In the last two weeks, Churchill Capital Corp IV (NYSE:CCIV) stock has fallen 30%, as the markets react negatively to its pending merger with Lucid Motors, an electric-vehicle maker expected to debut its much-awaited luxury sedan in the second half of 2021.
Such boom-bust cycles are fairly common in the SPAC, or special purpose acquisition company, space. In this case, details of the merger have rubbed investors the wrong way.
On March 22, Churchill filed an S-4 with the SEC detailing its merger negotiations with Lucid. According to the filing, the CCIV stockholders will only be getting a 16% stake in Lucid. The relatively fast pace of negotiations between the two parties was also not seen positively by investors.
Churchill’s price correction highlights the risk of investing in the SPAC space. The negotiations between Churchill Capital and Lucid were first reported in a Jan. 11 Bloomberg article. From that point until the formal merger announcement on Feb. 22, CCIV stock gained 470%.
As is customary for SPACs, Churchill’s gains eroded soon after. When it comes to CCIV stock, I believe the best days are behind it since we have crossed the major hurdles of merger target speculation and an eventual tie-up announcement.
But the shares still have short-term catalysts like the completion of the merger, the listing of the new ticker, and initial earnings reports, so there is still money to be made on the name.
CCIV Stock Is Returning to Earth, but It’s Not Unusual
The overall SPAC frenzy shows no signs of stopping. These previously obscure investment vehicles had a banner year in 2020, raising roughly $100 billion. And according to Bloomberg data, blank check companies have raised another $92 billion in 2021 thus far. Several companies seeking to avoid a cumbersome IPO process choose to go down this route.
Among them are many EV startups, buoyed by the enthusiasm surrounding the space and increased environmental regulations. So it came as no surprise when CCIV stock skyrocketed after announcing a merger with Lucid Motors.
Lucid checked off all the boxes for an attractive SPAC play, causing Churchill’s shares to skyrocket. That was par for the course for SPACs, as was the share price’s fall soon after the announcement.
But the long-term outlook for SPACs is not bright. According to empirical evidence, the post-merger returns of SPAC shareholders are often weak. That’s because the exchange ratios of SPAC mergers are generally more favorable for SPACs than their merger targets.
Not Everything Is Doom and Gloom
Despite the negative headlines about the merger between Lucid Motors and Churchill, there are still things to like about the combination. The Lucid Air luxury sedan EV, set to launch in the second half of 2021, is an exciting vehicle.
Lucid Air is expected to have a range of 517 miles on a single charge. The EV company believes it will be the world’s most aerodynamic production car, increasing its energy efficiency exponentially. The car was designed by Derek Jenkins, who has previously served automakers like Audi, Volkswagen (OTC:VWAGY), and Mazda (OTC:MZDAY).
Lucid Motors also plans to recycle its batteries by using them as storage devices once they have lost 30% of their range. They can be sold to utilities and industrial users for backup power or paired with AC converters and used by homeowners for electricity storage.
Besides, Lucid, unlike several other EV startups, has complete control over its supply chain. Most EV companies are looking to outsource their production.
Fisker Inc (NYSE:FSR) is a classic example. It has outsourced its manufacturing to Canadian auto parts maker Magna (NYSE:MGA). On the one hand, it’s positive that the company uses an asset-light production system. But it wastes the chance to develop a great deal of institutional knowledge.
Lucid will not suffer the same fate, meaning it is more like Tesla (NASDAQ:TSLA) and unlike several other major EV startups out there.
The Bottom Line
Lucid has a lot to prove in terms of scale and profitability. Although its shares have lost a lot of steam, they still have unrealistic expectations built into them. But that is also true for industry leader Tesla. Not a day goes by when we don’t hear or read something regarding how bloated its valuation has become.
So arguing about price multiples is futile because most EV stocks are not worth buying and holding. Investors’ underlying assumptions regarding demand, infrastructure, and supply are too bullish, fueled largely by green initiatives and the prospect of finding another multi-bagger like TSLA stock.
So the EV space can become confusing. In the case of EV companies with an unproven track record, investors need to time their entry and exit points and take profits at regular intervals.
Having said that, I believe that CCIV stock still has short-term catalysts that investors can exploit.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence.
