The current Churchill Capital IV (NYSE:CCIV) stock price values Lucid Motors, with which Churchill Capital IV is merging, at more than $27 billion net of post-merger cash. As of this moment, Lucid has not produced a single car.
To some investors, those two facts simply make CCIV stock an avoid. Lucid’s valuation is nearly as high as that of Kellogg (NYSE:K), even including the cereal maker’s debt. Kellogg should generate about $1.4 billion in net profit this year.
Those investors aren’t necessarily right – or wrong. Every investor has her own individual style. But many of those would prefer Kellogg, or the myriad other businesses valued below Lucid despite real revenue and real profits, over the speculative likes of Lucid. They would see CCIV stock as the sign of excess in the market. A bubble, even.
CCIV Stock and a Market Shift
What CCIV and so many other SPACs (special purpose acquisition companies) represent is a real shift in the retail stock market. That’s true in terms of both supply and demand. Individual investors simply haven’t had much opportunity to own pre-revenue companies, save for a brief stretch in the late 1990s. We all know how that turned out.
So far in this market, however, it’s been the aggressive, mostly individual investors that have been correct. Speculative names soared. It’s not an exaggeration to say that we’re coming off the best year for the individual investor – ever.
Yet we’re also seeing signs that the trend is breaking. CCIV stock, which touched $60 before the Lucid merger was announced, is a perfect example. And so where Churchill Capital IV stock sits now, and where it might head, says a lot about much of the market at the moment.
Did CCIV Break Part of the Market?
There’s a story to tell in which Churchill Capital IV itself undercut much of the optimism in certain portions of the market.
On Feb. 23, the day after Churchill officially announced the merger with Lucid, CCIV stock plunged 39%. It fell another 18.5% the next day.
CCIV wasn’t alone in selling off, though its decline was steeper than most. The ARK Innovation ETF (NYSEARCA:ARKK) fell sharply. So did the Defiance Next Gen SPAC-Derived ETF (NYSEARCA:SPAK). The Global X Autonomous & Electric Vehicles (NASDAQ:DRIV) took a big hit before bottoming.
Obviously, it’s silly to blame one SPAC for the declines in literally a couple of hundred stocks. But the timing lines up. And the story here makes some sense.
Before Churchill’s plunge, SPACs were basically easy money. Nearly every one traded well above its (usually) $10 redemption price; many had doubled or better after mergers were announced.
EV stocks were easy money. Anything “hot” that appealed to individual investors seemed to provide guaranteed returns.
Indeed, that’s why so many individual investors piled into CCIV stock in the first place. And, as I’ve written before, they pushed the stock to unsustainable levels. The $57.37 close on Feb. 22 (Churchill officially announced the merger after regular trading ended that day) was wrong. It valued Lucid, even net of cash, at $90 billion.
Once CCIV plunged, investing in SPACs and other “hot” stocks didn’t seem so simple.
Will Retail Keep Winning?
And that gets us to a key question, and maybe the key question, for CCIV and other stocks like it: is the correction over?
Quite honestly, history suggests it isn’t. We know for instance, that there are many SPACs with much further to fall. It’s ludicrous to believe that hundreds of mergers were executed, and all are going to be worth the $10 per share the merger price over the long haul.
We know there are going to be losers in EVs. The market will be big, yes. But the consumer market alone is being targeted by Lucid and Fisker (NYSE:FSR) and Tesla (NASDAQ:TSLA), plus legacy manufacturers. The three big Chinese EV plays now have a combined market capitalization just shy of $100 billion. Tens of billions more in equity sits in suppliers, charging-station developers, and autonomous-vehicle plays.
There will be winners, yes. But the winners may not be enough. Amazon.com (NASDAQ:AMZN) and eBay (NASDAQ:EBAY) survived the dot-com crash. The NASDAQ Composite still lost a staggering three-quarters of its value.
Be Careful Out There
Again, CCIV stock highlights this fact. Yes, the stock is down almost two-thirds since Feb. 27. But it still has a $27 billion valuation with no revenue as it enters an auto manufacturing business that has steep competition and low profit margins.
More broadly, history is not on the individual investor’s side. Over the long run, professionals usually win. And that’s not because, as social media would tell you, the market is rigged. It’s because investing is hard.
Buying a stock because it’s an electric vehicle play, and because EVs are going to grow, does not qualify as due diligence. That’s how Nikola (NASDAQ:NKLA) happened.
Not understanding how SPACs actually work is how Lucid saw a $90 billion valuation, if briefly. Choosing a random round-number price target that sounds good ($100 seems a popular choice for CCIV) is a good way to get into trouble. So is listening to social media influencers who themselves aren’t doing the work.
There’s a case for CCIV stock. Management tells a great story of what will be an enormously innovative company. If Lucid is successful, a $27 billion valuation will, in retrospect, look too cheap.
There’s a case for nearly all of these “hot” stocks as well. But there also remain investors who are pushing those stocks for a “short squeeze” or because of promotional management or because they don’t understand the whole story.
And as someone who saw the late 1990s bubble up close, that’s a concern. Over the long run, stocks always find their equilibrium. CCIV and other formerly hot names are getting closer. They may not be there yet.
On the date of publication, Vince Martin held a long position in AMZN.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.