Why Churchill Capital Corp IV (CCIV) Stock is Down 60% Since Lucid Merger
The SPAC’s highly inflated value deflated abruptly, but this could be good news for Lucid IPO buyers.
Special purpose acquisition companies, or SPACs, have been the latest investment fad for some time now, with people investing in the IPO-focused shell companies enabling other companies to fast-track the funding needed to go public.
One of the big stories in SPACs right now is Churchill Capital Corp IV, or CCIV (NYSE: CCIV), the shares of which spiked to astronomical valuation, yet have since plunged nearly 60% following its merger with Lucid Motors just two weeks ago.
Something clearly went badly wrong with the SPAC model in the case of CCIV and Lucid. What was it, and what does it mean for other SPACs?
Why CCIV Stock Rose So High
Enthusiasm about electric car stocks drove the huge upward spike in CCIV’s share value last month, as investors tried to get in on the ground floor of what they imagined to be the next Tesla Motors (NASDAQ: TSLA). Retail investors pumped cash into the SPAC, making its share price soar to $63.20 on Feb. 18, and remain as high as $60.86 on Feb. 22, the day before the merger and crash.
At that point, CCIV, Lucid, and analysts favorable to the companies were comparing the electric vehicle (EV) enterprise to Tesla openly, though Lucid has no actual products and has never earned a cent of revenue through retail sales. CEO Peter Rawlinson claimed in a Feb. 4 interview with Forbes his first independent car design, the Lucid Air, will outdo the performance of the Tesla Model S.
Rawlinson, who previously worked for Tesla as the maverick electric car company’s chief engineer, says the Air will accelerate from zero to 60 in two seconds and drives 517 miles on one charge. He also said Lucid is mimicking Tesla’s market strategy by offering a high-end $164,000 model first, to be followed within five years by mass-market vehicles costing in the neighborhood of $45,000. He added he formerly considered SPACs a “dirty word,” remarking “what a difference a year makes.”
Yet, immediately after CCIV announced the merger with Lucid, its shares plunged 43% in a single day of selloffs. The drop has continued at a slower pace since, with CCIV’s shares down from the pre-announcement figure of approximately 59% at market open today.
Why CCIV Has Plunged Since Its Merger
We’ve created a full Lucid Motors stock hub that has many of the details surrounding their plunge if you want more in-depth reading on the subject.
However, the key idea to keep in mind is valuation. The day the terms of the merger were announced, it was revealed that post-merger Lucid would have 1.6 billion shares outstanding. That means at CCIV’s peak share price of $63.20, the implied market capitalization of Lucid Motors was more than $101 billion.
That high valuation may have surprised many investors who had seen headlines prior to CCIV’s merger announcement that Lucid was being valued at $12 billion in the merger transaction. However, remember that when acquisition companies like CCIV trade for more than $10 per share, that generally means they’re being traded at a premium.
So, while Lucid Motor’s presentation announcing the deal stated the company was valued at ‘less than 2%’ of Tesla, that value was at the funding valuation.
Meanwhile freely traded shares of CCIV had risen enough to value Lucid Motors at more than 10% of Tesla, which is a rich valuation for a company that hasn’t produced a single car.
The SPAC Lessons to Take Away from CCIV
At the end of the day, Michael Klein’s CCIV traded at what we now know was a $100 billion valuation for Lucid. Comparing this valuation to established car companies reveals Ford Motor Company (NYSE: F) has a market cap of $48.8 billion, General Motors Corporation (NYSE: GM) boasts a market cap of $77.4 billion, and fellow EV startup Nikola Corporation (NASDAQ: NKLA) is valued at just $5.8 billion.
There are three important takeaways for any investors who have been following this saga.
1.) Remember that the “reported” details about SPAC deals can differ greatly when final merger agreements are announced. For example, Lucid was valued at a pro forma valuation of $24 billion, which was higher than early press reports of the merger. Also, details like final share count post-merger can have huge implications post-merger announcement. It’s likely many CCIV investors didn’t realize how many shares outstanding (1.6 billion) would exist post-merger. This higher share count led to a market cap that was higher than anticipated and contributed to CCIV’s post-merger sell-off.
2.) One trigger for the plunge appears to be Lucid’s statement its first car release will now be delayed until sometime in 2021’s second half.
3.) Electric car companies, in general, have sold off recently. Tesla is now about 37% off its peak. Many retail investors have rushed into the space based on well-founded optimism about electric vehicle sales growth, but when just about every company in the space is looking to quickly go public, it’s a tell-tale sign that the space is getting frothy with speculation.
Does this mean CCIV is a sell today? Not necessarily.
Volvo just announced last week it intends to go fully electric by 2030 and half of its sales will be EVs by 2025. I believe that most mainstream estimates for electric cars will prove conservative.
Lucid clearly has promising technology, a strong leadership team, and the interest of millions of potential car buyers. However, it was also a painful lesson for many investors on the unknowns that exist when you invest in SPAC companies prior to merger agreements being announced that spell out the full details on exactly what you own.
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