Serial SPAC sponsor Chamath Palihapitiya (Etienne Laurent / Getty Images)

Return of the SPAC

Oh my god.

7/30/24 3:02PM

It looks like one of my favorite feats of financial engineering might be mounting a comeback. From The Financial Times:

New fundraising [for SPACs] has been improving slowly this year, rising about 20 per cent over the same period of 2023 to $3.1bn, according to Dealogic, and advisers are expecting activity to pick up pace. More than 20 Spacs have filed IPO documents since the start of June, targeting a combined $4.3bn in fundraising. That compares with just $1.8bn raised in the entire second half of 2023.
“There are over 1,300 unicorns out there, and the exit route on both the IPO side and the strategic M&A side has been closed,” said Jimmy Fang, chief operating officer at Spac sponsor Explorer Acquisitions. “Even in the hottest tech IPO market ever, you’re unlikely to get more than 150 IPOs in one year. What happens to the remaining companies? . . . I’m not saying SPACs will fill the entire void there, but I certainly believe they can fill a sizable amount.”

SPACs, obviously, got overhyped in 2020 and 2021, considering that everyone from NBA champion Shaquille O’Neal to former Speaker of the House Paul Ryan launched a SPAC, and as the market grew frothier, the quality of “businesses” going public in SPAC deals deteriorated.

Electric vehicle startups with no revenue, electric scooter startups with broken business models, marijuana seller review platforms, and rare earth metal-based battery producers not expected to be cash flow-positive for six years all went public through SPACs, and, as you could guess, most didn’t perform too well in the public markets.

However, not every company that went public through a SPAC was a bad company. School bus manufacturer Blue Bird, IT infrastructure provider Vertiv, sports betting platform DraftKings, and potato chip maker Utz all went public through reverse mergers with SPACs, and they’ve fared quite well in public markets. The issue is less “SPACs” and more the quality of a company that looked to go public through a reverse merger with a SPAC.

SPACs provide an expedited IPO process with less regulatory hurdles than traditional IPOs. In 2021, the public market appetite for new listings was massive, so “good” companies had no trouble going public through an IPO, and the only companies willing to do a SPAC deal would have been those that couldn’t attract the investor interest needed to support a traditional IPO (for context, Blue Bird, DraftKings, and Vertiv all announced their deals well before the pandemic, and Utz announced its deal in June 2020, before valuations got crazy). Naturally, many of these companies had no business being public.

However, IPO markets are now frozen, many venture and private equity investors need exits to return capital to their investors, and many of their portfolio companies are either 1) worth more than $1 billion, 2) profitable, or 3) both. If the IPO market remains cold, SPACs could become an attractive alternative to get portfolio companies to the public markets.

Nia Warfield, Luke Kawa

Megacap tech and the AI trade power US stocks to fresh records

The S&P 500 rose 0.5%, the Nasdaq 100 was up 0.8%, and the Russell 2000 advanced 0.3% on Monday.

Matt Phillips

Analysts on hard drives: “Supply remains tight”

Bank of America analysts bumped up price targets for hard disk drive (HDD) industry leaders — and S&P 500 top stocks — Seagate Technology Holdings and Western Digital as surging AI data center demand for these low-cost, long-term data storage devices continues to ramp up. They wrote:

“We raise our calendar year hard disk drive exabyte shipment forecast to 1,602 exabytes (+28% y/y) from 1,575 exabytes (+26% y/y) and see room for further upside as demand continues to outpace supply. Despite double digit percentage increases in total capacity... from STX & WDC so far during C25, HDD industry supply remains tight.”

BofA boosted its price target for Seagate from $170 a share to $215, slightly above where the stock is trading on Monday. The analysts also increased their stock price target on Western Digital from $100 to $123, implying a roughly 20% premium to where its share were trading Monday afternoon shortly before 2 p.m. ET.

Besides being an influential market driver this year, demand for hard disk data storage also reflects the vast amounts of data that the boom in AI is expected to generate. (A single exabyte is the equivalent of 1 billion gigabytes.)

As a result, hard drive makers like Seagate and Western are focusing on the next generation of high-capacity data storage gizmos that pack more data bits. These devices are also more profitable than traditional disk drives, which has helped to boost the profitability of the industry, BofA analysts said.

“As HDD demand continues to outpace supply, STX & WDC have seen profitability metrics hit all-time highs,” they wrote.

Those profitability metrics could help explain why the stocks have suddenly caught the fancy of traders.

“We estimate that STX & WDC can get above 42-43% corp gross margin levels exiting [calendar year 2028],” they wrote. “But if pricing is stronger than expected or if manufacturing efficiencies lower COGS, we believe margins could go even higher. Key risks include pause in hyperscaler capex (low probability) and tariffs.”

Max Knoblauch

Alaska Air declines as it warns its profit will be dinged by fuel costs, weather, and air traffic control problems

Seattle-based Alaska Air is trading lower Monday afternoon after the airline warned investors that its third-quarter profits will likely come in on the low end of its prior outlook.

When Alaska Air reported its second-quarter results in July, the airline said it expected third-quarter earnings to land between $1 and $1.40 per share. As of early Monday, analysts polled by FactSet estimated $1.35.

A host of issues are behind the company’s expectations of a dent to earnings. ALK said it’s projecting fuel costs to climb to between $2.50 and $2.55 per gallon, up from its previous estimate of $2.45, due to West Coast refinery disruptions. Weather and air traffic control issues “led to increased costs from overtime, premium pay and passenger compensation,” Alaska said.

With Monday afternoon’s move, ALK shares are down about 8% year to date.

Matt Phillips

Intel cuts expense forecast, sees best gain in weeks

Intel shares jumped after the partially nationalized US chip giant snipped its forecast for operating expenses this year to $16.8 billion from $17 billion after finalizing the divestiture of 51% of its stake in its Altera programmable chip unit to private equity firm Silver Lake.

Shortly after 12 p.m. ET the stock was up 4%, Intel’s best gain since August 22, when the Trump administration announced the extraordinary step of having the federal government take a 10% ownership stake in the private chip company.

Intel trims full-year expense outlook following Altera stake sale

OpenAI doesn’t have the cash to pay Oracle $300 billion — raising it will test the very limits of private markets

The ChatGPT maker plans to burn though $115 billion by 2029. No company in history has ever lit that much money on fire intentionally, let alone tried funding such a splurge through private markets alone.

David Crowther10h