2 Beaten-Down SPACs That Could Be Long-Term Home Runs
These stocks are down by 50% or more from the highs but could be big winners for patient investors.
Although the stock market has rebounded a bit recently, there are still many growth stocks that are 50% or more below their highs. This is especially true when it comes to companies that went public through special purpose acquisition companies, or SPACs, in the past couple of years.
However, there might be some hidden gems among the sea of beaten-down SPAC initial public offerings (IPOs) that could produce massive returns for patient investors. Here are two in particular with massive addressable opportunities that could be worth a look for investors who measure their returns in decades and have relatively high risk tolerance.
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A profitable iBuyer?
Offerpad Solutions (OPAD -8.10%) is an iBuyer that went public through a blank check company, or SPAC, in 2021, and like many SPAC IPOs, the stock has been hammered since going public. There's no denying that the home selling process is full of pain points in the United States. Sellers have to deal with showings, open houses, staging, making repairs, and more -- and once they find a buyer, they need to hope that all goes well with inspections and with the buyer's financing. iBuying aims to find a better way, with companies buying homes directly and instantly (that's where the 'I' comes from), making cosmetic repairs, and then reselling them to buyers.
The main question is whether this can be done profitably at scale. After all, Zillow Group got out of the iBuying business after losing hundreds of millions of dollars, and profits have been elusive for others in the space.
Offerpad might be a different story. Not only did the company grow rapidly in 2020 and 2021, but it was actually profitable for the full year of 2021. Offerpad generated over $2 billion in revenue for the year and sold more than 2,400 homes in the fourth quarter alone.
This might be just a starting point. Roughly 2 million homes are sold in the United States in a typical year, and Offerpad is expanding its geographic reach rapidly, including into California in 2022. If the company can scale to 3% to 4% of its target markets, which is management's stated goal, Offerpad could be a home run for long-term investors.
Could this be the next big-cap drug company?
23andMe Holding (ME 4.89%) is the worst-performing stock in this article, down by about 65% from its $10 SPAC valuation, and to be fair, there are some reasons. Just to name a few, the business is losing tons of money -- an expected $205 million to $220 million net loss in 2022 -- and it turns out that some of the company's projections when the SPAC merger was announced may have been a bit too optimistic.
However, the long-term potential of the business could be huge. Today, about 80% of 23andMe's revenue comes from its well-known consumer genetic testing business, particularly selling DNA test kits. But the most exciting potential comes from pharmaceutical development.
Specifically, 23andMe has genetic data from over 12 million individuals (the next closest competitor has about 1 million). The company aims to use this data to develop targeted pharmaceutical products, and in a more efficient and effective manner than competitors. It has two candidates already in phase 1 trials, including one in partnership with GlaxoSmithKline, plus more than 40 others in earlier stages of development. If some of them make it to Food and Drug Administration approval, the company's $1.5 billion market cap could seem like an incredibly cheap value -- and with nearly $600 million in cash on the balance sheet, 23andMe has the financial flexibility to spend on research and development as necessary to move the pipeline along.
Don't expect a smooth ride
Neither of these are low-risk investments by any definition of the word. But all have massive addressable market opportunities, excellent management, and the risk-reward dynamics make a lot of sense at the current valuations. Both of these have potential to produce home run returns, but there's a lot that needs to go right for that to happen.