On Feb. 23, Churchill Capital Corp IV (NYSE:CCIV) plunged on the news of its merge with Lucid Motors, a U.S.-based luxury electric vehicle (EV) maker. Now, InvestorPlace’s investment analyst Luke Lango believes this drop is a once-in-a-lifetime buying opportunity for CCIV stock.
It may very well be.
But it also might be the swan song for special purpose acquisition companies (SPACs), which have been one of the most popular market trends of this past year. Here’s why CCIV’s dip might mean the end of the SPAC era.
CCIV Stock Manipulation
Right now, CCIV stock is trading at around $30. That’s down about $27 from the stock’s Feb. 22 closing price of $57.37, or about a 50% decline. However, given the SPAC marketplace’s frothiness, it wouldn’t surprise me if the stock rallies again.
The last time I wrote about CCIV was at the end of January. At the time, SPAC impresario Michael Klein was rumored to be negotiating with Lucid, but they had not struck a deal.
With or without Lucid, I thought that it was way too early to give up on Klein’s $2.1 billion SPAC. As jockeys go, Klein is one of the best. He’s in the same league as Gores Holdings, Social Capital and Eagle Acquisition.
CCIV stock was trading at about $23 as it closed out January. Even with dips, it more than doubled in less than a month, ultimately hitting a 52-week high of $64.86 in mid-February. Fortune’s Lucinda Shen put the stock’s post announcement tumble in perspective:
“As rumors of a potential merger swirled in recent months, ebullient traders hoping to ride the updraft for another Tesla-esque success story bid up shares of Churchill Capital IV to as much as $60 apiece. Which means the price of the PIPE can be dilutive to existing shareholders.”
It wouldn’t surprise me in the slightest if hedge-fund investors — knowing what was coming down the pike — decided to play both sides of the street by buying into the $2.5 billion PIPE while using their influence to short its stock in the near-term. That would leave retail investors to take the brunt of a rigged system that allows a select few to buy CCIV stock for $15 while regular Joe’s are paying as much as $64.
As Shen states, with bond yields so low, SPAC stocks have become a better option for institutional investors. But when they decide that’s no longer the case, you can be sure that regular investors will be left holding the bag — just like in the GameStop (NYSE:GME) affair.
The End of the SPAC Era?
Like many of the companies acquired during the SPAC craze, Lucid comes with lots of promise and little else. Its projections suggest revenues will climb from $2.2 billion in 2022 to $22.8 billion in 2026 (Page 59). On the bottom line, it expects to generate positive earnings before interest, taxes, depreciation and amortization (EBITDA) by 2024.
Free cash flow (FCF) — a financial metric I’m always looking at — is also expected to grow from -$2.8 billion in 2022 to $321 million in 2025.
So, based on 1.6 billion shares outstanding post-combination, $4.6 billion in cash, no debt and a $30 share price, CCIV has an enterprise value of $43.4 billion. That means that investors are valuing the Lucid combination at 135 times projected 2025 FCF.
I consider an FCF yield of 8% or higher to be value territory. CCIV’s FCF yield is considerably lower than that. And that’s on a projection five years out.
Don’t get me wrong. I think the Lucid Air is a wonderful-looking vehicle that will go like stink and take you far at the same time. However, I’ll never be able to afford one.
So, all I can do is consider what this valuation means for the SPAC craze. Is it the end? INSEAD professor Ivana Naumovska recently discussed this very subject in the Harvard Business Review.
Naumovska pointed out that more than 300 SPACs must complete a combination in 2021 or face liquidation. That suggests the quality of the transactions — which haven’t been good in recent years — will only get worse. Even Goldman Sachs (NYSE:GS) CEO David Solomon, whose company has benefited mightily from the SPAC phenomenon, believes the pace is unsustainable.
In the Lucid deal, fees and expenses were $165 million (Page 62). And those get paid whether Lucid becomes a “trillion-dollar company” or flames out in spectacular fashion.
The Bottom Line
Luke Lango believes that Lucid can capture 8% of the global EV market share by getting to an average selling price of $40,000 and roughly 20% operating margins.
But that’s going to take a lot of success, considering the Lucid Air starts at $77,400 and goes up from there. Yet, Lango thinks it will easily be worth more than $700 billion someday. Perhaps even a trillion dollars, if things go exceedingly well.
Like a lot of equity-crowdfunding valuations, people think capturing market share is an easy thing. It’s not.
Companies like Tesla (NASDAQ:TSLA) have struggled for years before tasting success. So, I’m highly skeptical when someone implies it will be simple to go from zero production to 8% global market share of any product, let alone something as complicated as an electric vehicle.
In that regard, this SPAC era reminds me of the dotcom bubble.
There’s a place for SPACs, but not at 135 times free cash flow. So, govern yourself accordingly.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.