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CIIG Merger Highlights the Promise and Peril of the Entire SPAC Trend

Investors buying CIIG Merger (NASDAQ:CIIC) stock at the moment aren’t buying it for CIIC stock itself. The SPAC (special purpose acquisition company) is merging with U.K.-based electric vehicle manufacturer Arrival — and it’s Arrival that has sparked investor optimism.

A close-up shot of an electric vehicle charging station with a row of electric buses in the background.
Source: Shutterstock

As well it should have. Arrival is a truly fascinating company whose potential is simply enormous. The company can transform significant swaths of the transportation industry. In the most bullish, blue-sky scenario, Arrival might well change global manufacturing.

It’s an exciting story, certainly. It’s also exciting that investors even have to chance to own shares in Arrival (if indirectly so until the merger closes).

Equity in pre-revenue companies historically (though not exclusively) has been the province of private venture capital firms. The SPAC trend that exploded in 2020 has brought an entirely new class of potential investments to the public markets, including a number of EV plays like CIIC stock.

There’s a flipside to that availability, however. For all the stories we hear about VC firms making returns of 1,000x or more in companies like Facebook (NASDAQ:FB) or Spotify (NYSE:SPOT), there are thousands of investments that go to zero with little or no fanfare. Venture capital investing is hard. Getting from zero revenue to profitability is difficult. Most companies, particularly those like Arrival, fail.

So far, SPACs like CIIC have provided impressive returns. The concern for CIIC stock and so many others is when the risks will start to show up.

The Case for CIIC Stock

Just a year ago, investors had few ways to play electric vehicles. There was Tesla (NASDAQ:TSLA) and a few small-capitalization, often-struggling names like Workhorse (NASDAQ:WKHS).

That’s no longer the case. Public investors can own electric vehicle manufacturers, suppliers, charging companies, and battery developers.

And all of the “new” EV stories, there may not be a better one than Arrival. Arrival should target both the bus and van markets to begin with, but there’s potential to move into passenger vehicles down the line.

Meanwhile, there’s real intellectual property here, with Arrival building its vehicles from the ground up. How it plans to build those vehicles too is innovative, via so-called “microfactories,” which can be located all over the world and dramatically decrease shipping time and costs.

To go back to the VC analogy, this is precisely the kind of company that would attract significant interest from Silicon Valley. Arrival doesn’t have any revenue yet, but it has real assets, real IP, and a real plan to attack a growing market. That’s precisely what early-stage investors are looking for, and so it’s no surprise that CIIC stock has nearly tripled since the Arrival merger was announced.

Watch the Risks

As attractive as that story is, however, it alone doesn’t answer a hugely important question: What is Arrival (and, by extension, CIIC stock) worth?

It’s an impossible question to answer with any certainty. Again, Arrival has no revenue. Losses are significant at the moment. The size of the potential markets is up for debate. Competition will be stiff, from both fellow upstarts and established legacy manufacturers.

At the time of the merger, CIIC and Arrival did offer projections. The company expects $14 billion in revenue by 2024, up exponentially from about $1 billion in 2022. A current $1.2 billion in orders supports some of that optimism, though it’s worth noting that management has admitted those orders still are based on prototypes.

But projections are just that: projections. There’s nothing that guarantees Arrival will hit $14 billion in revenue in 2024. There’s nothing that guarantees the company will hit $14 billion in revenue ever.

Venture capitalists know this. It’s why they make multiple bets, generally across multiple industries. Much like in biotech investing, if one investment rises fivefold and three others go bust, overall returns still look strong.

What is worrisome about CIIC stock, and so many of the early-stage EV plays, is that the market doesn’t seem to be pricing in that downside. The entire sector is rallying at a massive rate. All of these new stocks, including CIIC, are being treated as if they are likely to be the winner. Indeed, pro forma for the merger, Arrival is being valued at a whopping $18 billion.

Against revenue projections, that valuation looks reasonable, and even attractive. But, again, those are just projections. There’s a lot that can go wrong. And there will be losers. Truthfully, I don’t think Arrival will be one of those losers — but I wouldn’t entirely discount that possibility just yet.

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

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.

Article printed from InvestorPlace Media, https://investorplace.com/2021/01/ciic-stock-highlights-promise-peril-entire-spac-trend/.

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