EV SPACs – No bottom here.

The real pain is yet to come.

• The problem of selling shares at overinflated prices is that raising more money is extremely difficult which can lead to bankruptcy and forced consolidation as the EV SPACs are just beginning to find out.
• This is not limited to the EV SPACS but because building cars is capital intensive, it is these companies that will need to raise money much more than SPACS in other sectors.
• This was an entirely predictable circumstance as I expected back in March of 2021 (see here).
• The first signs of these stresses are beginning to show as Lordstown Motors is delaying the tooling that it needs to make its products until capital markets make it viable for it to raise money.
• At the same time, another SPAC start-up, Canoo was forced to admit that it may not have enough money to continue developing its products and never make it to market.
• This admission came despite the likelihood that around $300m is due in from the SPAC transaction for which the terms have already been agreed.
• This is a very unusual situation as the Canoo SPAC completed its merger in December of 2020 meaning that the PIPE investors have been sitting on their $300m for over a year despite having committed to making the investment.
• This sounds to me like a serious case of buyer remorse, and I suspect that all of the PIPE investors are now looking for ways to avoid giving Canoo the cash and cancelling their investments.
• Given that the share price has fallen from $10.0 to $3.3, I can’t say that I am particularly surprised.
• These sorts of difficulties are now increasingly commonplace among the SPAC crowd and I continue to think that most of them are heading for disaster.
• Faraday Future is a classic example whose market capitalisation has fallen to $743m but according to its plans will need to raise a further $1.35bn before it will become self-sustaining.
• Assuming Faraday Future could find demand for a rights issue of this size, existing shareholders would be diluted by at least 66%.
• Furthermore, this company remains delinquent in its financial filings having only just filed Q3 2021 and has not yet filed its Q4 2021, FY 2021 or Q1 2022.
• My opinion on Faraday Future (see here) remains unchanged and I have real doubts whether this company will ship a single vehicle.
• Lucid Motors is in a similar position (see here) which needs to raise around $6bn over the next few years or so in order to reach cash flow break-even.
• Of all of the crazy SPACs, Lucid is a company that I like as it has real EV technology that it has leveraged extremely well and built a great product that its users love.
• However, despite falling by 68%, the company still has a market capitalisation of $28bn which for a company that will have $2.3bn in 2022 revenues (best case) and lose money, is still much too high.
• Hence, much as I like the company and its product, the shares have much further to fall.
• Everywhere one looks, one sees a similar story and almost all of these companies are going to need to raise money in order to stay afloat.
• In this environment, I suspect most of them will fail meaning that there will be brutal consolidation and where companies with money will be able to pick up great assets and talent very cheaply.
• This is why there is speculation that Apple will buy Canoo, but given its legal hassles, I would simply stand at the office door and hand out contracts as employees go home at night.
• So what one is looking for are companies that are exposed to the EV trend, where the share price has cratered but have a good product and are well capitalised.
• Put simply, look for the babies that have been thrown out with the bathwater.
• This leads me right back to Ouster (lidar maker) which had a somewhat soft Q1 2021 but crucially, maintained its guidance for FY 2022 revenues of $65-$85m in revenues.
• Furthermore, on my numbers, it is well capitalised through to profitability, but it had the foresight to strengthen its balance sheet with a $50m term loan.
• I suspect that the terms it would receive now would not be as good as the terms that it received just a few months ago.
• This gives it the opportunity to take advantage of the current situation rather than being taken advantage of.
• I have been adding to Ouster against general market weakness and continue to think that many of its EV SPAC peers should not be touched under almost any circumstances.