Special purpose acquisition companies (SPACs) seem to have lost their mojo after a splendid run during the pandemic. SPAC liquidations are on the rise due to tough market conditions and a new 1% excise tax imposed on stock repurchases or buybacks under the Inflation Reduction Act. Based on the data from SPAC Research, the Wall Street Journal estimates that nearly 70 SPACs have liquidated and returned money to investors in December. This marks the highest number of SPAC liquidations seen until now.
A SPAC or a blank-check company is a shell firm that raises money from investors through an initial public offering (IPO) to merge with a private company and take that business public. Once the deal is completed following regulatory approval, the company going public replaces the SPAC in the stock market. A SPAC generally has two years to complete an acquisition and faces liquidation if it fails to do so.
SPACs Under Pressure
SPACs are struggling to find lucrative deals amid soaring interest rates. The situation is worrisome as the two-year deadline for several SPACs will be coming up in the first half of 2023. Several SPACs have also accelerated liquidations due to rising regulatory concerns and the 1% excise tax that might be applicable next year onwards. The liquidation of a SPAC will require sponsors to return cash to investors, which could be considered as a buyback of the company’s existing shares and thus invite the 1% excise tax.
SPAC creators have lost over $1.1 billion on liquidations in 2022, including more than $600 million in December. Often called SPAC King, venture capitalist Chamath Palihapitiya had to wind down two SPACs in September and return cash to shareholders as he failed to find companies to take public. Stocks of Palihapitiya’s SPACs, including Virgin Galactic (NYSE:SPCE) and SoFi (NASDAQ:SOFI), have lost significant value this year. Interestingly, Palihapitiya’s investment firm Social Capital Holdings Inc. has made nearly $750 million across several SPAC deals.
SPAC Research estimates that more SPAC sponsors will seek liquidation in the coming months. As per the research firm’s latest report, 428 SPACs with a total worth of $108.4 billion are still searching for deals.
Let’s have a look at Wall Street’s ratings for two of Palihapitiya’s popular SPACs.
SoFi Technologies (SOFI)
Shares of fintech firm SoFi Technologies have plunged 71% year-to-date as investors have moved away from sky-high valuation firms amid rising interest rates. Nonetheless, several analysts remain bullish about the company’s long-term prospects based on its growing product portfolio, expanding customer base, and its banking business. However, near-term pressures might persist due to macro challenges and the extension of the student loan moratorium.
Is SoFi Stock a Buy?
Wall Street has a Moderate Buy consensus rating for SoFi stock based on seven Buys and four holds. The average SOFI stock price target of $7.18 implies nearly 56% upside potential.
Virgin Galactic Holdings (SPCE)
Space travel company Virgin Galactic, founded by entrepreneur Richard Branson, aims to pioneer commercial human spaceflight for private individuals with its advanced air and space vehicles. The persistent delay in the commercial launch of the company’s services has impacted investor sentiment.
The company’s losses are mounting and its cash burn rate (negative free cash flow) is increasing as it continues to make significant growth investments. Meanwhile, Virgin Galactic has assured investors that it is on track to launch commercial service in Q2 2023.
What is the Forecast for Virgin Galactic Stock?
Wall Street has a Moderate Sell rating for Virgin Galactic stock based on one Buy, one Hold, and three Sells. The average SPCE stock price target of $5.40 implies 47.5% upside potential. Shares have tanked 73% so far this year.
Conclusion
SPACs were considered by many as a better alternative to traditional IPOs. However, this year SPACs have witnessed declined interest amid challenging macro conditions. SPAC liquidations are rising due to the lack of attractive deals and the 1% excise tax on buybacks.
