Investors looking up Churchill Capital IV’s (NYSE:CCIV) market value will find a company worth just $7.5 billion – a tempting target at first glance. After all, Tesla’s (NASDAQ:TSLA) $650 billion market capitalization is almost 90 times higher. And Lucid Motors – CCIV stock’s planned merger partner – looks like one of the most promising electric vehicle (EV) companies of the decade.
CCIV’s low market value, however, comes from a quirk in SPAC accounting. The actual value of Lucid Motors sits at $47 billion, or almost as much as Detroit-based stalwart Ford (NYSE:F). Here’s why this EV startup is worth that much and what investors should expect next.
CCIV vs. Lucid: Apples and Oranges
Many novice investors might have assumed the merger would leave CCIV in control of Lucid. But they were wrong. When Churchill Capital IV announced its merger on Feb. 24, CCIV shareholders realized they would receive only 16.1% of Lucid. Shares of CCIV went spiraling from $64 to $22 within days.
It’s hard to blame CCIV’s sponsor Michael Klein for the fall. CCIV only had $2.1 billion cash to invest, and the experienced dealmaker couldn’t have possibly acquired a more substantial Lucid stake without a larger checkbook. Even now, CCIV still sits at a 200% premium to its cash-on-hand; few pre-merger SPACs come close.
So, how much is Lucid worth? To calculate that, investors should take CCIV’s $7.5 billion value and divide it by its 16.1% stake (i.e., 7.5 billion / 0.161). That makes Lucid worth $47 billion.
Is Lucid Motors Worth $47 Billion?
Many experienced investors would cringe at such a high valuation. $47 billion puts the pre-revenue EV maker in the same league as established makers like Ford, Honda (NYSE:HMC) and the Fiat/Peugeot merger Stellantis (NYSE:STLA)
Such comparisons, however, miss an essential point: Lucid is not a legacy automaker.
Margins in the legacy automaker industry have bordered on zero for years. Cut-throat competition and inefficient dealer networks drove profits the ground. Even though the global automotive sector generates more than $5 trillion in sales annually, legacy automakers combined are barely worth $1.5 trillion combined. (The 0.3x price-to-sales ratios puts automakers on par with sunset industries such as metals and mining.)
Lucid and other luxury EV makers look to change that. Instead of competing on price alone, these companies have added in features and engine power that have left even its fiercest critics admitting “it doesn’t feel like anything else, it doesn’t go like anything else. It’s fabulous.”
Buyers have responded by opening their wallets and paying the premium. With Tesla, analysts now estimate that the firm will generate a 5.3% net margin in 2022 – four times greater than Ford’s recent average. Put another way, if Lucid achieves just a 10% margin (i.e., 10 times higher than Ford) the EV startup could theoretically produce a tenth of the cars and still achieve the same (or greater) market value.
Comparisons to BMW and Ferrari
BMW (OTCMKTS:BMWYY) and Ferrari (NYSE:RACE) offer a better comparison for Lucid’s $47 billion price tag. These luxury automakers already have relatively high margins and are worth between $50 billion and $70 billion.
Consider BMW. The German-based automaker typically earns between 4% and 9% net margins – far higher than most. But growth has stagnated since 2017 after its SUV push alienated many core customers. Meanwhile, Lucid looks primed for phenomenal growth. While the firm’s rosy estimates will likely prove too high, the startup has already secured more than a half-billion dollars in pre-orders. Lucid also has the same advantage that Tesla does over BMW: a sales network that’s untethered to a pricey U.S. dealership model. By selling direct to consumers, Lucid will avoid sharing profits with the $1 billion car dealership market.
Ferrari offers an even better comparison. The Italian supercar manufacturer builds just over 10,000 vehicles per year (compared to BMW’s 2.3 million) yet is worth $48 billion thanks to its princely 17% to 23% margins and high brand equity. Lucid’s prices start lower at $77,400 (a third of an entry-model Ferrari), but the company will likely sell vehicles numbering into the hundred-thousands.
What’s CCIV Stock Worth?
CCIV could potentially reach $100 by 2024. The firm already has a world-beating design for its planned vehicles. A combination of solid demand, tax credits and excellent management might well come together and send Lucid stock to a $160 billion aggregate value.
But the alternative is equally likely. Competitors from Fisker’s (NYSE:FSR) to Chinese-based Nio (NYSE:NIO) could steal market share. Even BMW might get its fully electric vehicle lines to compete. That could leave CCIV stock stagnating for years, even if the company finds reasonable commercial success.
Regardless, investors shouldn’t view CCIV as a $7.5 billion company. Instead, it’s Lucid’s $47 billion value that ultimately matters. And if that figure can grow, so too can CCIV stock.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.
