Don’t Let SPAC Hype Detract You From Churchill Capital Corp IV

It doesn’t take a genius to understand the enormous sentiment toward electric vehicles (EVs) these days. From the dramatic rise and influence of sector leader Tesla (NASDAQ:TSLA) to the new, eco-friendly administration of President Joe Biden, there’s no shortage of bullish catalysts. As a result, I can appreciate the mass speculation in Churchill Capital Corp IV (NYSE:CCIV), the latest name of SPAC, or special purpose acquisition company, fever. But should you buy CCIV stock?

A photo of the Lucid Motors Air EV from 2018.
Source: ggTravelDiary /

Apparently, this is a question that has gone completely over the masses. And that’s because, as of Friday, Jan. 22, rumors intensified that Churchill’s merger with Lucid Motors, a luxury EV manufacturer that has the potential to compete with Tesla, will be made official, perhaps by Monday, Jan. 25. Naturally, this has been a boon for CCIV stock.

The Backstory

Here’s how InvestorPlace Web Content Producer Sarah Smith explained it:

“The story here is simple, minus the lack of merger confirmation. Bloomberg reported the blank-check company was in talks with Lucid Motors, and investors have been celebrating ever since. We have seen pops and drops in the meantime, and Churchill Capital executive Michael Klein has been working to tamper expectations.

“However, those expectations are once again climbing. As of this morning, CCIV stock fans are arming themselves with a new report in the Los Angeles Times. According to writer Russ Mitchell, Lucid Motors and Churchill Capital are closing in on a deal. According to social media users, that means confirmation could be coming after the weekend. Without commentary from the companies or the requisite U.S. Securities and Exchange Commission filings, this is nothing but speculation.”

And this last sentence is the crux of both the opportunity and the challenge: The deal is a rumor. Because sentiment is so hot, if the deal falls apart, CCIV stock is likely to tumble. Of course, the opposite is also true.

However, irrespective of the SPAC rumors, if you have a long-term framework, you’ll want to buy shares of Lucid Motors no matter which blank-check company gets the honors.

The Fundamental Case for CCIV Stock Is Compelling

From here on out, when I mention CCIV stock, I’m talking specifically about sentiment toward Lucid’s business and not about the SPAC rumor mill. Further, I’m not one to chase up nothing more than a rumor. However, my gut tells me that this isn’t your garden-variety speculation.

That’s because for the first time, we have a legitimate and credible direct competitor to Tesla. For one thing, the flagship Lucid Air is a sharp design contrast from the same-ish looking Tesla motif that Elon Musk and company rehashes throughout their product portfolio.

Further, Lucid features advanced innovations, particularly the “Lego brick” modular system, allowing the upstart competitor to stack multiple EV batteries in the Air’s framework. The end result is a 480 horsepower base model (starting at $69,900) with a projected range of 406 miles. Of course, the “wow” factor comes from the premium Air Dream Edition, which features 1,080 horsepower and 503 miles of range.

However, with a price tag of $161,500, it’s fair to wonder if CCIV stock would be viable. In my opinion, the answer is a resounding yes. First, Teslas are notorious for their poor fit and finish, not a good look for a premium EV maker. In contrast, Lucid was built from the ground up with quality and luxury in mind. Second, it’ll be a while before EVs are holistically competitive with combustion cars by Toyota (NYSE:TM) and the like.

There’s a reason why Tesla buyers are overwhelmingly among the affluent and privileged classes.

Lucid Has the Proper Strategic Mindset

Most importantly, economic dynamics support Lucid’s decision to enter the luxury EV market first before attempting to deploy “Reaganomics” to its business. According to the car registration index by the Organization for Economic Co-operation and Development (OECD), which measures growth trends against prior periods, demand growth for auto registrations have been declining since 1986.

Car registration trends vs. U.S. population
Source: Chart by Josh Enomoto

This of course contrasts with the U.S. population, which has been nominally rising higher. Interestingly, the correlation between the car registration index and population trends was positive until 1986. From 1987 onward, the correlation became an inverse one.

Put another way, once the millennial and Generation Z demographics entered the picture, America’s car culture began waning. Don’t get me wrong — people are still buying cars. It’s just that the intensity with which they’re doing so pales to demand dynamics in decades prior.

And that implies that volume in the middle-to-lower income bracket is becoming less profitable for all automakers. Here, I don’t think it’s enough for EVs to be on par with combustion cars, which are also constantly improving and leveraging enormous economies of scale. They’ve got to be superior, because here’s the deal — the lower you go in the income bracket, the less access consumers have to infrastructure (i.e., a house with a garage).

Indeed, it might be a fool’s errand for EV startups to chase the high-volume game when the underlying batteries, despite their massive improvements in efficiencies, still leave EVs at a severe price-for-value disadvantage when setting aside government-mandated (read artificial) incentives.

This is a longwinded way of saying Lucid’s management team is making the right strategic decision, which should help CCIV stock in the long run.

Believe the Hype, But at the Right Price

Furthermore, the above circumstances is another reason why CCIV stock could give TSLA shareholders something to think about. Other SPAC competitors have competed with Tesla in other countries or in other platforms (electric pickup trucks). This is arguably the first time where a competent automaker is going after the EV luxury flagship: the Tesla Model S.

Obviously, this is a treacherous road. However, Lucid has the advantage of pushing quality to the forefront and targeting a consumer base that can afford it. Because let’s be real — the lower end of the EV market is a mess.

Frankly, I’m not sure if the U.S. market is ready for effeminate EV econoboxes — that might work in other countries, but I don’t think it will work here. That makes me skeptical about Kandi Technologies (NASDAQ:KNDI).

As well, I’m not so confident that three-wheeled EVs like Electrameccanica Vehicles (NASDAQ:SOLO) will do the trick. Anyway, do you see what’s going on here? Currently, automakers competing in EVs for the middle and working classes are focused on taking things away — like range, in-car features and perhaps your dignity — just so you can go electric.

Call me stupid, but I don’t believe the EV technology is robust enough now, even at scale, to be competitive in the reasonable income bracket.

But on the higher end? It’s very viable. But the numbers, of course, are limited. That means you’re going to compete with Tesla, and, in that case, you’ve got to bring strengths against Tesla’s weaknesses.

Again, Tesla’s quality control has lacked quality relative to automakers in its price zones. For once, someone’s going to compete there but with premium craftsmanship in mind. That should siphon market share from Tesla, which is a net positive for CCIV stock.

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

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. 

Article printed from InvestorPlace Media,

©2023 InvestorPlace Media, LLC