The early history of automobiles made me think about the current gold rush of electric vehicle (EV) manufacturing, in particular, Lucid Motors, soon to be merged into Churchill Capital Corp IV (NYSE:CCIV). Let’s take a closer look at the merger deal and CCIV stock.
The final details of the deal were announced on June 11, in which a PIPE (private investment in public equity) offering will be priced at $15 per share. That increases shares outstanding to 1.6 billion, which at today’s price of $27.34 implies a $43.7 billion market capitalization.
A Brief History of Auto Manufacturing
The early 20th-century history of automobile manufacturing is not what many people think. There were hundreds of auto companies producing all types of cars in the early stages of the internal-combustion-engine boom.
In 1908, there were 253 car companies. That number dropped to 44 in 1929, still a shockingly high number. Most of those were wiped out in the Great Depression, and a few were absorbed into what became the big three — General Motors (NYSE:GM), Ford (NYSE:F) or Chrysler.
It’s an incredibly tough business with massive amounts of capital requirements. It doesn’t scale well like a software business does. All cars, whether electric or gasoline, are heavy pieces of equipment that take an incredible amount of steel, plastics, glass and electronics. Not many companies can scale up for the long haul. There are doubts about whether even EV global leaders like Tesla (NASDAQ:TSLA) can become successful.
CCIV Stock Valuation
As a pre-revenue company, CCIV/Lucid is hard to analyze. Earning returns on capital above its cost of capital could be five to 10 years out, provided the company is still in business.
We can take a purely speculative guess (which is based on Lucid’s own projections) and say Lucid sells 20,000 cars in 2022 at $110,000 each, which would provide $2.2 billion in revenues. But wait a second, the company says the Air Pure starts at $69,000 — so the $110,000 final selling price must have a lot of undercoat added on at the dealership!
2023 car sales are estimated at 49,000, which due to the forthcoming market crash and global recession expected before then, has about as much chance of happening as me actually buying a $100,000 electric vehicle in the next five years. The 2023 revenue projections are at $5.5 billion (now the average selling price is $113,000?).
So to support a projected market cap of over $40 billion, the new Lucid would have to carry a price-to-sales ratio of 18x in 2022 and 7.2x in 2023. Tesla’s highest forward EV-to-sales level is 18x. So that implies Lucid would have to be the next Tesla — in just 2.5 years.
Lucid’s own business plan projects approximately 500,000 vehicles produced in 2030, achieving the sales status where Tesla currently is. The company is falling victim to spreadsheet bias. Excel makes every business story sounds good if the right numbers are input.
The Price Point Screams Luxury
Lucid’s expected price points are too high for the mass market. The competition for Lucid is not other EV manufacturers, but the luxury car market.
With the Lucid Air Pure starting at $70,000, the Air Touring at $87,500, the Air Grand Touring at $131,500 and the Air Dream Edition at $161,500, Lucid’s competition is not other EVs but rather the likes of Porsche, Jaguar, Mercedes-Benz, Audi, Lexus, Maserati and many more.
Can you imagine a negative-free-cash-flow company (for the next five years at least) competing against those types of brands. Particularly against their own EVs! It’s an uphill battle they may not win. The company claims a 4% market share in the total addressable market is all they need to meet their goals. That 4% will be a harder endeavor than D-Day.
Final Thoughts on CCIV Stock
The merger is supposed to occur during this quarter, and who knows what volatility will come to fruition at that time. Dilution in these SPAC deals are killers.
There is a price at which an investment in Lucid Motors may make sense if you’re a long-term investor, but owning CCIV stock at these levels is not it.
On the date of publication, Tom Kerr did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tom Kerr has worked in the financial services industry for over 25 years. Currently he is a Senior Portfolio Manager at Rocky Peak Capital Management. Prior to that he was Chief Investment Officer and Director of Research of SGL Investment Advisors, and has served in a number of positions at other finance-related organizations. Mr. Kerr has also been a contributing writer to TheStreet.com, RagingBull.com and InvestorPlace.com. He’s a CFA charterholder and obtained a B.B.A in Finance from Texas Tech University.
