attracted institutional buyers as well.
Some air may be leaking from the bubble, though. Tesla’s shares succumbed to the law of gravity in late February and early March, tumbling from their stratospheric heights and losing a stunning $277 billion in market value in a month . Those losses reversed, however, and as of Monday Tesla was worth basically the same as at the end of 2020 — eight times its valuation at the beginning of last year. Chinese rivals such as Nio, Li Auto Inc. /zigman2/quotes/219811686/composite LI -4.99% and Xpeng Inc. /zigman2/quotes/219982686/composite XPEV -2.10% were still down on the year, but had also bounced back from lows.
SPACs have continued to show rampant speculation throughout, as investors looked for the types of gains those stocks enjoyed in 2020.
“I think the electric-vehicle space is something where investors are chasing past returns,” said University of Florida Professor Jay Ritter, who has both invested in SPACs and shorted Tesla shares of late. “As with all bubbles, it’s hard to know where the turning point is going to be.”
Two cautionary examples of EV hype
Two EV companies are good examples of the caution needed by investors and the problems that exist in these early-stage ventures. Nikola Corp. /zigman2/quotes/208704275/composite NKLA -6.22% was one of the early EV makers to get swept up and purchased by a SPAC, which then attracted an army of investors who drove prices sky high. But a short seller, Hindenburg Research, helped deflate that bubble. In September, Hindenburg published a detailed report, calling Nikola an “intricate fraud” and pointed out the company staged a deceiving video of a truck running on its hydrogen fuel-cell technology, when it was actually filmed slowly rolling down a hill, not running on its own power.
Nikola, which surged to a peak of around $66 last July, before Hindenburg’s report, closed at $15.85 Tuesday.
While Nikola could be in the vaporware camp, Lucid Motors Inc., is another story. It is seen as a legitimate potential Tesla rival, based in Newark, Calif., not far from Tesla’s Silicon Valley manufacturing site in Fremont. Lucid was founded by Peter Rawlinson, the chief engineer of the Tesla Model S, and is developing an electric luxury sedan that is expected to launch this year, as well as an electric SUV.
The mania around SPACs struck Lucid as well. After news leaked in January that Lucid was about to be acquired by a SPAC called Churchill Capital Group , shares in the SPAC surged to unreasonable levels as speculators jumped in. When the merger was actually announced in late February, it included an investment from Wall Street that valued the company far less than the public had, and its shares plunged .
For more: What investors need to know about SPACs, the inherent dangers of them, and how to find the good ones
There could be plenty more pain for speculators looking to get in on EV companies. In January alone, according to Dealogic, 90 SPACs filed to go public. While only a handful of those companies actually said they plan to focus on electric vehicles or batteries, many did not identify a target industry or market for acquisitions but did mention a sustainable focus — for example, Switchback II /zigman2/quotes/223715941/composite SWBK.UT -0.43% of Dallas, which raised $275 million in its January IPO, said it intends to focus on companies in the “broad energy transition or sustainability arena targeting industries that require innovative solutions to decarbonize in order to meet critical emission reduction objectives.”
“Never underestimate the market’s ability to find products for people who have money. The market has more money than product right now. The shelf of near-ready IPOs was pretty bare, and laid more barren with COVID-19,” said Scott Galloway, a professor of marketing at New York University’s Stern School of Business, in an interview late last year. “So all of a sudden, there is good money looking for public companies. It’s incredible how fast this submarket has reformed around SPACS.”
Typical IPO buyers like Fidelity and Franklin Templeton are making large investments in SPACs through private investment in public equities, or PIPEs, the type of investment that pumped into Lucid as its SPAC traded much higher.
SPACs represent an unusual investment opportunity, because they take place in two phases. In the first phase, the blank-check company raises money in its IPO, the pre-acquisition phase, which can offer investors a good return. They also offer investors the ability to exit, with original funds intact, if a proposed acquisition is not to the liking of the investors.
So far investors have had an excellent run in SPACs in general, especially hedge funds, or the SPAC mafia, Ritter said. According to Dealogic, a total of 262 blank-check companies went public in U.S. markets in 2020, with a current average performance of 21.3% for those 2020 deals. So far for 2021 IPO SPACs, though, the current average performance is 1.95%.
Ritter was so impressed with the returns that he invested in a few SPACs himself in the aftermarket, after seeing his funds in an investment account earn barely anything in interest.
“There is investor enthusiasm. Even though supply has been exploding, investor demand has been growing even faster,” Ritter said, adding that most of the electric-vehicle companies have chosen to go public via a SPAC and not the standard, more costly, IPO process.
SPACs are typically a better investment in the pre-acquisition phase, which can go as long as two years, the time limit set for companies to make an acquisition. Only early investors, though, are often able to receive the biggest security for their investment in SPACs. They usually receive a warrant with each share of the IPO, that entitles them to buy a share at a prearranged price. Public investors in the aftermarket deal don’t get this option, which is why hedge funds have zeroed in on SPACs as a sure thing.
Ritter noted that even though he drives a Tesla himself, he has been short the stock.
“When it got added to the S&P 500, I shorted more shares. So far it’s been a wealth-losing activity for me,” Ritter said, adding that he also believes many investors are hoping for a repeat performance of Tesla. “Investors tend to chase past returns. Fifteen years ago it was investing in real estate, which ended badly; 21 years ago the internet bubble was about to peak.”