About a month ago, Churchill Capital IV (NYSE:CCIV) stock closed at $53.
Here’s the thing: that price was, and is, wrong. It’s wrong in the sense that all past prices are in some sense wrong. The market is constantly updating based on new information. In the case of CCIV stock, we’ve received hugely important information: the details of its merger with Lucid Motors.
But the price was also wrong at the time. At least some of the traders and investors who drove the rally to $57 on Feb. 22 — let alone a previous peak just shy of $65 — didn’t quite understand what was going on.
As I write this, CCIV has been cut in half from its close from a month ago. It’s in fact down 60% from its all-time high. But when an investor understands how and why those levels were reached, it’s much harder to make the case that CCIV stock is trading at much of a discount.
The Wrong Price
It sounds condescending, I know, to claim that buyers of a stock didn’t know what they were doing. But the fact remains.
There was little logic to the buying on Monday, Feb. 22, the session before the Lucid merger was officially announced after the close.
Over that weekend, we got leaked details of the merger. A pair of reports suggested the deal would get done at a valuation between $12 billion and $15 billion. Yet the $57 CCIV stock price the following Monday valued Churchill Capital IV itself at about $12 billion, and even more when accounting for outstanding warrants.
That valuation almost suggested that Churchill Capital IV was going to acquire Lucid. That, of course, is not how SPACs (special purpose acquisition companies) work. When the details were released, CCIV stock fell 39%.
It bears repeating: it should have plunged. Figures from the merger presentation (slide 62) showed that CCIV shareholders would own just 16.1% of the company. At $57, then, CCIV was valuing Lucid in the range of $72 billion — at least.
But even that 16.1% figure understates the case. It includes 41 million warrants with an exercise price of $11.50. But anyone who bought CCIV stock on Feb. 22 didn’t get those warrants, just common shares. The common shares — some 207 million — represented about 13% ownership of the company.
Incredibly, the $64.86 peak price for CCIV stock from mid-February wound up predicting that Lucid Motors would have a valuation of over $100 billion.
What to Do Now
Again, that valuation was wrong. Investors were buying CCIV stock without knowledge of the details of the merger, and when they got leaked information that was roughly correct, they still overpaid.
Now, I don’t bring that up to look down on people who bought CCIV stock, or to criticize without being helpful. Every one of us has made mistakes in investing, or made bad calls, or misread a situation.
It’s part of the deal. In fact, it’s why I find investing so fascinating and so rewarding. Success would not be so enjoyable without the risk of failure.
What I’m trying to do is to make an important point. You cannot look at CCIV stock now at $24.50 and think, “Oh, it’s down 50%, it must be cheap!”
In general, such an argument is a classic case of “anchoring bias.” In this specific case, CCIV clearly and simply ran too far. Way too far.
The Case for CCIV Stock
Has CCIV stock now fallen too far? It’s possible. But I’m skeptical.
Lucid itself absolutely is interesting. Its management team has deep expertise in electric vehicles. The industry is poised for significant growth. Indeed, regular readers know I’m a big-time and long-time bull on the sector.
But let’s also understand the risks. Lucid as yet has not sold a single car. The specs sound excellent — and maybe even incredible — but the company obviously hasn’t proven its ability to put and keep quality vehicles on the road.
Meanwhile, production targets already have slipped a bit, with Lucid postponing its original spring 2021 date. That slight delay doesn’t doom the case for the company, but it is a modest concern in a competitive space with an entrenched incumbent.
All that aside, the valuation for Lucid implied by CCIV stock remains massive. After the merger, there will be about 1.6 billion shares outstanding.
The current price of $24.50 for CCIV thus implies a pro forma market capitalization of about $39 billion. Back out cash on the balance sheet and we’re still looking at a cool $32 billion — again, for a company that has yet to make a single sale.
Could Lucid grow into that figure? Absolutely. Will it? I’m not sure I’m ready to take that bet quite yet. I’m certainly not going to take it simply because CCIV stock went nuts a month ago.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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