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So many SPACs, so many disasters.
This is an old story. At least as old as 1720.
In 1845, Thomas Mackay wrote Extraordinary Popular Delusions and The Madness Of Crowds. This is the actual text he chronicled of a public offering made in 1720. The sole description of the company’s business, balance sheet and prospects were contained in the offering sheet as:
"A company for carrying out an undertaking of great advantage, but nobody can know what it is."
This was the offer for shares in what came to be called the "South Sea Bubble." Think that's ancient history? Not quite. "Blind pools" are still with us today. At manic market tops, I have seen a number of these little rascals—and seen thousands of people line up to offer their hard-earned cash. Here is one from the go-go 1980s:
"This offering is of securities of a startup company with no operating history and no plan of operation; the company will not engage in any business whatever until after the completion of this offering... The company does not know what business it will engage in and has no plan of operation."
Most of these deals enrich the Big Money that fronts the fact and hype of a company they are typically merging with to create a public listing. They can easily list their own pre-merger company with a private firm because their public offering consists of nothing but some variation of the above two quotes. They are basically saying to the SEC “we have no earnings, no revenue and no business plan.” There is nothing for the SEC to “review” so they are easily listed. Then and only then do they hunt for a (hopefully robust) merger partner. The SEC typically gives them 2 years to do so without penalty.
In its latest incarnation, these companies hunting for a merger partner are called Special Purpose Acquisition Companies, or SPACs. I have re-learned the hard way that it can pay to buy SPACs at their initial listing price, before they have found a merger partner, or after they have announced their intended quarry and investors have moved on to some other hot ticket item.
If their price returns all the way to or below the original offering, and if the intended marriage partner looks to be interesting, I will take the flyer. One such firm is the SPAC Forum III (NASDAQ:FIIIU), which is merging with the pedestrian-sounding Electric Last Mile Solutions company—ELMS. ELMS is creating a niche in the local delivery market by manufacturing EV Class 1 delivery vans at an existing Indiana auto plant converted for EV manufacture.
I am interested in this SPAC (after buying way too soon the first time) for two reasons: (1) after reaching a speculative high of $15.30, it has returned to a price of $9.95, with the “Units” at $10.35 (FIIIU, consisting of one share and one warrant,) just 50 cents over its initial offering price. And (2) I believe it has a first mover advantage in its niche market of smaller delivery/cargo/utility vehicles for an urban setting. The company’s direct competition is delivery vehicles like the Ford (NYSE:F) Transit Connect.
There are many other companies vying for EV supremacy in the delivery and cargo business. ELMS specializes in the “Class 1,” the less-than-6000 pound category. Names like Arrival, Rivian, and Workhorse are often mentioned in this field, but they offer only the larger Class 2 (6000-9000 pound) and Class 3 (10,000-14,000 pound) vehicles.
The only EV competitor in the more maneuverable in tight city streets Class 1 arena is one Canoo (NASDAQ:GOEV) model and it is not expected to begin production until 2023. So ELMS’ competition in the immediate term are the more-expensive-to-operate internal combustion vehicles that currently own the market for Class 1 vehicles.
ELMS, on the other hand, is scheduled to begin production in the USA by the 4th quarter of 2021. I say “in the USA” because they will be producing EV van platforms made by Chinese auto-, engine- and components-maker Chongqing Sokon Industry Group (SS:601127) in China. Sokon has sold more than 30,000 of these EV vans in Asia, proving real-world experience in actual usage.
Fewer Moving Parts
One benefit of EVs, especially to large fleet purchasers like Amazon (NASDAQ:AMZN), Best Buy's (NYSE:BBY) Geek Squad, Walmart (NYSE:WMT) and any other big outfit with lots of deliveries, is that there are way fewer moving parts to an electric vehicle, thus lower operating costs. Also, there is the dependability of fuel benefit: electricity prices may fluctuate but not nearly as much as gasoline prices.
Between lower operating costs, lower fuel costs and the sweet (currently) $7,500 tax credit for purchasers, ELMS’ vans are on a par with the current internal combustion engine (ICE) vans to buy—and then much lower costs to operate beginning on Day 1. Because there is less weight and room taken up by the engine, ELMS’ Urban Delivery offering also gives the owner 40 more cubic feet of cargo space than the current ICE leaders like Ford.
Another “moving part” that can force current ICE leaders to charge more is the cost of getting their product to the US. Ford’s primary manufacturing plant for delivery of ICE vehicles is in Spain, Nissan's (OTC:NSANY) is in Mexico, and the Dodge (NYSE:STLA) vehicle is built in Turkey. ELMS was able to convert the former Hummer plant in Mishawaka, Indiana into an assembly line for their EVs.
Finally, in the realm of “moving,” I hearken back to the fact that ELMS will likely enjoy at least one full year with no competition in this niche market for the very popular Class 1 vehicle. If their product is of sound quality and resonates with buyers, this first mover advantage will prove to be a major competitive edge.
How Do We Value a Company With No Sales?
We have to use a little Kentucky windage. If we figure that ELMS just gets, say, 3% of the market the first year, 2022, and ICE vehicles the other 97%, but then grows to 5% of the market in 2023 when their first EV competitor “says” it “expects” to start production, then grows to 7-10% of the market over the next year-plus, we are looking at 30,000 to 40,000 EVs sold by 2023, growing to as many as 90,000 to 110,000 by 2025-2026. At those two points, not that far away, we might reasonably expect to see $1 billion in sales by 2023 and $2 billion+ in the following couple years.
I have tried to portray a middle ground perspective here. Again, ELMS is currently a pre-revenue, pre-earnings company. There is no guarantee that ELMS will execute in such a manner as to reach the above reasonable projections. Of course, if the political winds continue in the same direction and increase just a smidgen going forward, further subsidies might render my numbers above too conservative. Time will tell.
I believe the current retrenchment among all SPACulative EV offerings provides a good opportunity to buy into EV manufacturers, battery manufacturers and the miners who mine and process the essential metals that will create the EV Revolution. I have written about these here and elsewhere. Among them, I place Electric Last Mile as one of the top few of the hundreds of SPACs out there to reward me with good execution and an increasing share price.