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Even after a SPAC announces its planned takeover target, investors typically don’t have nearly as much information about the business as they would with a traditional IPO. And this can make it very difficult to analyze a SPAC that has not yet completed its business combination. In this Fool Live video clip, recorded on May 17th, Fool.com author Matt Frankel, CFP, and Industry Focus host Jason Moser discuss how investors should feel about such situations.
Jason Moser: Preston asks, “How do you measure the valuation of a SPAC stock after the merger is announced and it’s in the de-SPACing process?” As an example he says: “I’m also looking at IPOE SoFi (NASDAQ: SOFI) specifically. “Matt, we’re talking about SoFi here on the show. This is a company that I know you haunted. What do you think of Preston’s question? How do you look? How do you look up the rating of SPACs the merger? been announced?
Matt Frankel: Well, it’s definitely less of a science than evaluating the company that has been public for five years. When they announce a SPAC merger, you don’t really get much insight into the books until they’re public. They tell you basics like, we made so much sales last year, that was so much growth, we are profitable, we are not profitable. But the big focus of the SPAC merger announcements is on forecasting. Many of them are, to put it bluntly, not realistic. Many of them are forecasting 35x sales growth by 2023, or something to that effect, with no clear explanation of how they’re going to get there. Take the projections with care, especially if your eyes get this big, then take a step back and don’t worry too much about the projections. When I evaluate SPAC deals, I use SoFi as a good example. I wonder what are you doing better than the competition?
Remember who your competition is. You have robinhood on the investment side. They have the old lenders on the credit side, so what are they doing better? We have often spoken to Robinhood about the fact that it’s just better up until now to prioritize, invest and educate consumers. They make the loan process a lot easier than their competitors on the loan side. They do the best job of any financial company I know, they create a sense of community, they create customer loyalty if you will. That’s one of the big things that I look at. I’m looking at the overall market opportunity, which I mean, investments are clearly a huge market opportunity, but they come in some forms of lending, like auto loans. I mentioned it was a $ 800 billion market. The personal loan market is around $ 200 billion by the last count. There are many great market opportunities there. I think they do things better than the competition. Current earnings, which are actual numbers, not their projections. Current earnings look impressive and their current growth numbers look impressive. Another example, 23andMe (NYSE: VGAC) is one that I talked about on the show. They just do what they can, better than the competition. You have a greater collection of genetic information for consumers than anyone else. You partner with one of the biggest names in the industry who creates the therapeutics based on information. Such great competitive advantages. It’s like the Buffett model. When Warren Buffett describes why he likes a stock, he doesn’t go into a lot of numbers. He describes the moat, the competitive advantages.
Moser: Yes. Why he likes the business.
Frankel: Law. That really is when, in evaluating some of these SPACs, I look to what will give them the ditch and what will give them the ditch and what will be able to build lasting market share. Because many of them are small and still have very little income.
Moser: Yes. You’re right.
Frankel: Hopefully that was a decent answer.
This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.