I’ve changed my mind about Lucid Motors and its prospects when the special purpose acquisition company (SPAC) merger with Churchill Capital IV (NYSE:CCIV) happens. In the past, I argued that CCIV stock (LCID stock after the merger) was undervalued. But now I am not so sure.
It’s really simple. According to my calculations, CCIV/LCID has a pro forma market capitalization of $31.7 billion. This is 5.76 times the $5.53 billion in revenue forecast for 2023.
This is based on page 140 of CCIV’s SEC filing on March 31 and its May 13 analyst slide deck. It shows the company’s projections going forward for revenue, EBITDA (earnings before interest, taxes, depreciation, and amortization), as well as free cash flow.
Valuation Comparison With Tesla
By comparison, Tesla (NASDAQ:TSLA) has a market value of $560 billion, and analysts forecast $84.77 billion in revenue by 2023. That gives TSLA a forward price-to-sales (P/S) multiple of 6.6 times.
So, here is the conundrum. Tesla’s 2023 P/S multiple is 14.6% higher than Lucid’s. But it makes cars right now and has a real company. Lucid has not even yet produced one electric vehicle (EV).
TSLA stock probably deserves to have at least a 50% or greater valuation premium. Vice versa, CCIV stock is at least 33% too high at $317 billion.
In other words, to say the least, I’ve changed my mind since I think that Lucid now has a fair-to-slightly- overvalued valuation. I could change my mind again once the company completes its merger.
And also I will change my mind once it starts producing cars that people want to buy and sales look like they will reach $5.53 billion by 2023. I have that kind of confidence right now with Tesla.
But there is just too much that could wrong with Lucid for it to have a $31.7 billion valuation without one car having been delivered to a customer.
Where This Leaves CCIV Stock
Investors that have already bought CCIV stock are still waiting for the merger to close. The company has not yet said when that will happen. CCIV has not set a date for the shareholders’ meeting that has to approve the deal. This is the most important event that shareholders are waiting for, in order to close the deal.
However, I suspect that once the date is set, the stock will likely rise. For one, the company will receive over $4.4 billion at the close, based on page 69 of the slide deck referred to above.
That will assist the company greatly in getting its production line off the ground. Production is still set to begin in the fall (“second half 2021”) according to slide deck page 9.
Sell On the News Effect
But I am afraid that there could be a repeat of the often seen “buy on the rumor, sell on the news” effect that has happened with other SPACs. This means that once the deal closes, especially given its potential full valuation as I have pointed out, CCIV stock could face selling pressure.
So be careful with the stock. Look for an opportunity to get in at a bargain price, or perhaps after the deal closes, if there is selling pressure.
CCIV has already come down a bit. It was at $23.18 at the end of Q1 on March 31. As of Friday, May 21, CCIV stock was at $19.81, or 14.5% below March 31. But that doesn’t mean it could not fall further.
My estimate is that LCID stock could end up dropping another third to $13.21 after the merger closes. That would lower its market value to about $21.175 billion. This gives it a price-to-sales multiple of just below 4 times its forecast 2023 sales. That seems about right at this point.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.