CIIG Merger Corp. (NASDAQ:CIIC) sits at the intersection of two current trends. And so it’s no surprise that CIIC stock has soared of late.
First, CIIG Merger is a SPAC, or special purpose acquisition company. SPACs have disrupted traditional initial public offerings (IPOs) this year. Many have seen huge post-merger rallies, and CIIG is no exception.
Second, the company is merging with the U.K.’s Arrival, a manufacturer of electric buses and vans. Electric-vehicle stocks, too, have been “hot.”
The combination has led CIIC stock from roughly $10 before the merger was announced to a current $27.68. At this point, however, the rally seems like it’s gone too far.
Easy Money
SPACs have been around for a long time — since the 1990s, in fact. But they’ve exploded in popularity in 2020.
One key reason why is stability. A traditional IPO takes time. Wall Street bankers have to perform their due diligence, regulatory filings need to be prepared and then the company must market itself to institutional investors through the “roadshow.”
In a volatile market, time adds risk. A company that planned to go public in, say, March of this year might well have had to pull its IPO as markets plunged amid the novel coronavirus pandemic.
In contrast, the SPAC process is simpler, if not necessarily faster, start to finish. Thus, it is also safer. Once the merger agreement is made, the deal essentially is done, pending a shareholder vote.
And so we’ve seen dozens of private companies use the SPAC route to market this year. Many have been huge winners — so far.
But there are concerns with the SPAC process. Notably, disclosure is far less robust. Because SPACs are technically a merger, meanwhile, management can be more aggressive about making forecasts without running the risk of regulatory intervention.
For instance, in the merger announcement, CIIG Merger and Arrival highlighted estimated revenue all the way out in 2024. Other SPACs have issued forecasts that go even further. And, unsurprisingly, most of those forecasts are rather bullish. Indeed, Arrival, which will have zero revenue in 2020, expects $14 billion in sales four years later.
Even after the rally, CIIC stock looks cheap based on that forecast. But it’s just a forecast, and it’s fair to wonder if the big rallies in so many SPACs have come in part because investors are pricing in projections that simply may not come to fruition.
The EV Rally
Meanwhile, EV stocks have soared too. This rally makes some sense. Election results in the U.S. and elsewhere suggest continued government support. Businesses, meanwhile, seem to be moving aggressively toward EVs to both minimize their environmental footprints and to lower total cost of ownership.
Again, there’s some logic behind these gains. Indeed, EVs and AVs (autonomous vehicles) are among the megatrends that should define what I am calling the “Roaring 2020s.”
But here, too, there are some risks. Basically every EV stock (SPAC or not) has rallied sharply in 2020, whether they deserve to or not. We’ve seen more than a few questionable stocks double or even triple.
I’m not saying CIIC stock is one of those plays. But the nature of the rally — a rising tide lifting even leaky boats — raises a real risk of a pullback. EVs are going to be winners, but that doesn’t mean that every EV stock will be a winner. When the market realizes that, the sector is likely to see a sell-off.
The Case for CIIC Stock
To be fair, an investor can share these worries and still see CIIC stock as attractive. Arrival has a solid story. Its “microfactories” can locate production around the world and upend the traditional vehicle manufacturing model, in which size is paramount.
Unlike a number of EV plays, many of which are glorified assemblers, Arrival has significant intellectual property. And while a current enterprise value around $15 billion is expensive for a startup, it’s still only a bit over 2024 estimated sales. Even if Arrival misses that target, there’s some slack in the valuation, particularly if the long-term opportunity plays out.
But that’s still a big “if.” In fact, it’s a huge “if.” Arrival has booked $1.2 billion in orders, but even its president admitted in an interview that those deals were in the prototype stage. Beyond that $1.2 billion, competition will be stiff. And customers may take longer to switch away from ICE (internal combustion engine) models than most currently believe. In other words, they are talking the EV talk now, but they still have to walk the EV walk.
Arrival has a chance, certainly. But risks abound. And the short-term risks, in particular, suggest that even CIIC bulls should be able to find a better entry point with a bit of patience.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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