Churchill Capital IV (NYSE:CCIV) has been one of the best performing special purpose acquisition companies (SPACs) in recent memory. CCIV stock has gained over 85% in the past six months, due to the hype surrounding its impending merger with luxury electric vehicle (EV) maker Lucid Motors. However, the stock has now plunged more than 72% from its 52-week high. Now with an erroneous valuation and the heightened scrutiny around SPACs, this name’s investors are in a major spot of bother.
For months, the speculation surrounding Churchill’s merger target had been fueling its price. Moreover, when CCIV announced that its target was the up-and-coming Lucid Motors, the stock skyrocketed to as high as $65. However, as I’ve discussed in my previous articles on CCIV, this pick has an incredibly tough road ahead. The EV market is getting more competitive with every passing year. Carving out a share of that market is not going to be easy.
So, with that said, let’s dive deeper into the story here and assess its investment potential.
CCIV Stock and the SEC Crackdown
SPACs became darlings of Wall Street just last year. In 2020, some “248 companies went public through a SPAC” — more than the number of deals in the past decade. This wild run has also carried into 2021, with 300 mergers having been filed in the first quarter alone. However, this mass issuance came to a dramatic halt last month.
The slowdown is primarily attributable to guidance recently issued by the U.S. Securities and Exchange Commission, which classifies “SPAC warrants as liabilities instead of equity.” As a result, warrants are a common feature of the deal. They are essentially call options that offer investors an opportunity to profit from a rise in share price by exercising their warrants.
Because of this new guidance, SPACs will have to restate their financial results to properly account for the warrants, which will significantly slow down the initial public offering (IPO) process. On top of that, they could be less lucrative for private investors in public equity (PIPE) in de-SPAC deals.
There are conflicting opinions among industry insiders about the new guidance. Paul Marshall, co-founder of the hedge fund Marshall Wace, believes that the “The SPAC phenomenon will end badly and leave many casualties.” Others are more optimistic, however, which could work out for CCIV stock.
That all said, one of the main concerns with the Lucid Motors-Churchill Capital IV arrangement is its stupendous valuation. The deal has a transaction equity value of $11.75 billion with its PIPE priced at $15 per share. This puts its implied pro-forma value at over $24 billion.
This valuation is incredibly far-fetched, considering how the company won’t generate its free cash flows before 2025. Moreover, its revenue and cash flow projections are highly optimistic. In its first year of production, the company expects to generate $2.2 billion (Page 64). By 2026, it expects revenue to be $22.8 billion.
The bulls here point toward the meteoric growth of the EV sector and its massive growth runway ahead. However, the competition in this sector is increasing rapidly. Cementing a position as a new company will be remarkably challenging. Additionally, Deloitte holds the view that EV sales will rise at a compound annual growth rate (CAGR) of 29% by 2030. Expecting Lucid to exceed that industry growth would be wishful thinking at best — another mark against CCIV stock.
Final Word on CCIV Stock
CCIV stock has been one of the hottest SPACs in the past year. Unfortunately, though, it is also one of the most overbought names.
The merger target here has big ambitions and the resources to make a splash in EVs. However, CCIV’s current value does not justify those ambitions, especially with the glaring risks involved in Lucid’s business model. Hence, it’s best to wait for the CCIV stock price to dip further before even making a move.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.