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Fundamentally, CCIV stock makes little sense. In this market, that’s a bull case
By Vince Martin, InvestorPlace Contributor Feb 11, 2021, 11:10 am EST
The catalyst has been rumors that SPAC (special purpose acquisition company) Churchill Capital IV is going to merge with electric vehicle manufacturer Lucid Motors. Lucid was founded by Peter Rawlinson, a former engineer at Tesla(NASDAQ:TSLA). That alone has been enough to send investors racing to get a piece of the company.
Of course, there are a couple of problems with the buying frenzy. First, the merger isn’t necessarily going to happen. As we shall see, another Churchill vehicle saw similar rumors that didn’t pan out.
Second, even if the merger does go through, we have no idea what the terms will be. Obviously, the case for CCIV stock varies wildly depending on the percentage of Lucid that Churchill IV shareholders wind up owning.
And yet, on essentially rumors alone, the stock has more than tripled. All that is driving the rally is investor desire to get a piece of seemingly every EV stock out there. Of course, as long as that desire holds, it may be more than enough to keep CCIV stock moving higher.
Will the Merger Close?
The rally in CCIV stock began on Jan. 11. Shares closed the day before at $10.03, narrowly above their initial public offering price of $10. Then, Bloomberg reported that Churchill IV and Lucid were in merger talks.
To be fair, there does seem to be some evidence that Lucid and Churchill may wind up tying the proverbial knot. As one author noted at Seeking Alpha, Lucid certainly seems to expect that it’s going public soon: the company is hiring for positions including a Director of Investor Relations.
Churchill itself on Jan. 19 issued what looks like a “non-denial denial” of the rumors. Rawlinson told Forbes that while he’d previously thought of ‘SPAC’ as a “dirty word,” he now would say, “what a difference a year makes.”
Investors are reading the tea leaves. And they’ve been right to do so in the past. SPAC Tuscan Holdings (NASDAQ:THCB) spiked back in November on speculation that it would merge with EV battery developer Microvast. It took a bit of time, but THCB soared 56% when the merger finally was confirmed last week.
But there is at least one cautionary example. Churchill Capital II (NYSE:CCX) saw speculation last summer that it would merge with golf entertainment provider Topgolf. CCX stock moved near $12, the deal never materialized, and CCX now is back near $10.
What Is CCIV Stock Worth?
The rally in CCIV stock itself creates a bit of a potential problem for that deal. Churchill’s negotiating position has been significantly weakened. It absolutely has to get a deal done at this point, on basically any terms. Otherwise, CCIV stock plunges.
Again, the terms of the deal are material to CCIV stock. Churchill Capital IV is one of the largest SPACs out there, with over $1 billion in capital. But even with that capital, current CCIV shareholders are going to wind up with a minority of the combined company. (It’s difficult to imagine that Lucid would accept a valuation below $2 billion in this market.)
What precisely that minority is depends on the valuation Lucid accepts. It’s going to be a high figure. Fisker (NYSE:FSR), for instance, has a market capitalization over $4 billion. Public market reaction alone suggests investors see much more potential in Lucid than its fellow EV play.
Meanwhile, the Tesla ‘halo’ probably moves valuation higher. That halo is based on both Rawlinson’s association with the company and , as Rawlinson detailed to Forbes, Lucid’s plan to basically mimic Tesla’s strategy.
Lucid is going to go public, however it goes public, at a big valuation. But the value of CCIV stock (assuming a Churchill-Lucid tie-up happens) is based on precisely what that valuation is. It’s impossible to know, meaning there’s a risk that CCIV plunges if the terms of the deal aren’t quite as good as the 200%-plus rally suggests.
Of course, after the past eleven months, there’s a simple retort to either of the risks: who cares?
For SPACs and for EV stocks, the fundamentals haven’t mattered much, particularly since early November. Electric vehicle adoption is going to continue for not years, but decades, and investors want a piece.
They’re not terribly interested in valuations or near-term fundamentals. They want companies that can be a part of the EV landscape, whether as manufacturers, battery suppliers, or charging station operators.
Lucid seems to have an awfully good chance. The Lucid Air certainly looks phenomenal. And the Tesla strategy that Lucid plans to follow certainly worked out well for those who have owned TSLA stock long-term.