Chamath Palihapitiya has earned his reputation as the “King of SPACs.” SPACs have been the preferred listing mode for many companies. However, there has been a sell-off in Palihapitiya’s SPACs. Social Capital Hedosophia Holdings IV (IPOD) lost 1.4 percent on Feb. 23 and is down over 14 percent from the 52-week highs. Should you buy the dip in IPOD SPAC stock?
The SPAC mania that started in 2020 has only accelerated in 2021. Looking at the IPO calendar for the coming weeks, you’ll find mostly SPACs or blank-check companies. On a YTD basis, the total money raised through SPACs far exceeds the money raised through traditional IPOs.
Why IPOD SPAC stock has fallen
Hindenburg Research accused Clover Health, which merged with Palihapitiya’s Social Capital Hedosophia Holdings III (IPOC), of hiding material facts from investors. The SEC launched a probe into Clover Health after Hindenburg’s allegations.
Hindenburg also took a swipe at Palihapitiya and asked whether he knew about the Department of Justice investigation against Clover Health. Hindenburg accused Palihapitiya of incompetence at best and misconduct at worst.
The fall in Palihapitiya’s SPACs was understandable after Hindenburg’s allegations. After all, investors rely on the sponsor’s reputation, especially their credibility, when buying a SPAC stock before the merger is announced.
Blame CCIV’s fall too
Meanwhile, even as IPOD stock was recovering from the sell-off after Palihapitiya and Clover Health issued a strong response to Hindenburg, there was broad-based selling in SPACs that haven't found a merger target yet.
There has been a sell-off in small tech companies and companies in the green energy ecosystem. While IPOD hasn't announced a merger target, it might look at the green energy or tech industry considering Palihapitiya’s previous investments.
Churchill Capital IV’s (CCIV) merger with Lucid Motors, where the huge PIPE (private investment in public equity) triggered a massive sell-off, also seems to be contributing to the sell-off in SPACs including those from Palihapitiya.
Should you bet on Palihapitiya?
Overall, Palihapitiya has a good track record when it comes to identifying merger targets. Apart from Clover Health, his SPACs have also taken Virgin Galactic and OpenDoor public. Social Capital Hedosophia Holdings V (IPOE) is set to merge with fintech company SoFi. All of these look like good merger targets and the deals were done at attractive valuations, unlike the Lucid Motors-CCIV merger.
Competition is rising in SPACs
That said, SPACs are becoming the proverbial case of too much money chasing too little quality. Looking at the huge number of SPACs that are hunting for mergers, the target companies are spoilt for choice. This would mean merger targets negotiating for a high valuation in the merger deal. The result could be similar to what we saw in CCIV.
Even Palihapitiya, who intends to launch many more SPACs and has reserved all the ticker symbols from IPOG to IPOZ, admitted that launching a SPAC is easy but the execution isn't. Incidentally, Bill Ackman’s Pershing Square Tontine Holdings (PSTH) hasn’t been able to find a merger target and has been reportedly snubbed by Airbnb and Stripe.
IPOD SPAC stock is a buy on dips
Palihapitiya tweeted that he wants to take Stripe public. While the recent correction in SPACs looks understandable, the fall in IPOD stock could be a good buying opportunity.
While there are plenty of SPACs in the market, not all of them have good credentials. Going by Palihapitiya’s previous track record in identifying good merger targets at valuations that left something on the table for the SPAC investors, I would buy the dip in IPOD stock.