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The fever in electric vehicles (EVs) has recently boosted DiamondPeak (NASDAQ:DPHC). On July 31, DiamondPeak stock closed at $10.24. Now, it is flirting with $25. On Sept. 11, the share hit an all-time high of $25.30. Considering the volatility and the downtrend in broader markets, especially in tech shares, the young company is handily outperforming many other EV businesses in September.
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So far, 2020 has been an epic year for EV and alternative energy investments, building on the growth from last year. The “Global EV Outlook 2020” published by International Energy Agency (IEA) highlights, “Sales of electric cars topped 2.1 million globally in 2019. Electric cars, which accounted for 2.6% of global car sales and about 1% of global car stock in 2019, registered a 40% year-on-year increase.”
The surge in DiamondPeak stock came after a reverse-merger announcement of Aug. 3 between Diamond Peak, a publicly-listed special purpose acquisition company (SPAC), and the privately-held electric truck company Lordstown Motors.
SPACs are unique financial firms. Recent research by Johannes Kolb and Thereza Tykvova of University of Hohenheim highlight that as shell companies SPACs have “no or nominal operations and either no or nominal assets, assets consisting solely of cash and cash equivalents.” SPACs use their proceeds to find a suitable partner for a reverse merger. Today we’ll discuss what investors may expect from DiamondPeak stock in the coming quarters.
Another EV, Another SPAC
CNBC Host Jim Cramer has recently noted that Robinhood investors are betting on shares, especially in the alternative energy space, that may become the next Tesla (NASDAQ:TSLA) and shape the future of technology.
Who can blame the average investor for wanting to own a piece of the potential growth story companies like Tesla offer? Despite the recent sell-off in tech shares, year-to-date TSLA stock is still up over 400%. The surge in Tesla’s share price has disrupted market-value rankings among car manufacturers and baffled many investors.
Another recent fever in the markets has been the increased numbers of SPACs, which are getting increased attention as an alternative method of going public instead of the traditional initial public offering (IPO) route. An SPAC usually has two years to find that potential merger partner to take public and finalize the deal. In a SPAC reverse merger, a private company, like Lordstown Motors, merges with an existing SPAC, such as DiamondPeak, that’s already listed on a stock exchange.
So far in 2002, we have had several SPAC reverse-mergers within the EV and alternative energy space. They include Gore Metropoulos (NASDAQ:GMHI), Kensington Capital (NYSE:KCAC), Nikola (NASDAQ:NKLA), and Spartan Energy Acquisition (NYSE:SPAQ).
Why do private companies prefer reverse-mergers with SPACs? As a result, a pre-revenue privately-held company can avoid going through various steps and hurdles to go public or sell new shares, which may take months if not years. Put another way, such a reverse merge could be a win-win for both parties as well as shareholders.
What to Expect from DiamondPeak Stock Now?
Not all reverse mergers with SPACs are necessarily successful. Yet there are others that create value for shareholders. There may be different reasons for post-merger successes or failures. It is possibly too soon to tell how DiamondPeak stock will fare. Lordstown Motors is taking pre-orders for its electric pickup truck, the Endurance. However, there is currently no production.
Most SPACs start trading around $8-$10. Diamond Peak stock also traded between $9-$10 since listing on NASDAQ in April 2019. Following the merge announcement, the price typically spikes up, as has been the case in DPHC shares. In a matter of days, Diamond Peak stock more than doubled.
Yet, in SPAC reverse-mergers, many companies eventually give up their gains and even go below the $10 level. For example, Del Taco Restaurants (NASDAQ:TACO), which saw a high of $17.50, is currently around $8. Similarly, Waitr (NASDAQ:WTRH), which hit $15.06 as an all-time high, is now below $3.70. Finally, Virgin Galactic (NYSE:SPCE), whose highest level was $42.49, is hovering at $16.
In the reverse merge, the IPO is typically conducted by issuing units, i.e., a composite security consisted of a share and certain number of warrants. InvestorPlace.com contributor Mark R. Hake, CFA has recently written in detail about the in-the-money warrants of five SPACs. His analysis shows that DiamondPeak stock is worth around $21.50.
If you also believe that in the long-run fundamentals drive a company’s worth, then it is possible that we have already seen the highs in DPHC shares, at least for now.
The Bottom Line
2020 has become the year when electric car startups are turning to blank check firms, or SPACs, to raise cash fast and become listed. Yet it is too soon to tell if DiamondPeak will be able to create a niche in the market. Furthermore, the deal between the two companies has not yet fully closed. The Street expects completion in the fourth quarter of this year, after which the new company will trade under the ticker symbol “RIDE.”
Therefore, if you’re considering investing in DiamondPeak stock now, you may want to see how the next several quarterly reports come out. With a newly listed company, it is important to see the trend in its fundamental metrics. You may be able to buy them for a cheaper price in the weeks to come.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. She also publishes educational articles on long-term investing.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.