There is no shortage of speculation as to why Churchill Capital IV (NYSE:CCIV) stock has plunged since its merger with Lucid Motors was officially announced. But there is a simple explanation.

The closing price above $57 on Feb. 22, the day the merger was officially announced after the close of trading, was wrong. Information available to the market at the time suggested that CCIV’s valuation was far too high.

Some investors (including a few to whom I’ve spoken) apparently believed that Churchill was buying all of Lucid Motors. Others didn’t completely understand the mechanics of these SPAC (special purpose acquisition company) mergers.

Those investors bought Churchill because they liked Lucid. They either didn’t quite understand, or chose to ignore, the valuation of the stock, or the fact that Churchill only would receive an unspecified portion of the equity in Lucid.

And so the fact that CCIV stock has fallen from $63 (its intraday high on the 22nd) to $22 doesn’t make the stock ‘cheap’. It doesn’t mean that short sellers, or the Saudi Private Investment Fund, or other nefarious actors, manipulated the stock.

Let’s be honest: CCIV stock was a bubble. That bubble is bursting as we speak. The question, as always, is what happens from here.

Why CCIV Stock Fell

There have been complaints that the company leaked incorrect information before the merger. Ostensibly, that was to benefit PIPE (private investment in public equity) who invested alongside the SPAC merger at a price of $15 per share.

Short-sellers, as always in this market, have been blamed. But short interest was minimal (barely 2% of the float), and even some of that activity may have been hedges against owned warrants in CCIV stock.

The actual cause doesn’t require conspiracy theories or bad actors. Churchill Capital IV stock simply ran too far. The trading on Monday, Feb. 22 was particularly illogical. CCIV gained as much as 19% intraday and closed above $57, up 8.4%. Yet we had information suggesting that the rally was ludicrous.

For instance, Bloomberg reported that weekend that a deal was near, at a valuation of $15 billion. That followed earlier news from Reuters citing a $12 billion valuation. Yet at $57, Churchill itself had a market capitalization near $11 billion, and including warrants its $3 billion-plus in cash was being valued in the range of $16 billion.

There was no way to support a price of $60-plus for CCIV stock given the information we had. Indeed, I sold hedged call options into Monday’s trading for precisely that reason. And as the details of the merger were released after the close, the market rightly corrected the price.

Bear in mind that according to Churchill itself, there will be 1.6 billion shares outstanding after the merger. That figure doesn’t include some shares and warrants which vest in coming years.

And so the $64 peak of CCIV stock valued Lucid Motors (all of Lucid Motors) at a stunning $102 billion. The $57.37 close on the 22nd valued it at more than $90 billion.

Once that became clear, CCIV plunged.

The Case for Buying the Dip

So outlandish were the gains in CCIV stock that even Churchill itself couldn’t support them. In the merger presentation, Churchill noted its valuation discount to the likes of Tesla (NASDAQ:TSLA), Nio (NYSE:NIO), and Fisker (NYSE:FSR). But that discount only existed using CCIV’s merger price of $10. Plug in $57 and Lucid’s valuation was above that even of Tesla.

However, you cut it, $57 didn’t make sense. The question is if $22 does. Admittedly, there’s an interesting case.

After all, the core reasons for the optimism toward Lucid pre-merger largely exist post-merger. The search for the “next Tesla” long has struck me as a bit silly: Tesla had the noted advantage of not having an entrenched, established incumbent against which it had to compete. Lucid, Fisker, and others don’t have that edge.

But Lucid’s cars look spectacular. It claims better range and better performance. It has its own “skateboard” platform, a la Canoo (NASDAQ:GOEV), that can support launches of additional models.

Chief executive officer Peter Rawlinson even said in February that Lucid would mimic Tesla’s strategy. Like Tesla, it will start with the luxury market and then expand from there. Like Tesla, Lucid is going with a direct sales model.

Those attributes are the core of the case for CCIV at $22 — not the fact that it traded at $57 just weeks ago. And at $22, with a pro forma valuation (excluding cash) closer to $30 billion excluding cash on the balance sheet, valuation is a little easier to swallow.

The Case for Patience

All that said, I wouldn’t rush in quite yet, for a number of reasons.

First, the chart is horrendous. It’s hard to imagine a better example of a “falling knife” than CCIV stock at the moment.

Indeed, the entire sector is plunging. That sentiment problem argues for short-term patience. But it creates a long-term roadblock as well.

Again, Lucid itself was trying to highlight its discount to peers. But there should be some discount, because Lucid isn’t established yet. There’s still a great deal of risk in the story relative certainly to Tesla.

Meanwhile, all those peers have fallen as well. TSLA is down 27% in two weeks. FSR saw a big pop but has dropped 25% in four sessions. Nio and Xpeng (NYSE:XPEV) too are down. By Lucid’s own methodology, CCIV should be cheaper.

Finally, there was a bit of disappointing news in the merger presentation itself. As a YouTube video pointed out (admittedly along with some other questionable assertions), Lucid dramatically pulled back its guidance for this year. The company now expects to deliver less than 600 vehicles in 2021, with deliveries not beginning until the second half of the year.

That’s not necessarily a deal-breaker. Tesla has missed more than its share of targets as well, and consumers and investors have proven patient. But it is another modestly negative development at a time when Lucid and CCIV don’t have much room for additional negativity.

So is there a case for buying CCIV stock at $22? Personally, I don’t think we’re quite there yet. A $30 billion valuation for a pre-revenue company still seems steep. Trading can and likely will get worse.

But it’s a reasonable case — as long as it’s made the right way. Investors have to believe that CCIV stock is cheap because Lucid will eventually be a winner, not just because it’s plunged. The fact remains: it should have plunged.

On the date of publication, Vince Martin held a net short position in CCIV options.