Hype or No Hype, Lucid Motors Can’t Evade These Ugly Truths

Given the recent short squeeze attempts on meme stocks like AMC (NYSE:AMC) and GameStop (NYSE:GME), it’s no surprise that investors have been searching for juice among similar stocks with high short interest. Enter Churchill Capital Corp IV (NYSE:CCIV), a high profile SPAC (Special Purpose Acquisition Company), which currently has 26% of its float in short positions. The upcoming merger between Churchill Capital IV and Lucid Motors has spurred a rally in CCIV stock that could result in a squeeze. 

The Electric Vehicle (EV) space is hot and everyone loves an underdog story, especially if that underdog has the potential to take out EV giant Tesla (NASDAQ:TSLA). But investors take note: if you want to ride the momentum train, make sure you know when to get off. Despite the near-term hoopla around Lucid as a “Tesla killer,” an overheated valuation, lack of fundamental catalysts and sketchy production timeline ultimately set the stock up for disappointment.

I’d sell CCIV stock into near-term strength. Meanwhile, I continue to recommend buying Tesla on weakness.

Here’s a closer look. 

Lucid Motors: On a Mission to (One Day) Compete With Tesla  

Lucid Motors was co-founded in 2007 by former Tesla director Bernard Tse as Atieva. The company’s initial focus was battery packs for Chinese vehicles. In 2013, Lucid recruited Peter Rawlinson as CEO. Rawlinson was formerly Tesla’s chief engineer for the company’s first mass-produced Model S luxury sedan. Lucid shifted to manufacturing cars in 2014. 

In September 2020, Lucid Motors revealed the Lucid Air, the company’s first car. The vehicle is currently in pre-production in Casa Grande, Arizona. While Lucid has not yet sold any vehicles, the company ranks among the most mature electric vehicle startups in a race to one day compete with Tesla. 

Lucid has designed three Air models: 

• Air Pure starting at $69,900 (406-mile range; 480 HP)
• Air Touring starting at $87,500 (406-mile range; 620 HP) 
• Air Grand Touring starting at $131.500 (517-mile range; 800 HP) 

The Air is expected to be a catalyst for a lineup of future all-electric vehicles from Lucid, including an SUV in 2023 and eventually, more affordable vehicles. 

What’s Moving CCIV Stock? 

CCIV is one of the latest high-profile companies to come to market via a SPAC IPO. Despite the fact that its merger target, Lucid Motors, has not yet shipped a single vehicle, the stock is gaining momentum as it heads into the upcoming IPO (no date has yet been announced). While CCIV stock has fallen roughly 55% from $53 back in February when the deal was announced, it has been propelled from about $20 to $26 over the past two weeks. 

There are three explanations for the move. 

• High short interest. Like most pre-IPO SPACs, CCIV’s short interest is high, at 26% of float. There’s a structural reason for this high short interest. Pre-SPAC investors typically receive warrants as a sweetener for their early-stage investment. As a result, they tend to hedge their position by shorting the stock. 
• Increased short position in Tesla. A rising short interest in Tesla and a scarcity of publicly traded EV stocks has also buoyed CCIV stock. At over 40 million shares, Tesla’s short interest is currently worth $24 billion, making it the largest short position by total value. Some observers have prematurely begun to tout Lucid as the “next Tesla.” However, this comparison only makes sense in the context of Lucid’s copycat manufacturing model (all in-house) and similar sales and service model. 
• Valuation relative to Rivian Automotive. Electric vehicle startup Rivian Automotive is targeting an IPO backed by Goldman Sachs (NYSE:GS), JPMorgan (NYSE:JPM) and Morgan Stanley (NYSE:MS). Early reports suggest that the company, backed by Amazon (NASDAQ:AMZN) and Ford (NYSE:F), could garner a valuation of around $70 billion. In contrast, some investors may be viewing Lucid Motors as inexpensive by comparison, at an implied valuation of $42 billion. 

While CCIV stock may continue to gain momentum into the IPO transaction, I’d suggest selling into strength. CCIV has an overheated valuation. At these levels, the stock is setting investors up for disappointment, particularly around manufacturing timelines. 

Cool Designs…  

Unlike Tesla, which is strictly focused on commercial EVs, Lucid’s business plan calls for expansion of its technology portfolio into other industries, including aerospace and agriculture. For now, the company is in pre-production with a single product: the Lucid Air, a sedan to rival Tesla’s Model S. Notably, it wasn’t until Lucid Motors offered the Air for a starting price of $69,000 last October that Tesla cut the Model S price to $69,420. 

Lucid’s designs are getting a lot of attention. But building out vehicle production at scale is a much more difficult problem — one that almost led Tesla to bankruptcy. Already, many EV startups like Lordsdown Motors (NASDAQ:RIDE) are challenged by the capital requirements of scaling production. Lucid’s PIPE (Public Investment in Private Equity) transaction and subsequent IPO are expected to generate up to $4.6 billion in cash for the company to scale production.

…But It’s Bound for Disappointment 

Lucid’s balance sheet should carry the company into the early stages of production. But the company’s manufacturing ramp is less certain. Lucid’s $700 million AMP-1 facility in Casa Grande Arizona is capable of scaling to 34,000 vehicles annually. But, the company’s 2021 target calls for only 577 Lucid Air vehicles. In fact, Lucid delayed the launch of its flagship Air sedan into the second half of 2021. 

Investors seeking more detail on Lucid’s manufacturing timeline beyond this year won’t get much clarity. The company says it has three stages planned to expand its Arizona facility to a maximum 365,000 vehicles annually. Yet, Rawlinson has refused to confirm the company’s earlier stated target of 20,000 vehicles in 2022. Given the lack of real production guidance, the stock could be setting up for disappointment in the coming quarters. As a comparison, last year, Tesla produced 509,737 electric vehicles and shipped 499,550 — even despite a global slowdown in auto sales due to the coronavirus pandemic.

Follow the Money Flow

CCIV shareholders will own a minority interest in Lucid Motors (19.1%). So, it’s worth taking a closer look at the company’s ownership structure and governance. Saudi Arabia’s sovereign wealth fund, or Public Investment Fund (PIF) will own approximately 62% of the company once the acquisition is complete. PIF invested $1.3 billion in the company in 2018. It also provided Lucid with $600 million in bridge financing to help get through the deal’s conclusion.

PIF, under the direction of Crown Prince Mohammed bin Salma, has been looking to invest in technologies that reduce the Saudi economy’s reliance on the petrochemical industry. PIF’s first major international investment was in Uber (NYSE:UBER) as well as Softbank’s (OCTMKTS:SFTBY) Vision Fund. PIF also held a 5% ownership position in Tesla in 2018, but liquidated its holdings at the end of 2019. 

Both Lucid and CCIV have close ties to Saudi Arabia. Notably, Churchill Capital founder, former Citigroup (NYSE:C) investment banker Michael Klein, worked for years as a Middle East financier and was an advisor in the 2019 listing of Saudi Arabian Oil Company. Given Saudi Arabia’s history of human rights abuses it’s worth mentioning that companies such as Richard Branson’s Virgin Galactic Holdings (NYSE:SPCE) and Virgin Orbit have declined investments from PIF in the wake of the 2018 assassination of Washington Post reporter Jamal Khashoggi. 

The ‘G’ in ESG

Also of note is Lucid’s board structure. The company’s Chairman, Andrew Liveris, is a former Dow Chemical (NYSE:DOW) chief executive with deep financial ties to Saudi Arabia. Liveris also serves as an operating partner at CCIV. This makes him a player on both sides of the transaction. It is highly unusual to have officers from the acquired company hold an operating role in the SPAC, owing to an obvious conflict of interest. While CEO of Dow, Liveris was the focus of a three-year Securities and Exchange Commission investigation for failing to disclose around $3 million in perks. The perks ranged from personal use of company aircraft to sporting events and dues Dow paid to a charity Liveris chaired.

In addition to Lucid’s strong ties to Saudia Arabia, there has also been speculation that the company has an undisclosed commitment to build a manufacturing facility near the Red Sea city of Jeddah. This speculation has in turn led to questions surrounding the cost of such an investment — particularly given that Saudi Arabia lacks the manufacturing footprint necessary to build automobiles at scale. The country has been trying to persuade an automaker to build an assembly plant on its home turf since a fizzled deal with Jaguar Land Rover, owned by India’s Tata Group (NYSE:TTM). 

Tesla Plaid Plus Cancellation Is Noise 

Earlier this week, Tesla announced that it had cancelled the Model S Plaid Plus, with Elon Musk citing the Model S Plaid as being “so good” on its own. This announcement seems to have some observers speculating that Lucid now has an open lead in the premium EV category. We can certainly debate the reasons for the cancellation. But, one thing is very clear. The Plaid offers essentially the same functionality as the Plaid Plus — and at a $20,000 discount.

With the lowest-end Plaid models capable of 390-mile range and 1020 horsepower, it’s mostly the battery range that would have been incremental. With new battery cells still on the horizon, Tesla is likely focusing on other luxury features for now. It’s also possible that Tesla wants to wait on its new battery cell type until the next Roadster ships (2022). 

The Bottom Line on CCIV Stock 

Factoring in for the 19.1% ownership interest in Lucid by CCIV shareholders, Lucid is coming to market at an implied valuation of $42 billion. At this price, Lucid would trade at the same market capitalization as Tesla in 2017. As reference, Ford and General Motors have market caps of $62 billion and $93 billion, respectively. 

With EVs well-positioned to cannibalize a $5 trillion automobile market, there’s very little debate over industry growth. That said, it’s too early to take a position in CCIV at these levels. Building vehicles is a rough business, and getting the manufacturing process right (and delivering products on time) will take more than cool design renderings. 

CCIV stock may continue to move upwards into the IPO transaction. But any strength will likely be short-lived as EV valuations recalibrate. There is risk to the shares as investors begin to more closely scrutinize Lucid’s manufacturing ramp. While there may be a short-term speculative trade here, I’d sell into strength.

Your comments and feedback are always welcome. Let’s continue the discussion. Email me at jmakris@investorplace.com.

On the date of publication, Joanna Makris did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Joanna Makris is a Market Analyst at InvestorPlace.com. A strategic thinker and fundamental public equity investor, Joanna leverages over 20 years of experience on Wall Street covering various segments of the Technology, Media, and Telecom sectors at several global investment banks, including Mizuho Securities and Canaccord Genuity.