CIIG (NASDAQ:CIIC) stock has returned 191.0% in one month. If you think that’s astronomical, then I should mention just two terms — SPAC and EV.
In an otherwise lackluster economy, the electric vehicle (EV) space is one of the few sectors witnessing monumental growth.
That has to do with the general optimism surrounding EVs at the moment. Governments are looking to restrict and ban the sale of internal combustion engine vehicles all over the world. It also helps that Elon Musk’s billion-dollar baby Tesla (NASDAQ:TSLA) is now the most valuable automaker in the world.
Having these facts in mind will help you understand the special purpose acquisition company (SPAC) phenomenon in 2020. And by extension, you also begin to realize why EV startups merging with these shell corporations make so much noise this year.
Companies that might not be marketable enough to go public through a traditional IPO will find SPACs a godsend. If you want cash for your operations and a listing during periods of market instability and higher volatility, you really have one option.
However, these two elements are making for some irrational behavior. Retail traders are rushing in and trying to play the EV trend. It’s a situation reminiscent of the late 1990s dot-com boom and bust. While some SPACs have a robust business model, I don’t believe the euphoria surrounding each announcement is warranted.
Case in point, the CIIG Merger, which will bring London based EV maker Arrival to the market in a deal worth $5.4 billion. The newly combined entity will trade on the Nasdaq stock exchange under the ticker symbol ARVL. The deal will leave it with about $660 million to fund growth. It has institutional backing and sound management. But the valuation doesn’t make sense.
Like its EV SPAC brethren, Arrival is keen to take advantage of the shift towards electrification.
SPAC Challenges
A SPAC, or special purpose acquisition company, is a shell company with no operations looking for a startup that wants to go public. They gather funds to finance a merger or a leveraged acquisition, usually within a two-year period. Essentially the reverse of a traditional IPO, these shell corporations allow retail investors to invest in private equity-type transactions, particularly leveraged buyouts.
Going public through a SPAC can accelerate a company’s market entry by anywhere between two and four months. Since there isn’t an actual company in the shell, the U.S. Securities and Exchange Commission (SEC) cannot ask the usual questions associated with a public listing process due to the lack of financial statements and related material. Disclosures put more weight on forecasted financial data, while IPO prospectuses require audited past financial statements.
Having a long-term investor base in place through private investment in public equity, or PIPE, is beneficial since you don’t have to sell a company to public investors at a roadshow.
Due to all these advantages, 2020 seems to have upended the traditional IPO market. Fledging EV startups are the biggest beneficiaries of the trend.
Fertile Ground
EV companies preferred to go public this year through reverse mergers with SPACs because of the less demanding process. Plus, as we have seen with several SPAC deals this year, if you have a novel EV concept, retail traders will rush in to create exorbitant market caps, leaving these organizations with a lot of cash to fuel operations.
That’s good for any nascent company looking to take it to the next level. But how is this strategy going to work for retail traders that don’t have money to lose?
Hydrogen truck maker Nikola (NASDAQ:NKLA) got listed on Nasdaq after a reverse merger with VectoIQ on Jun 3. The combined company was valued at more than $3.3 billion. However, no one could’ve predicted what happened next.
A short-seller Hindenburg Research report surfaced not long after the listing, raising serious questions regarding the company’s integrity. In a regulatory filing, the electric and fuel cell truck manufacturer said it received subpoenas from the SEC and the Department of Justice regarding fraud allegations.
Nikola’s founder, Trevor Milton, who resigned from the company in September amid the fraud allegations, also received grand jury subpoenas. I guess I don’t need to tell you what happened to Nikola’s market cap due to this development.
Where Does CIIC Stock Fall?
Time to talk about the belle of the ball. British electric vehicle start-up Arrival is one of the more interesting EV startups to go public through a merger with a U.S. blank-check company. The deal gives Arrival an enterprise value of $5.4 billion and $660 million in gross proceeds.
Arrival stands out from other electric vehicle makers as it’s purely focused on the commercial market. Avinash Rugoobur, Arrival’s president, expects to start production in the fourth quarter of next year, while van production will begin in the second quarter of 2022.
It already has an order for 10,000 vehicles from U.S. parcel service UPS (NYSE:UPS), and it has institutional backing from Hyundai (OTCMKTS:HYMTF), Kia, and BlackRock (NYSE:BLK).
Another thing that sets it apart is the production model. Arrival uses “micro-factories,” which are much smaller than traditional auto production lines. You can pack them into existing warehouse real estate. The firm expects to make 10,000 vans a year from each factory.
It plans to build three to four of these factories per year. They take up about 20,000 square meters of space and cost $45 million to build.
My Final Word on CIIC Stock
SPACs are the “flavor of the year” in the capital markets. From a CEO’s standpoint, they are great. Compared to the traditional IPO process, you have a lot less complexity and can raise more funds.
However, from an investor’s perspective, you don’t have a lot of data to work with. Usually, a decent track record of sales growth is essential to get investors to notice you, but SPACs have turned the concept on its head.
Arrival was one of the UK’s most valuable startups before the merger announcement. But the stock will really only follow one trajectory. Several catalysts will boost CIIC stock between now and when the merger closes in the first quarter of 2021.
Board approvals, regulatory nods, and the eventual listing will all lead to shares soaring. The stock will lose steam as the difference between valuation and fundamentals becomes more apparent. If you are a smart technical trader, you can definitely make profits with this one.
But you need to know when to get out. Don’t let the names backing Arrival sway you. With these SPACs, there is a lot of speculation built into the stock price.
Invest a small amount of your capital in CIIC stock and spread out the rest in more stable investments. In the EV space itself, there are two big guns, Tesla and NIO (NYSE:NIO), that shouldn’t give you sleepless nights. Yes, they are overvalued, but they are the industry leaders.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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December 24, 2020 at 12:14AM
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CIIC Stock Is Exciting but It's Trading Too Hot Due to the EV SPAC Bubble - InvestorPlace
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