Special purpose acquisition companies (SPACs) continue to target electric vehicle manufacturers. But among those SPACs, Northern Genesis Acquisition (NYSE:NGA) stock stands out.
After all, there’s a lot of hype around electric vehicles, and particularly around EV SPACs. But that hype, combined with the somewhat opaque nature of SPAC mergers, makes it difficult to separate the contenders from the pretenders in the industry.
All of these EV companies promise billions of dollars in revenue in a relatively short period of time. Yet even in a market poised for spectacular growth, they can’t all be right. Given that most of those companies have zero revenue at the moment, it’s difficult to project which of these mergers will be winners — and which will lose out.
Lion Electric, with which Northern Genesis is merging, too is promising big-time growth over the coming years. But Lion has one key difference from so many other SPACs that make it one of the group’s most intriguing plays.
The Projection Problem
It’s important to remember a key difference between SPAC mergers and traditional initial public offerings. Companies going through the IPO process generally can’t issue financial projections. They’re limited for the most part to backward-looking results.
That’s actually one reason why SPACs have become so popular of late, and particularly for EV companies. The restrictions placed an IPO prospectus limit pre-revenue startups from aggressively pitching their stock to the market. Looser rules around merger presentations, however, allow for more talk of a promising future.
The problem is that every EV developer thinks it has a promising future. They’re not all going to be right. The market is growing, but as far as electric models go, it’s relatively zero-sum. And as we’ve seen, some merger targets are happy to take some liberties with their stories.
The issue isn’t that these companies aren’t unethical. Rather, their management teams are optimistic. They have to be, of course. No one starts any company, let alone an electric vehicle manufacturer, believing they will fail. Yet many startups — in fact, most startups — don’t make it.
The issue with investors is that it’s hard to see which expectations are based on optimism and which are based in reality. As the Wall Street Journal noted last week, multiple EV companies believe they will become the fastest company ever to reach $10 billion in sales.
Obviously, they’re not all right.
More importantly, many of those companies are trying to hit that bogey starting from literally zero in revenue. Investors looking at these SPACs, before and after the merger, are thus left reliant almost solely on those projections, even though most are likely to prove too optimistic in retrospect.
Why NGA Stock Is Different
Admittedly, Lion issued projections of its own when the merger was announced at the end of November. But there is one key difference: Lion already has a business.
Indeed, the company expects 2020 revenue of $29 million, on the back of 110 units sold.
The company isn’t profitable yet. But its supply chain is established. Its sales force is set up, and will expand.
Most importantly, the technology is proven. Over 300 vehicles are on the road already. Combined, they’ve traveled more than 6 million miles.
These aren’t prototypes. They’re working vehicles. A number of EV stocks with substantially higher valuations can’t say that.
Now, those 300-plus vehicles don’t mean Lion is going to dominate the bus and truck markets. They don’t guarantee that NGA stock is going to move higher from here. Pro forma for the merger, Lion is still is valued at over $3 billion. That’s over 100x 2020 revenue.
But Lion has a legitimate shot at growing into that multiple. The bus market, in particular, will see strong growth. A number of states are pushing zero-emission targets. So is the Biden Administration.
The demand is going to be there. Competitors will be too, but particularly on the bus side, it’s not a market being targeted by the biggest players yet.
So we know Lion has the technology, and a real shot at success.
As far as SPACs go, that’s about as good as it gets. Investors looking for a play in the sector should take a long look at NGA stock.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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