Churchill Capital Corp. IV (NYSE:CCIV) has taken it on the chin in the past week. CCIV stock is down about 13% on news the special purpose acquisition company (SPAC) had not had any contact with its tentative merger partner, Lucid Motors, until after an article appeared in Bloomberg on Jan. 11 that suggested they were already in talks.
In the big picture, it really shouldn’t matter when a marriage is first hatched, only that it’s a happy one. Investors, being a persnickety sort, chose to punish the stock for the lack of clarity. Personally, if you’ve got a beef, it ought to be with the publication, but I digress.
All that should really matter is whether Lucid is going to deliver the goods or not.
SPACs Have a Lot of Explaining to Do
In recent weeks I’ve become less enamored with SPACs, noting that very few of them actually perform post-merger over the long haul. Sure, they pop when the announcement of a combination is made, but they can’t hold a candle to the long-term performance of traditional initial public offerings (IPOs).
Renaissance Capital looked at the 813 SPAC IPOs from January 2015 through September 2020. Of those, 93 had completed a combination. The median return of the 93 SPACs post-merger was -29.1%. The average after-market return of traditional IPOs was 47.1%.
So, let’s consider how CCIV stock has performed compared to some of its SPAC peers from July 2020.
Maybe it’s not doing badly at all.
CCIV Stock Is Up 135% Since IPO
Churchill Capital Corp. IV sold 207 million units on July 30, 2020, at the traditional $10 per share offering price. This includes the 15% over-allotment for underwriters.
So, I’m interested in SPACs that IPO’d around the same time, give or take a week or two.
A glaringly obvious choice is Pershing Square Tontine Holdings (NYSE:PSTH). It sold 200 million units at $20 on July 21, 2020. As you’re probably aware, Bill Ackman has yet to announce a merger candidate, although he did say he hopes to announce any day now.
PSTH stock has gained about 12%, far less than CCIV over the same period. Granted, the identification of a target often puts the SPAC price into the stratosphere. In Churchill Capital’s case, the opposite happened. It drifted up to almost $65 on the January rumor planted by Bloomberg, only to lose two-thirds of its value from its high on the actual announcement.
On July 24, 2020, Property Solutions Acquisition Corp. (NASDAQ:PSAC) sold 200 million units at $10 apiece. The underwriters exercised their over-allotment for an additional 2.98 million units.
PSAC announced on Jan.28 that it would merge with electric vehicle (EV) manufacturer Faraday & Future Inc. in a deal valuing the combined entity at $3.4 billion. PSAC stock gained 22% on the news. After hitting a 52-week high of $20.75 on Feb. 1, it’s since lost 44% of its value from the high and is up 19.2% from its July 2002 IPO.
On July 27, 2020, ACE Convergence Acquisition Corp. (NASDAQ:ACEV) sold 20 million units at $10. The underwriters exercised their over-allotment of three million units.
On Jan. 7, ACEV announced it would combine with Achronix, a fabless semiconductor company based in Santa Clara, California. Its acceleration solutions are used for artificial intelligence, machine learning, and other computer-intensive applications.
The combined entity is valued at $2.1 billion post-merger based on 2020 revenue of $105 million, a backlog of $160 million, cash of up $330 million, 79% gross margins, operating margins of 35%, and estimated revenue growth of 20%-25% annually through 2025.
The company has all of this going for it, and ACEV shares are trading below their offering price. Go figure.
I Could Go On
There are more examples I could trot out to demonstrate how CCIV’s performance stacks up against its July 2020 peers, but I think you get the picture.
SPAC investing isn’t a slam dunk.
In late February, I suggested that Churchill Capital’s stock was getting the smackdown it deserved after the merger announcement with Lucid. I just had an issue with a stock trading at 135 times its projected 2025 free cash flow (FCF).
At the time, it was trading at $30. Today, at $23.16, it’s still trading around 101 times the estimated 2025 FCF, based on an enterprise value of $32.68 billion (1.6 billion shares outstanding post-merger and $4.6 billion in cash) and an estimated $321 million in 2025 FCF.
So, the fact that its shares are still up more than double what they were last July in its IPO, I’d say CCIV is doing well against the class of July 2020.
That doesn’t mean I’d buy it by any means, but if you bought in the IPO, you shouldn’t be disappointed with the return on investment.
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. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.