It goes without saying that 2020 was the year of electric vehicles and EV stocks. CIIG Merger (NASDAQ:CIIC), which raised $225 million in a SPAC offering in December 2019, is no exception. Up 160% since its IPO, CIIC stock is looking for direction as it enters 2021.
If you bought CIIG Merger units in its IPO, 13 months later, you’re sitting on a nice double and then some. To sell now would mean paying the long-term capital gains tax rate of 15% to 20% rather than the short-term rate.
So, if you’re married and file a joint return and have a taxable income of $80,800, you’d pay no capital gains. However, if you sold before the 12 months were up, the same gain would be taxed at 12%. The tax differential gets progressively worse as your taxable income increases.
So, with absolutely no guarantees that CIIG Merger’s combination with Arrival, the U.K. maker of electric buses, will be a success, I believe CIIC’s double is nothing to sneeze at.
CIIC Stock: A Bird in the Hand Is Worth…
You know the rest.
For me, the more I cover SPAC’s, the more I get worried about these stocks post-combination. That’s because everything is so airy-fairy until the operating companies start reporting their quarterly results. Until then, investors are almost operating on hearsay and that’s never a good thing.
In the case of CIIG Merger, it announced its merger with Arrival on Nov. 18, 2020. Immediately, its stock gained 18% on the news. By Nov. 24, it had risen to a high of $33.50, before falling back, then hitting an all-time high of $37.18 on Dec. 7, before falling back once more to $26 and change.
Like I said in the opening, it’s a stock struggling for direction.
The November press release announcing the merger was naturally very positive about Arrival’s product and how it will revolutionize the commercial electric vehicle market.
“Arrival’s initial focus is on the commercial vehicle market, which is undergoing a seismic shift towards electrification in line with global public policy. Arrival believes that it is well positioned to capitalize on this market opportunity with its technology driven approach to a traditionally underserved market,” the press release stated.
“The result is its best-in-class products with an exceptional user experience that are priced competitively with fossil-fuel vehicles and have a substantially lower total cost of ownership (“TCO”) than both fossil fuel and electric variants.”
A $5.4 Billion Valuation
Once the combination is completed, Arrival will trade on NASDAQ under the symbol “ARVL.” According to its December 2020 presentation, Arrival will have a pro forma enterprise value of $5.4 billion or 0.4 times its estimated 2024 revenue of $14.1 billion. Arrival shareholders will own 88.1% of the company.
In case you’re wondering, that’s approximately half Tesla’s (NASDAQ:TSLA) trailing 12-month revenue. It currently has zero sales, with production expected to start in Q4 2021. UPS has an order for 10,000 electric delivery vans worth $1.2 billion with an option for an additional 10,000 vans in the future.
The company says its microfactories will cost $44 million each and take six months to get up and running. They can produce 10,000 vans per year based on two shifts and $12 million in operating expenses.
The gross margins in 2024 will run 38% for buses, 34% for large vans, 21% for regular-sized vans, and 18% for small vehicles. It will have $660 million in cash post-completion of its merger.
I’m 100% behind the electrification of both personal and commercial vehicles. Long-term, I don’t see that the world has any other choice.
So, back to valuation.
InvestorPlace’s Mark Hake discussed this subject days before Christmas, arguing that its $5.4 billion enterprise value mentioned when it announced the combination in November really isn’t all that crazy.
“[T]he present value of 2024 sales, at a 15% discount rate means that the $14.135 in 2024 sales are worth only 57.175% of that right now. This is due to the opportunity cost, or inflation and risk element forecasting sales three years in the future. That brings the present value of its 2024 sales to $8.08 billion,” Hake stated on Dec. 22.
“As a result, the revised EV-to-sales multiple is 2.1 times. In other words, it seems at this price [$29.08], CIIC stock looks to be at full value. That is the same conclusion I reached in my last article on the stock.”
Hake says that even though CIIC stock appears to be fully valued in the high $20s, it may move even higher due to the excitement over electric vehicles.
Is it still worth buying?
The Bottom Line
My colleague doesn’t mention that all of these present value calculations are based on a company that has zero revenue at the moment and likely won’t generate a dollar of sales until sometime in 2022.
If you think TSLA is way too pricey, CIIC/ARVL ought to be completely out of your league because it’s provided investors with absolutely no evidence its microfactories can mass-produce its prototypes.
If you can buy CIIC in the low $20s or high teens and can afford to lose your entire investment, aggressive investors might give it a shot. Everyone else ought to remain on the sideline until it’s actually producing vehicles and revenue.
And if you bought it at $10 in December 2019, I’d be booking profits.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.