SPAC Mania Does Not Make Churchill Capital Corp IV a Buy
One of the hottest investment trends today is investing in special purpose acquisition companies (SPACs). Churchill Capital Corp IV (NYSE:CCIV) has seen CCIV stock surge from $10 per share in early January to about $58 per share today.
Should you consider CCIV stock now after this price appreciation? My investment thesis is based on several key arguments. Let me give a sneak preview by saying that in general, I do not like SPAC stocks.
CCIV Stock: Another Speculative SPAC
First, what is a SPAC? I like this simple definition by Investopedia: “A special purpose acquisition company is formed to raise money through an initial public offering [IPO] to buy another company. At the time of their IPOs, SPACs have no existing business operations or even stated targets for acquisition.”
The key point is that Churchill Capital Corp IV does not have any existing business operations now. It will have business operations if it merges with a private company. This is the goal of any SPAC: to find a target company and merge, providing capital and value for its shareholders.
Now, what are the main catalysts that move a stock? Fundamental factors, changes in management, a sector or industry that is benefiting from news related to technology, infrastructure and speculation. CCIV stock surged 27% last Friday, Feb. 12, on hopes and rumors of a merger with another hot electric vehicle (EV) name, Lucid Motors.
As long as these rumors have not been officially confirmed by any press release, they are pure speculation. Pure speculation is too risky. What if the deal with Lucid Motors is not materialized? Then the well-known motto “buy the rumor, sell the fact” in stock investing could send CCIV stock to a significant price correction.
A Potential Deal Would Be Big News, but Risky Too
Churchill Capital Corp IV mentions on its website that its “track record provides a highly attractive opportunity for prospective targets looking for proven, expedited access to liquidity, capital and value creation.”
Value creation is different from irrational stock price appreciation. Some may argue that the number one reason for buying any stock is to make money and sell it at a higher price than the price bought. Correct.
CCIV stock has moved from about $10 per share to $58 per share. I cannot see any complaint by shareholders buying the stock at $10 per share. They have already more than quadrupled their investment.
But this is not value creation. Value creation means I have a solid business — a brand — and I am an important company in my business sector. I have a strategy, services or products that can be considered superior to the main competitors of my business.
For CCIV stock, this is not happening. And Lucid Motors, if the target company to be announced soon, has plenty of risks.
Lucid Motors is a premium and luxury EV manufacturer, with only just a model, the Lucid Air. With a base price of $69,900 and a top price of $161,500 depending on the trim level, Lucid Motors will have to compete with other premium EV makers.
And while Lucid Motors plans to sell its luxury electric vehicles not just in the U.S. and Canada, it is too soon to have any indication of future sales, growth, market share and profitability.
Lucid Motors has a model that looks impressive, but will it sell well with its premium price? This is a risk we do not know yet because we have no data at all.
A few years ago we had only one key player in the EV industry, Tesla (NASDAQ:TSLA). Now, there are EV manufacturers worldwide, and some are not just startups, but established, decades-old car manufacturers.
CCIV Stock: Some Fundamentals Worries
Another fact that I do not like about SPACs is that there is a rule for their stocks to trade at about $10 per share initially. This rule does not make sense to me and implies that the stock valuation is too high from day one. Let me explain it more clearly.
Not all SPACs are the same. Yes, they have the cash to target a merger, but what drives stock price at first when a stock goes public? One of the reasons is expectations and demand.
I find the idea of multiple SPACs with different managements all having an inital flat price of $10 per share to be absurd. CCIV stock’s price for 2020 hovered near $10, and then in 2021 surged amid the rumors of a merger.
Churchill Capital Corp IV’s price-to-book ratio is, for now, the most reasonable way to check its valuation based on the asset-based approach. According to Macrotrends, the current ratio is 621.47.
In general, a price-to-book value ratio of 1.0 is considered a fair value, and anything less than 1.0 suggests the stock may be undervalued. For CCIV stock, this ratio is irrationally high.
CCIV stock, for now, is pure speculation. Its price is too expensive. For reasonable investors, it is best to avoid it. It is too risky to buy stocks on hopes and not on their actual fundamentals and valuation.
On the date of publication, Stavros Georgiadis, CFA, did not have (either directly or indirectly) any positions in the securities mentioned in this article.