Since the novel coronavirus pandemic turned the world upside down, a new category of investments became particularly prominent: pre-revenue companies. Their upside potential attracts speculators looking to put their money to work. This explains the excitement over Churchill Capital Corp IV (NYSE:CCIV), the reverse merger that will turn CCIV stock into shares of Lucid Motors.
The other catalyst? Obviously, Lucid Motors plies its trade in one of the most popular business segments, electric vehicles. Ask any analyst and chances are, that person will tell you that EVs are the future. No matter your transportation preferences, it’s hard to deny the viability of this thesis.
Sure, EVs are exponentially cleaner running than combustion-engine cars. But even if you take out the environmental component, EVs are much more convenient. For instance, they don’t require the costly regular maintenance that petroleum-fueled vehicles do. Plus, you don’t have to pull into dirty smelly gas stations any longer. That’s a big plus for arguably most drivers.
Because EVs check off multiple must-haves for the modern consumer, Lucid Motors attracted investors despite its aspirational status. However, being a pre-revenue company draws huge questions now for CCIV stock in light of the global supply chip shortage.
Unfortunately, the pandemic imposed a perfect storm on automakers. First, virtually every industry shut down production when the coronavirus started raging across the world. The natural assumption was that consumer demand, especially for high-priced products, would be weak. That assumption was incorrect as demand skyrocketed.
But production can’t be turned on and off like a spigot and this is where CCIV stock becomes problematic. While automakers are scrambling for whatever chip supply they can get their hands on, some companies are forecasting huge losses for 2021.
CCIV Stock Might Survive on Its High-Income Focus
Not surprisingly, many investors are taking a dim view of the automotive sector. Whether combustion based or EV, the chip supply shortage mercilessly impacts all players. But it’s pronounced for names like CCIV stock.
As a pre-revenue company, shareholders took management’s word that it can both build production and a consumer base that will purchase those units. Neither task is easy. But when you’re coming in relatively late to the game against an established dominant player, an outside disruption like a supply chain crisis can be a cruel headwind for CCIV stock.
Therefore, an investment into the special purpose acquisition company (SPAC) that will become Lucid should not be taken lightly. Nevertheless, if you can handle potential volatility, CCIV stock fills a niche in the EV sector that longer term could be the most viable.
Currently, I see four methods that automakers are deploying to better compete in the EV market. First is the direct approach, perhaps best characterized by Ford (NYSE:F). The company’s Mustang Mach-E garnered strong reviews from the automotive community for its combination of features and performance.
But the Mach-E is not winning in the price department, which brings me to the second approach, undercutting. A great example is Electrameccanica Vehicles (NASDAQ:SOLO). You want undercutting? The company’s flagship Solo has one less wheel and only 20% of a typical sedan’s seating capacity.
A third approach is what I would term innovation. This is where Fisker (NYSE:FSR) comes to mind, which combines automotive artistry with a flexible lease option that caters to commitment-adverse millennials.
These approaches have their pros and cons. But the fourth one, premium offerings, is the most aggressive but also the most realistic. With Lucid, you’re getting a company that gets its customers the performance and range that they crave.
Of course, you need money to have your cake and eat it too, which is why Lucid for now is only catering to the rich.
Going for the Best Approach
While Lucid theoretically should compete with Ford in the upper middle-income category (where most EV buyers are), it’s also becoming highly competitive. In the years ahead, you’re going to see the majors intrude heavily into this segment.
Further, neither Lucid nor its competitors have much hope competing in the average income bracket. Maybe improving lithium-ion battery technology will allow automakers to be profitable in this segment but it may not happen for a while. Since Fisker has positioned itself in the innovation niche, Lucid’s best shot is in the premium market.
By focusing on the absolute best in EV machinery, the company can carve out a small but extremely profitable portion of the electric vehicle industry. This is the main reason why I’m still bullish on CCIV stock. The underlying company is making the best decision given its circumstances.
That’s still no guarantee that CCIV stock will be a winner. Naturally, the supply chain crisis remains a huge distraction. But again, if you can stomach the risk, Lucid enjoys a credible business plan.
On the date of publication, Josh Enomoto held a long position in F and FSR.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.