SPAC Wipeout Is Punishing Followers of Chamath Palihapitiya; More Knocks on [Cathie] Wood; WeWork's New Stock-Listing Plan Has Echoes of Its Past; The oldest company in the world

By Whitney Tilson

Wednesday, April 21, 2021
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1) Special purpose acquisition companies (“SPACs”) are in a major slump, led by those of “SPAC Man” Chamath Palihapitiya, as this Bloomberg article highlights: SPAC Wipeout Is Punishing Followers of Chamath Palihapitiya. Excerpt:

Just as Chamath Palihapitiya was the face of the SPAC frenzy that gripped financial markets at the start of the year, he is today the face of the bust.

All six of Palihapitiya’s Social Capital Hedosophia-linked blank-check companies, including three that already completed mergers, have plunged more than the broader SPAC market since it hit its peak in mid-February. One of them – Virgin Galactic (SPCE), a space tourism business that’s backed by Richard Branson – is down more than 50%. All of these losses are greater than the 23% average decline in SPACs, as measured by the IPOX SPAC Index, over that time.

The collapse in special purpose acquisition companies – oddball financial structures with a niche role in markets before the recent boom – came as part of a broader cooling of speculative mania in markets. Just a couple weeks earlier, the fever in meme stocks had finally broken. So, too, in penny stocks. Too much supply is part of what did SPACs in. Dozens of new deals – many of them minted by celebrities – were hitting the market each and every week.

Days before the rout began, Palihapitiya, a 44-year-old venture capitalist with a flair for self-promotion, proclaimed he was poised to be the Warren Buffett of his generation. “Nobody’s going to listen to Buffett,” he said in a Feb. 8 Bloomberg “Front Row” interview. “But there has to be other folks that take that mantle.”

His last comment about Buffett really irritated me, so in my February 24 e-mail, which turned out to be within days of the peak of the SPAC bubble, I wrote:

My observation over the past two decades is that anytime a “new economy” guru compares himself to – while also trash talking – the Oracle of Omaha, the market soon punishes his hubris!

Little did I know how quickly my prediction would come true…

That said, I think the SPAC market is here to stay this time. I view this pullback as a healthy turn of events that will shake out much of the absurd foolishness and speculation that has been running wild.

But, as we now know, investing in this sector is treacherous, so you’d better know what you’re doing – or have a good guide. And on that front, there’s nobody better than my colleague Enrique Abeyta, who publishes Empire SPAC Investor every month.

Click here to sign up for it. If you’re not satisfied for any reason, just call our customer service team within 30 days and we’ll give you a full credit, which you can apply to any other Empire Financial Research product.

2) Speaking of SPACs, shared office space company WeWork has recovered from its disastrous failed initial public offering (“IPO”) attempt in late 2019 (in my April 5 e-mail, I recommended the new Hulu documentary that tells this wild story: WeWork: Or the Making and Breaking of a $47 Billion Unicorn) and is now trying again to go public, this time by merging with the SPAC BowX Acquisition (BOWX).

My colleague Berna Barshay covered this in depth in her always-outstanding Empire Financial Daily e-mail yesterday, but I wanted to briefly add my thoughts (written before I read hers)…

First, here’s a recent Wall Street Journal article about it: WeWork’s New Stock-Listing Plan Has Echoes of Its Past. Excerpt:

WeWork, which had one of the most spectacular IPO implosions in recent years, is trying to go public again – and some of the factors that worried regulators on the first deal are back again.

WeWork isn’t doing an initial public offering this time, but merging with a special-purpose acquisition company, or SPAC. Rules around SPACs are looser than for IPOs, giving WeWork more leeway to tout its future.

The shared-office provider is expected to merge with a SPAC called BowX Acquisition later this year. As the two entities promoted the deal to investors, they painted an optimistic scenario for the company’s growth and profitability.

BowX’s chairman described WeWork in a call with investors as a $5 billion revenue company, though that figure is a projection rather than a current number. When describing WeWork’s size, the company counted units that WeWork doesn’t own directly.

WeWork is predicting a rapid recovery from the pandemic downturn, which hit its business particularly hard because few people were using offices, much less shared space, and because it was still on the hook for long-term leases. The company is also using a new profit measure that shows higher margins than it claimed in late 2019.

My take: I think Berna is likely correct in her conclusion that “WeWork is no bargain. Stay away!”

However, if I channel my inner Enrique (that’s a joke – sort of!), given WeWork’s puzzling ability to excite investors, BOWX shares are actually an interesting speculation – but I’d be more interested around $10 rather than the current $11.50.

3) If Chamath Palihapitiya is the king of hype and speculation, ARK Invest’s Cathie Wood is the queen. My colleague Berna Barshay and I have been warning our readers about her funds for months, as has my friend Doug Kass of Seabreeze Partners. Here’s his latest missive:

More Knocks on Wood

  • Cathie Wood’s ARK Invest sold (near a multi-month low) almost 600,000 Virgin Galactic shares yesterday
  • SPCE traded at around $60/share in February 2021 and is trading at approximately $22/share
  • What’s going on at ARK?
  • Perhaps the financial media should delve below the surface
  • Unfortunately, by the time they do… it might be too late for ARK Innovation Fund (ARKK) shareholders

Months ago I wrote a column, “We All Live In Cathie Wood’s World (But That Can Change Quickly).” At the time, ARKK was riding high – the beneficiary of enormous fund inflows.

A lot has changed since then, though many, including the financial media, have not taken the time to analyze what.

In Monday’s session (after recently buying SPCE), ARK Invest sold nearly 600,000 shares of Virgin Galactic. The shares traded at $60/share and closed yesterday at slightly above $22.

It was less than four weeks ago that ARK Invest’s space exploration fund (ARKX) started trading – the week of March 29 – and initiated a 2% position in SPCE (the shares were trading at about $30/share then). Now it looks to have been sold or is in the process of being sold.

The financial media is asleep in their coverage of ARK Invest. By fawning and emphasizing the past successes of ARK and its ETF vehicles – the media’s flattering attention is seen through the rear-view mirror and not based on a bona fide analysis of the risks (particularly the reduced liquidity in concentrated positions) associated with the ARKK ETF as well as the other ARK Invest vehicles.

The cynic might say that this is a function of ARK’s marketing and advertising clout (ARK Invest advertises aggressively on all three of the major business networks). Or the absence of real, critical commentary is a function of professional laziness.

Regardless, most are failing to see the difference between ARKK’s forest and the trees.

I continue to believe that ARKK is a fundamental short.

4) You’ll win trivia night with this: The oldest company in the world that is still operating is Kongō Gumi, a Japanese construction firm that was founded in A.D. 578:

This construction company was founded by an immigrant, who was commissioned by Prince Shotoku to build the Shitennō-ji Buddhist temple. Kongō Gumi was a family-run company for around 1,400 years until 2006, when the company struggled financially and became a subsidiary of Takamatsu. Before the merger, it employed over 100 individuals and had an annual budget of around $70 million. It continues to specialize in Buddhist temples today.

Here’s a list of the 20 oldest companies in the world, the oldest five of which are all in Japan.

Best regards,

Whitney

Whitney Tilson
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About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to more than $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor’s degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

Click here for the full bio.