Lucid Motors – SPAC crazy

FOMO feeds the cash bonfire.

• Lucid Motors is going public using a SPAC vehicle at a valuation that once again underlines that fear of missing out (FOMO) is driving investment in this sector as opposed to any semblance of reality.
• Lucid Motors is a luxury EV maker and as such is not really a competitor for Tesla but more BMW, Mercedes-Benz, Audi and so on.
• As a result, if being pre-revenue, the company intends to burn $9.8bn before it earns a single dollar in profits.
• I suspect that this is why it is listing now as the current appetite for this sector means that it will be able to raise this sum without too much difficulty and minimal dilution as long as the craze continues.
• It has one model, the Lucid Air that starts at $70,000 and goes all the way up to $161,000 depending on trim level, performance, and range.
• Lucid is also making extravagant claims with regard to its better efficiency with more than 4.5 miles per kWh compared to Tesla’s industry-leading greater than 4.0 miles / kWh.
• Lucid has some credibility in this space as it is already a battery and software supplier to Formula E which is the EV version of Formula 1 racing.
• Hence, I think that Lucid has a shot at carving out a space in the luxury EV segment as the interior of its vehicles are very well designed and it has some proven expertise in EV technology.
• In fact, many new technologies that have come into petrol vehicles over the years have started on the racing circuit further adding to Lucid’s technical credentials.
• Hence, I am inclined to like this company, its strategy and its outlook.
• However, when it comes to the transaction, that is when everything careers off the road.
• Lucid Motors is being acquired by a special purpose acquisition company (SPAC) which is already listed creating a very simple method of going public.
• A SPAC is a public company that has raised money through the sale of shares (usually at $10 per share) in an IPO but has no operations.
• The money sits in the company until it finds an acquisition target upon which it will typically raise more money and issue more shares to acquire the shares of the target company.
• The money in the SPAC and the cash raised typically goes onto the company’s balance sheet to finance growth and development.
• In this case, the SPAC is called Churchill Capital IV which has raised $2.07bn and will raise another $2.5bn (PIPE investors) and issue new shares to purchase all the shares of Lucid Motors.
• The end result is that the new investors are paying a valuation of $24bn to invest in the public company which I think is way beyond the realms of what the fundamentals can justify.
• When the acquisition closes, there will be 1,600m shares in issue meaning that the current share price of Churchill Capital IV is implying a post IPO valuation of $46bn
• The supporters of this valuation are using Tesla as the benchmark but I don’t know of anyone who really thinks deep down that Tesla is trading on its fundamental outlook meaning that at some point it is going to crack.
• In my opinion, this makes Tesla a very poor benchmark for Lucid because it sets the company up for a massive correction when the market finally starts focusing on fundamentals.
• On Lucid’s numbers, it will have around $4bn on the balance sheet when it lists but will not break even until 2024 by which time it hopes to have revenues of $90bn.
• In the meantime, it intends to burn $9.8bn in cash meaning that it will have to raise at least another $6bn over the coming 3 years or so.
• This will mean that there will be a dilutive rights issue, or the company will become heavily burdened with debt.
• If I were running this company, I would do a rights issue as soon as possible before the craze for electric vehicle investing ends and capital becomes much more difficult to come by.
• Lucid is a pre-revenue company but at $46bn it is already trading in line with BMW, a company that has been building and selling luxury vehicles for decades and has a highly recognisable and valuable brand.
• It is also trading at a huge premium to Ferrari which is probably the most desirable brand in the entire industry.
• At the moment Lucid has no brand and no revenues meaning that a valuation of $46bn is asking investors to pay for a lot of success which currently only exists in PowerPoint.
• I am steering well clear of this as at some point there will be a correction to well below the current valuation and probably also the IPO price.