Churchill Capital IV (NYSE:CCIV) stock lost almost 50% on Feb. 23 after it announced a SPAC deal to buy Lucid Motors, an electric vehicle maker. CCIV stock lost all of its premium and glitter.
Retail investors, who overbid on shares to lift it to unsustainable valuations, realized too late how bad the deal was for them.
CCIV Stock: The Most Unattractive EV Play
Last month, Lucid announced a transaction equity value worth $11.75 billion. The transaction includes around $2.1 billion in cash contribution by CCIV. The private investment in public equity (PIPE) will total $2.5 billion. This will include an investor lock-up provision. The PIPE price of $15 a share is a 50% premium to CCIV’s net asset value.
The pro forma equity value is $24 billion.
Investors sold CCIV shares after the announcement because of the dilution. The implied relative discount compared to Tesla (NASDAQ:TSLA) depends on Lucid producing at least 80,000 EVs, or over $8 billion in revenue, by 2023. Although two years is not far away, Lucid may face unexpected operational delays, adding to the uncertainty.
Churchill’s steep drop from a $64.86 high after the company announced the deal is justified. Lucid and Churchill both benefited from the EV hype train that fell off the rails last month. Still, investors who bought Churchill or any other EV stock at the yearly highs have a chance to break-even.
Earlier this month, EV stocks like Nio (NYSE:NIO) and Tesla bounced back from their sell-offs. As the newly elected government announces more clean energy and EV initiatives, markets will invest back into the sector.
Competing With Tesla
Every new and emerging EV firm is chasing Tesla, vying for its market share. The bad news is that Tesla does not have to have to do much to stay ahead. It may adjust pricing to spur demand. A price cut of $3,000 to $5,000 would easily raise the demand for the Model 3 entry-level EV sedan and Model Y sports-utility vehicle.
The media touts Tesla’s battery supply chain, supercharger network and software as some of the key advantages over the competition. So far, Lucid did not differentiate itself from Tesla. Instead, it is following Tesla’s playbook in the manufacturing and sales and services approach.
Lucid Chief Executive Officer Peter Rawlinson is Tesla CEO Elon Musk’s former employee. So, its in-house, vertically integrated manufacturing may be on par with Tesla’s operations.
Chartered Unknowns Ahead
Lucid is not a proven manufacturer of EVs just yet. It may offer sketches and a price list of its models. On the flip side, customers may select Lucid’s $77,400 model by early 2022. Thanks to (up to the amount of) a $7,500 federal tax credit, new customers may choose a Lucid model over a Tesla.
Just as Tesla launched a lower-cost, mainstream EV following its Model S, Lucid will do the same. The company has plans to sell a base model EV in the $40,000 to $45,000 range. By the time it does this, Tesla may still achieve economies of scale. Having opened gigafactories in China, Germany and Texas, the incumbent firm may enjoy low production costs. This would allow Tesla to undercut Lucid the moment it enters the budget EV market.
General Motors (NYSE:GM), which is very late in entering the EV market, is an ongoing threat to all EV players including Lucid. It announced a plan to spend $27 billion by 2025. Before the pandemic, GM said it would spend $20 billion.
Your Takeaway
CCIV is in the early innings of realizing a valuation that rivals Tesla. The EV firm has much to prove, especially after hurting retail investors.
Despite this article’s bearish tone, not all is lost. Investors who lost money have a short memory span. They will forget the unfavorable deal and may buy the CCIV stock dip if EV becomes hot again.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
