(Bloomberg Opinion) -- Wall Street isn’t always too fussed about whether a start-up is profitable before listing on the stock exchange. A decent track record of sales growth is usually pretty essential, though. That quaint idea has been turned on its head this year by the fad for special purpose acquisition companies. Called SPACs for short, they raise cash from investors in an initial public offering and then go find a company to buy. By merging with one of these cash boxes, the target gets a dollop of capital and a stock market listing without all the hassle of a traditional IPO (though the fees can be steep). So far this year, North American SPACs have raised about $38 billion, according to Bloomberg data. SPACs are so trendy, even former House speaker Paul Ryan has one. Billionaire Richard Branson wants to start one of his own too. The remarkable thing about some of these SPAC-backed companies is they’re going public before they’ve generated their first revenues. These businesses are selling a vision rather than a proven track record of turning that dream into reality. Investments don’t get much more speculative than that. The trailblazers for this were Branson’s space tourism company Virgin Galactic Holdings Inc. and electric truck maker Nikola Corp., which both rocketed to multi-billion dollar valuations after being taken public via SPACs. Both have yet to start commercial services.(3)They’ll soon be joined by slew of early stage electric vehicle companies, including Fisker Inc., Canoo Holdings Ltd. and Lordstown Motors Corp.(2) Lordstown, founded a year ago when it acquired a former General Motors Co. plant to build an electric pickup truck, won’t begin commercial production until the second half of next year. The point of the stock market is to funnel capital to companies with bold ambitions that banks and bondholders might be wary of lending to. Early-stage life sciences companies have a long track record of raising money via an IPO to fund research and see them through the lengthy regulatory approval process. However if you recall the dotcom bubble, you’ll know that things don’t always work out too well when some companies go public with little more than a prototype and a business plan.Perhaps the biggest lesson of the intense scrutiny Nikola has faced this week following a scathing short-seller report is to be wary of companies that list on the stock market before they’re ready. Nikola acknowledged rolling a truck down a hill in a 2017 promotional video, rather than having it drive under its propulsion, but it denies misleading its investors. “I guess you’re seeing how the sausage is made, and we went public way too early,” Nikola board member Jeff Ubben told Bloomberg this week.Is there a bubble forming again that we should be worried about? The trend for companies to go public with near zero revenue certainly reflects the current frothiness of equity markets. With Tesla Inc. valued at almost $400 billion even though it remains only modestly profitable, it’s not surprising SPACs want a piece of the action. Shares of Tortoise Acquisition Corp., a SPAC, have gained 370% since June when it announced it would take heavy truck electrification company Hyliion Inc. public later this year. In a traditional IPO, written disclosures tend to focus on historic financial performance. But when a company merges with a SPAC, it’s permitted to publish detailed revenue and profit projections for the next several years. Consider Fisker, which is being taken public by a SPAC affiliated with private equity giant Apollo Global Management Inc. The company forecasts $10.6 billion in yearly sales and $1 billion of free cashflow by 2024, even though it won’t begin production of its Ocean electric SUV until the end of 2022.Such forecasts doubtless help investors get comfortable investing in a company with little current revenue, but they could turn out to be a pretty unreliable guide. Developing and manufacturing a vehicle isn’t straightforward. Henrik Fisker’s first venture, Fisker Automotive Inc., filed for bankruptcy in 2013 after safety recalls and battery supply hiccups. At his new eponymous electric vehicle company, Fisker Inc., he and the chief financial officer, who’s also his wife, will together have 90% of the voting rights, according to this filing. Sub-optimal governance is another issue new companies can face.Investing in an immature company isn’t for the faint-hearted. Absent meaningful revenues to assess each quarter, investors might struggle to judge whether the company is making progress and the hype might start to fizzle. Nikola’s first earnings as a public company were a snooze: one analyst asked, “Is this all we get?”Of course, as Nikola has discovered, public companies also face much greater scrutiny from shareholders and regulators, which risks diverting management attention from the task of building a viable product or service. The company may have been able to avoid some of these issues by taking more time to perfect its hydrogen and electric trucks away from the public market’s gaze.For now, the buzz around pre-revenue companies remains intense. The hangover could be too.(1) Virgin Galactic holds over $80 million in customer deposits, so it has at least demonstrated there's demand for space tourism.(2) Canoo already generates some revenue from engineering servicesThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
Tesla had filed a lawsuit against Martin Tripp, who formerly worked at the Tesla Gigafactory in Nevada, in 2018 claiming that he had admitted to writing software that hacked the carmaker's manufacturing operating system, transferring several gigabytes of its data to third parties and making false claims to the media. The U.S. district court of Nevada said in its ruling that it will grant Tesla's motions to seal "because compelling reasons support them, and they are unopposed."
(Bloomberg) -- Amid last month’s frenzy in options, some investors said they saw an age-old ritual playing out. Newbie traders, blinded by dreams of riches, rushed into the market, where Wall Street professionals sat waiting to take advantage of their enthusiasm by raising prices.A few volatility analysts saw signs that dealers cashed in on novice buyers by pushing up options costs in the most popular stocks. By these accounts, individuals were so hungry for Apple Inc. and Tesla Inc. options in late August and early September that they were willing to buy at any cost.“That’s the perfect scenario: you get this big wall of demand that doesn’t really know what they’re buying,” said Matt Thompson, who runs volatility strategies as director of research at Thompson Capital Management. “All they know is they want the call and they want it now. You can keep raising prices of those short-term options if the demand is sufficient.”Day Traders, Nasdaq Whales Show Market-Moving Clout With OptionsAs with most things in markets, opinion varies. What one person sees as opportunism, another views as prudence. To the latter, boosting the price of bets on technology stocks is a decision any good dealer would make in a market when those stocks were rising 5% or 10% a day.One thing’s for sure: options prices turned extreme. In late August, contracts on Apple were the highest in almost a decade as measured by the premium of one month at-the-money implied volatility over 20-day realized volatility.For Apple and Tesla, dealers were able to charge more for calls than comparable puts in August. In normal times, the opposite is true, since bearish contracts are in greater demand for hedging. For Amazon.com Inc., call option prices increased significantly relative to puts.“There’s no doubt market makers were just raising the vols and Robinhood buyers didn’t even understand how that impacted the price of the options,” said Kris Sidial, vice president of Ambrus Group, a New York-based volatility fund. “They were more fixated on owning something that could provide a point of leverage.”Also beyond dispute is that volatility, a key determinant of an option’s price, was on the rise. Parabolic gains in technology companies had made sharp rallies look more likely, justifying higher options prices. The November election and withdrawal of economic stimulus added to an uncertain outlook.Matt Zambito, founder of markets data provider SqueezeMetrics, says big runups in Apple options made sense next to the wild moves in the stock.On Sept. 1, near Apple’s peak, implied volatility was forecasting moves of around 2% a day over the next month. Since then, the stock has moved more than 3% a day on average. “If anything then, implied volatility may have actually been too low,” he said.Volatility expectations don’t explain the full move in options prices, according to Brent Kochuba, who runs the analytics service SpotGamma. His view is that dealers, facing a tidal wave of demand from retail buyers, raised prices to prevent themselves from being overwhelmed.“Market makers are required to make a market, and so their best way to dissuade call buying is to jack up prices,” Kochuba said. “This made buying calls way too expensive to offer a positive expected return.”He pointed to Tesla calls that wouldn’t make money unless the stock moved more than 15% in three days as an example of extreme pricing.He also saw the impact first hand in his personal account. After buying Tesla puts, he realized he’d bet wrong as the stock rallied. But thanks to the dramatic surge in options prices, the wager became profitable.“It made money when the stock went up,” he said. “Never ever seen that before.”Retail option flows typically go to market makers such as Citadel Securities and Susquehanna International Group, which deploy state-of-the-art computers to crunch fair value by the millisecond, transact large volumes and skim pennies off each trade while making sure they are not left with unwanted exposures.A lot goes into the formulas dealers use to price options, including an estimate of a stock’s volatility. The more a stock swings around, the more likely it is to reach the strike price. Other factors, including how long it is until the contract expires, coming dividends, and its distance to the strike price, also affect the cost.For the Robinhood crowd that have made and lost fortunes, their bullish convictions are still going strong. Last week, small traders bought 6.4 million more calls than puts. That’s half the number compared with the week before, but still higher than anything in the last two decades before the summer mania, according to SentimenTrader.Justin Ferhati, a 19-year-old trading with his own savings and $30,000 from his father, said he’s practicing for a career on Wall Street and plans to keep dabbling in options despite some bad bets recently.He posted a video on Reddit titled “Bumpy staircase up with a straight elevator down.” It showed his Robinhood account balance plunging from around $84,000 in early September to $19,000 last week, accompanied by sunglasses and thumbs-up emojis.“You’re only at a loss if you stop trading because you’ll never ever be able to make your money back,” Ferhati said by phone from New York, where he’s attending college classes online. “If you trade options, it’s like a casino.”For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.