Tesla Vs. Lucid Stock: Which Stock Is The Better EV Buy?
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Summary:
- TSLA’s Q1 2023 deliveries came in ahead of the market’s expectations, while LCID’s 2023 production guidance was less than half of its reservations.
- Tesla has the scale and financial capacity to execute on an aggressive pricing strategy, which puts in a good position to take market share away from competitors like Lucid.
- Tesla is the better EV buy as compared to Lucid, considering various factors such as operating statistics, financial strength, and valuations.
piranka
Elevator Pitch
This article focuses on a comparison of Tesla (NASDAQ:TSLA) and Lucid (NASDAQ:LCID) to determine which of the two is a more attractive investment candidate in the Electric Vehicle or EV space.
I previously wrote about Tesla’s valuation metrics and its potential re-rating catalysts in an earlier article published on January 23, 2023; while my prior March 29, 2022 write-up for Lucid discussed its stock price weakness driven by sales that were below expectations.
With my latest article, I arrive at the conclusion that Tesla is a more appealing investment proposition than LCID, after evaluating both stocks’ key operating metrics, financial numbers, and valuation multiples.
TSLA And LCID Key Metrics
An analysis of Tesla’s and Lucid’s most recent metrics suggests the former has been performing better than the latter.
On April 2, 2023, TSLA issued a press release indicating that the company achieved deliveries amounting to 422,875 units for the first quarter of this year. This meant that Tesla’s deliveries grew by +36% YoY and +4% QoQ in the most recent quarter. More significantly, TSLA’s actual Q1 2023 deliveries beat the market’s consensus forecast of 421,200 units by +0.4%.
Tesla had made several pricing changes in Q1 2023 to boost demand for its vehicles. A Seeking Alpha News article published in early-March 2023 highlighted that TSLA lowered the selling prices of its U.S. Model X and Model S vehicles this month with price reductions in the 4%-9% range. Prior to this, Tesla initiated price cuts for the company’s Model 3 and Model Y SUV vehicles in January this year.
At the company’s 2023 Investor Day (event transcript sourced from S&P Capital IQ) held recently on March 2, Tesla stressed that it “found that even small changes in the price have a big effect on demand.” In other words, TSLA sees price cuts having a positive impact on its future sales volume, and the company’s pricing strategy has been validated by its above-expectations Q1 2023 deliveries.
In contrast, LCID’s most recent metrics have disappointed the market.
Lucid previously revealed in late February that its Q4 2022 deliveries amounted to 1,932 units, and this turned out to be -32% lower than the sell-side analysts’ consensus estimate of 2,831 units. Note that Lucid has yet to release its Q1 2023 operating and financial numbers.
Another key metric for LCID is reservations. Lucid’s reservations have declined from more than 37,000 units (equivalent to potential revenue of $3.5 billion) in August 2022 and in excess of 34,000 units (potential revenue of $3.2 billion) in November 2022 to over 28,000 units in February 2023 (potential revenue of $2.7 billion). It is also worthy of note that LCID has decided that it won’t release details of the company’s reservations figures going forward.
Lucid’s FY 2023 production guidance of between 10,000 and 14,000 units are significantly below its reservations of 28,000 units as of February this year, which could indicate that the company is still being affected by supply chain headwinds. At its Q4 2022 results call, LCID acknowledged that it was “unable to deliver on the popular stealth look option, resulting in a reduction of buildable configurations heading into Q1 2023 as a result of “supply chain issues.”
It would be reasonable to suggest that Lucid is facing challenges in terms of both demand and supply considering the company’s recent metrics.
What Is The Difference Between Tesla And Lucid?
The key difference between TSLA and LCID is that the former has a scale advantage over the latter. Tesla’s size allows it to remain profitable and free cash flow positive, which in turn provides the company with the capacity to be aggressive with pricing.
Tesla’s FY 2022 revenue was $81.5 billion, while Lucid’s sales in the most recent fiscal year were a mere $608 million. As mentioned in the preceding section, LCID has guided for production volume in the 10,000-14,000 unit range for 2023. Lucid’s expected production volume for the current year is just a fraction of TSLA’s production guidance of 1.8 million units as indicated at its Q4 2022 earnings briefing on January 25, 2023.
TSLA generated free cash flow and GAAP net profit of $7.5 billion and $12.5 billion, respectively for full-year FY 2022. In comparison, LCID suffered from a GAAP net loss of -$2.6 billion and a negative free cash flow of -$3.3 billion last year. As per the sell-side’s consensus financial projections sourced from S&P Capital IQ, the analysts only see Lucid turning free cash flow positive and profitable by 2027 and 2028, respectively.
According to an April 7, 2023 Associated Press article, Tesla recently “cut prices on its entire U.S. electric vehicle model lineup for the third time” in 2023. TSLA has the financial strength to implement multiple rounds of price cuts because its margins are sufficiently high to take the hit from price reductions; the company’s GAAP net margin and free cash flow margins were 15.4% and 9.3%, respectively for FY 2022.
In the case of Lucid, the company has to take a measured approach toward price cuts to avoid pushing back its timeline for profitability and positive free cash flow generation. To make things worse, LCID’s Lucid Air doesn’t qualify for federal tax credits based on the selling price criterion, and the company had to offer a $7,500 credit on specific Lucid Air models earlier in the year to stay competitive.
As discussed earlier, Lucid’s reservations have been falling, so that LCID might have to initiate further price cuts. But Lucid’s weak financial position limits the company’s ability to engage in price competition with its rivals going forward. LCID noted at its Q4 2022 results briefing that it has adequate liquidity to sustain its operations till Q1 2024, and this suggests that the company might need to raise fresh capital again next year.
Are These Stocks Fairly Valued?
Tesla currently trades at 3.20 times consensus forward FY 2025 Enterprise Value-to-Revenue based on S&P Capital IQ’s valuation data. On the other hand, the market values Lucid at a consensus forward FY 2025 Enterprise Value-to-Revenue multiple of 3.08 times.
As I have highlighted in the preceding section of this article, TSLA’s operating and financial metrics are superior as compared to that of LCID. As such, Tesla should be justified in trading at a significant valuation premium over LCID. Based on the current forward Enterprise Value-to-Revenue metrics for the two stocks, I deem Tesla’s shares to be undervalued, while I see Lucid’s stock as fairly valued at best.
What Should Investors Consider About TSLA and LCID?
Investors should be aware that Tesla has the ability to adopt an aggressive pricing strategy which will put it in a good position to gain market share at the expense of competitors like Lucid. Companies can only compete with rivals on pricing, if this doesn’t come at the expense of profitability or even financial survival. In comparison, LCID is already unprofitable and burning cash rapidly even before implementing severe price cuts.
Tesla shared at its 2023 Investor Day that its “target is to reduce 50% of cost” with the company’s “next-generation vehicle” platform. TSLA also disclosed at the recent investor event in early-March that “the next Tesla Gigafactory will be in Mexico” which “will build our next-generation vehicle.” In my opinion, TSLA’s ambitious expense reduction goal and its focus on expanding production in Mexico (to benefit from lower manufacturing costs) will enable the company to make up for the negative profitability impact brought about by recent price cuts.
LCID, like most of TSLA’s competitors, is caught in a Catch-22 situation. If Lucid doesn’t reduce vehicle prices in a significant way to remain competitive, meaningful market share loss to Tesla is a very likely scenario. On the contrary, implementing price cuts will worsen the financial situation for Lucid.
More importantly, with Tesla’s strong brand loyalty, a narrower price gap with competitors alone is likely to be enough for TSLA to grab customers from other brands including LCID. A recent March 25, 2023 Seeking Alpha News article cited the results of UBS’ (UBS) global survey which indicated that “42% of battery electric vehicle (or BEV) purchase intenders” had TSLA as their top pick. In comparison, only 18% of consumers surveyed by UBS preferred Lucid over Tesla when it comes to picking a BEV brand.
Is TSLA Or LCID Stock A Better Buy?
TSLA is a better buy than LCID based on my assessment. Tesla is free cash flow positive now, while it will likely take a few more years for Lucid to generate positive free cash flow. TSLA’s recent quarterly deliveries beat the sell-side’s expectations, while LCID’s reservations and production outlook have disappointed the market. Tesla deserves to trade at a more significant valuation premium as compared to Lucid, and I think that TSLA is a superior investment choice vis-a-vis LCID.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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