Churchill Capital IV (NYSE:CCIV) stock has grabbed investor attention since the beginning of fiscal year 2021. On rumors of a potential business combination with Lucid Motors, CCIV stock surged to highs of nearly $65. In a typical example of sell on news, the stock plunged to around the $20 level after confirmation of the deal.
CCIV stock has been relatively subdued in the last two months. It seems like a good consolidation phase. However, I am still concerned about the valuations.
It was recently reported that the Securities and Exchange Commission (SEC) is considering stricter rules for special purpose acquisition companies (SPACs). The focus of the SEC is on “wildly optimistic forward growth projections.” Optimistic guidance can help in justifying the SPAC business combination valuations. However, it poses a big risk for investors.
So, let’s start with the company’s financial projections and the valuations.
Overly Optimistic Projections Are a Concern
For Lucid Motors, the transaction equity value is at $11.75 billion. Further, the pro-forma equity value is “approximately $24 billion at the PIPE offer price of $15.00 per share.” CCIV currently trades at $22, which implies a post-business-combination value of over $30 billion.
Valuations seem unattractive for a company that’s likely to report first free cash flows (FCF) in FY2025. Importantly, the FCF projection seems to be based on overly optimistic growth projections — precisely the factor that the SEC is worried about.
For the coming year, Lucid Motors expects revenue of $2.2 billion. By FY2026, revenue is expected to surge to $22.8 billion. This would imply a compound annual growth rate (CAGR) of 79.4%. To me, this seems unrealistic or too optimistic. And the company’s pro-forma valuation is based on these projections. This is a big reason to be cautiously optimistic on CCIV stock.
Investors will point out that the electric vehicle (EV) industry is expected to grow at a healthy pace over the decade. Deloitte expects that by FY2030, there will be 31.1 million electric vehicles on the road globally. In the current decade, EV sales will increase at a CAGR of 29%. Lucid Motors is talking about sales growth that is significantly higher than the projected industry growth rate. I would therefore take the projections with a grain of salt.
I have pointed out one fact several times in the past, and I will do it again. By FY2022, there will be more than 500 different EV models available globally. Competition will continue to intensify, and that can negatively impact long-term growth guidance.
I would prefer to limit my exposure to CCIV stock. Further downside seems likely. However, there can be a news-based rally, which would provide a good trading opportunity.
The Positive Triggers
Peter Rawlinson, the company’s CEO, confirmed that Lucid has been approached by a few car companies this year over licensing deals. However, the talks have not yielded anything tangible. Positive news on this front is a potential upside trigger.
Another important point mentioned by Rawlinson is that the company is looking to collaborate with a mass-market carmaker. The idea is to get “millions of $25,000 cars into production fast.” It seems clear that the company is not just focused on the luxury car market. As the portfolio of models expand in the coming years, revenue growth will be robust. I would still doubt the projections.
Lucid Air is slated for delivery in the second half of the year. The sales response is likely to have an impact on the stock trend in the next few quarters. Further, the company’s SUV is planned for launch in FY2023. The pipeline is exciting and the company’s long-term outlook looks promising. However, a good company might not always be a good investment.
Concluding Views on CCIV Stock
CCIV stock might seem attractive from a trading perspective after some consolidation around the $20 level. Any potential licensing deal could also trigger upside.
However, the company’s growth guidance is optimistic and valuations look stretched. I would consider a long-term exposure once the business combination is completed and the stock is possibly available at lower levels.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.