One of the toughest things about being a public market CEO is getting your quarter right. In the private markets, if you achieve 90% of your target and you get high fives as people are amazed at how well you have done. In the public markets, that’s called a 10% earnings, and miss your stock gets hammered.
Public market CEOs need to tread the careful tightrope between being optimistic but leaving enough of a buffer to make the quarter. Missing is far worse than beating by the same magnitude.
In 2Q 21, 87% of companies in the S&P 500 reported surprise earnings. Most of the time many more companies beat than miss.
In the SPAC world, things are reversed. According to some great analysis by Spactrack only 41% of companies reaffirm or raise guidance. Only 18% of SPACS in 2020 and 2021 lowered or withdrew their guidance. That is actually much less than I thought.
However, the problem is when things go bad things go really bad.
Take AppHarvest for example. A SPAC that claimed to be revolutionising farming tomatoes and other produce with amazing technology. But eagle-eyed analystswere pointing out that on page 14 of their deck it looked more like they were plugging together other people’s technology together. But if they reduce the cost of my salary then let’s roll the dice right? Wrong! They closed their SPAC in Feb and their first earnings as a public company went from $25mln of projected revenue to $8mln. A 68% fall!
Momentus - closed their SPAC in August, 100% reduction in guidance (yes that is to zero)
Rockley Photonics, 32% drop in earnings and their SPAC closed in August again.
So far SPACTrak has found 20 companies that have missed their revenues by 30% or more and many of the sponsors are the so called “serial sponsors”
As I said above, the earnings misses are definitely less than I thought. Also sometimes the miss is for legitimate reasons. These days SPACs are being held up due to SEC accounting reviews which delays money coming into the coffers. More SPACs should more clearly spell out the assumptions on growth prospects, especially if they are dependant on the money. In many cases, it’s private market mentality coming to the public market. This is a lesson for both sponsors and companies, please be careful out there. The markets and lawyers are watching.