SPAC Valuation Multiples are Absurd

SPAC Valuation Multiples are Absurd 

SPACs are allowed to make forecasts of future earnings. And while any long term forecast comes with risk of overstatement, some of these forecasts strain credulity.  Companies going public via SPAC also compare themselves in valuation to other publicly-traded companies – a valuation shortcut known as “multiple analysis”– and some firms seem to just let their imaginations run wild 

QuantumScape, in trying to demonstrate its ostensible affordability versus a select set of firms it deems to be in its competitive set, shows multiples based on 2027-2028 estimated revenues for itself. It compares these ratios to those of electric vehicle companies showing their current enterprise value to revenue ratios – not an apples-to-apples comparison. A fair comparison would project those firms’ revenues to 2027-2028 – surely, Elon Musk would love to borrow from QuantumScape and tack 1,068% revenue growth for 2027 if he were asked to give such a long sighted forecast. 

 This is a very creative valuation. QuantumScape has impressive technology but has not yet earned any revenue. And yet, the firm’s own forecasts project positive free cash flow no earlier than 2028. Tesla earned $24.6 billion in revenue in 2019. Is it realistic to compare these two firms’ valuations with each other? 

Other SPACs have taken advantage of less scrutinizing investors using similar tactics. WeedMaps, a company that helps cannabis users find and buy in states where it is legal, announced a merger with publicly traded SPAC Silver Spike Acquisition Corp. 

A qualitative understanding of WeedMaps might lead one to think of Yelp or a cannabis company as comparable firms. WeedMaps, though, insists that it is indeed a SaaS or high-tech marketplace firm – comparable to Square, the dating company Match, Zillow, or medical CRM provider Veeva Systems. 

Veeva Systems cleared $1.1 billion in revenue for its fiscal year ending Jan 31, 2020 and includes customers like Genentech and GSK among its clientele. WeedMaps earned gross revenue of $144 million over 2019, only 13% of Veeva’s similar period revenue. Even if one could believe that these companies are qualitatively similar, it is still a stretch to see how these firms are financially similar. 

Noticeably absent from WeedMaps’ self-selected list of comparable firms is Yelp or any cannabis industry companies. Though many casually consider Weedmaps as a “Yelp of cannabis”, the firm goes to great lengths to distance itself from Yelp – quite literally so in the chart below from the investor deck. Why strain to avoid this otherwise obvious comparison? 

The answer has two parts. The first is explained by Yelp’s stock market return. After going public in 2012 to positive reception – priced at $15 and opening at $24 at IPO – the firm’s price has fluctuated widely and settled into $29 as of this writing eight years later. Compared to the other firms in the selected comparable companies list, this is an immeasurably small return; Shopify, Zillow, Square, and Match have all seen returns of several hundred or even thousand percent since IPO. 

The second part is the current valuation for firms that fall in the qualitative categories selected by WeedMaps. Having earned $1 billion in revenue in 2019, Yelp’s rough EV/Revenue multiple is about 2x. The same average multiples for the selected comparable companies are several times higher as shown in WeedMap’s own chart below. Comparing themselves to a set of firms with enterprise values of 15-18x NTM revenue seems to position WeedMaps as a relative bargain since its EV/NTM multiple is “only” ~7x.  But this analysis relies on the assumption that WeedMaps is actually comparable to the provided set instead of firms in the cannabis sector.  

Why are cannabis companies omitted? For similar reasons that Yelp is excluded – the market simply does not currently value them highly. WeedMaps stands to gain little by comparing itself to firms in the cannabis industry, despite facing similar regulatory and economic risks. If WeedMaps opts not to compare itself to cannabis companies to highlight its differentiated technology, it should compare itself to firms of similar financial profile – not firms earning 10x as much revenue like Square or Zillow. 

Expected returns to smaller firms are typically different than those of larger firms – a more realistic comparable analysis would see a set of similar revenue earning profiles. Given carte blanche, WeedMaps selected the fastest growing, best-in-class technology firms for self-comparison. They’re not alone in this though; many firms going public via SPAC exhibit the same hubris. I see not just mirages of revenue but  red flags that seem to be popping up all around the SPAC-osphere.