Pershing Square Tontine Stock Could Be Setting SPAC Investors Up for Disappointment

Thomas Niel

January 8, 2021 4 min read

Investors have high hopes for Pershing Square Tontine Holdings (NYSE:PSTH) stock. SPAC stocks were one of the hottest investing trends in 2020. But, while, at some point, the enthusiasm will fade, 2021 could be another banner year for blank-check companies.

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Especially for those with more established backers. That’s the case here, as Pershing Square Tontine counts billionaire investor Bill Ackman as its key principal. While mostly known as a activist hedge fund manager, Ackman was involved in SPACs before they were cool.

A decade ago, he launched Justice Holdings. Its eventual merger partner? Burger King. The renamed Burger King Worldwide eventually folded into fast food conglomerate Restaurant Brands International (NYSE:QSR). Along with this prior Ackman-originated SPAC, the investor dabbled in other SPACs as well, as seen from his mid-2010s investment in Nomad Foods.

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But now, with Pershing Square Tontine, investors are expecting something big. Via the capital it raised, and a commitment from Ackman, it has up to $7 billion at its disposal. Excitement remains high.

Yet, that doesn’t guarantee additional gains are on the table. How so? With high-expectations already priced-in, there’s more that could possibly send shares lower, in the coming year.

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Given its still mostly speculation driving SPAC names like this one, tread carefully. Rallying nearly 34% above its offering price of $20 per share, investors may be setting themselves for disappointment. If the blank-check company fails to wow investors with its merger partner choice, shares could fall back to where they started just a few months back.

Potential Merger Partners for PSTH Stock

What privately-held company is Pershing Square Tontine going to buy? The rumor mill on Wall Street, and in the financial media, hasn’t had trouble coming up with a list of candidates. Back when it went public, Reuters reported the company was “in talks” with AirBNB (NASDAQ:ABNB). But, that “unicorn” decided to go the traditional IPO route instead.

After that, financial media giant Bloomberg LP became the most high-profile merger candidate for PSTH stock. As InvestorPlace’s David Moadel mentioned on Dec 16, SpaceX and Stripe have been potential targets as well.

Yet, these aren’t the SPAC’s only options. What we know for certain is that Ackman is eyeing “mature unicorns.” That is to say, privately held startups worth at least $1 billion. Taking a look at an exhaustive list of unicorn companies, there are quite a few possible merger candidates.

While its casting a wide net for potential target, keep one thing in mind. Unlike other SPACs, Pershing Square Tontine isn’t going for a “growth at any price” play. In other words, don’t expect it to buy a high-flying EV or SaaS upstart. With this in mind, the chances of an epic rally post-deal seem minimal.

But, that’s not all! Given shares have already taken off, on SPAC speculation alone, PSTH stock could tumble back to $20 per share, as investors are underwhelmed by its eventual choice of merger partner.

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Despite scuttlebutt of deal talks with a variety of potential targets, Ackman’s still shopping around. But, the clock’s ticking. Per the prospectus, Pershing Square Tontine has 24 months from its offering date to complete an initial business combination. A set due date for a deal is par for the course with SPACs.

As this Seeking Alpha contributor put it back in August, there’s a near-certainty he finds a merger partner. Yet, that doesn’t mean PSTH stock is set for another surge higher once it announces a deal.

Why? Investors today have priced this much like the blank-check companies taken public by SPAC impresario Chamath Palihapitiya. Palihapitiya has built a strong track record with both his SPACs, Virgin Galactic (NYSE:SPCE) and Opendoor (NASDAQ:OPEN).

Yet, Ackman’s “mature unicorn” criteria, detailed further here, indicates his short list of targets differs from the ones the Palihapitiya sets his sights on. This may limit the potential for shares to rip higher after the deal’s announced.

Putting it simply, there’s more on the table to push shares lower than higher from here. Between the priced-in enthusiasm, and the potential for disappointment, there’s reason to chase this at today’s prices.

Too Late to Chase Pershing Square Tontine Stock

With its established backer, investors priced big expectations into this high-profile SPAC stock. But, with Ackman’s “mature unicorn” criteria, odds are this blank-check company won’t be acquiring the kinds of high-flyers rival SPACs have bought in the past year.

The problem? Investors are pricing it as such. Given the high chances it disappoints SPAC investors, watch out with PSTH stock, as it could fall back towards its $20 per share offering price.

On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.