Lucid Group: Not Healthy, But Has A Few Ways To Cheat Death
Contributor since 2023 / 33 Followers
Summary:
- Lucid has seen a harsh pullback in its stock price, and has announced unexpected production cuts compared to initial expectations.
- As a startup, it’s an inherently risky investment; financial fragility, production and demand concerns, and competitive pressures are a constant threat.
- I believe that the company has a decent chance at survival, since it can access more capital to sustain itself if necessary.
- However, it still has to prove its mettle before I would consider recommending it as a long-term investment.
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Thesis
The popularity of electric vehicles (EVs) over the past several years is undeniable. From finance media coverage to EV consumer sales over the past decade, EVs have been all the rage. EV demand in the United States (US) is no exception; battery electric vehicle (BEV) registrations doubled in 2022, and survey results by Deloitte show that American demand continues to exceed sales. Clearly, EV demand is booming, especially in the US.
Unfortunately, Lucid Group, Inc. (NASDAQ:LCID) is not able to capitalize on these secular tailwinds. With its lowered production numbers, the company is missing out on potential sales. But it’s not just supply that Lucid is constrained by. The company announced that it saw fewer-than-expected orders in 2022 and forecast weaker-than-expected production in 2023.
As bad as things look for Lucid regarding supply and demand issues, not to mention competitive pressures mounting, I believe Lucid could have enough support to make it in the long term, but it still needs to prove itself before earning a buy rating.
Valuation
While it is difficult to determine the true value of a young company that only has a year of sales under its belt, LCID’s valuation appears to match its cars’ style: pricey and luxurious. All possible measures to determine the stock’s value, including its Price/Sales and Price/Book ratios, are quite high compared to its sector; LCID sports a P/S of ~20 (trailing 12-months) and a P/B of ~3 (TTM), compared to sector averages of 0.85 and ~2 for the respective ratios.
If cheap companies are what you crave, stay away – LCID is as richly valued as a dark chocolate cheesecake.
Financials
Lucid Group made over $600 million in revenue in 2022, compared to less than $28 million in 2021 and only $4 million in 2020. While its revenue is improving substantially, the company is far from profitable, and its losses are worsening by nearly all measures. Gross profit was almost $1 million in 2020, but fell to a loss of nearly $130 million in 2021 and a loss of $1 billion in 2022. Operating income was even worse, falling from a loss of $250 million in 2020 to $1.5 billion in 2021, and finishing 2022 with an operating loss of $2.5 billion. Cash flow from operations was also very poor, with cash losses of nearly $600 million in 2020, $1 billion in 2021, and over $2 billion in 2022. The company’s debt is already about $2 billion, and combined with its losses, nearly or completely dwarf the company’s total cash of about $4 billion. At the very least, net income is improving, from a net loss of $700 million in 2020, to a $4 billion loss in 2021, to only a $1.4 billion loss in 2022. The company has also said it has liquidity to keep running into 2024. Still, these are not very encouraging numbers.
Lucid’s core car business is not yet generating profits, and its losses are increasing. This puts it in a bad position financially, since companies are in the business of making money, not burning it. While one could excuse its financial condition since it’s just a startup, or because it just started production in late 2021, it matters little; the precarious financial condition typical of startups is why they are universally considered speculative. Even a year or two into production, Lucid would be a risky play in the best of times. But these are not good times at all.
Lucid’s Prospects Fall as Competitors Rise…
Despite rising US EV demand, Lucid’s US sales and revenue performance has been disappointing. Investors consequently sold LCID stock down by almost 70% from a year ago at time of writing. Startups always start out in poor financial conditions until their businesses can generate positive cash flow. This is a challenge in a good macro environment; rising rates and a probable bear market make for a horrible time to be a loss-making firm. With Lucid’s reduced orders signaling a clear demand problem, the company appears to be facing a major cash flow issue that could hamper operations if left unchecked.
Even worse for Lucid, its competitors are churning out EVs of their own, driving even more demand away from Lucid. Among legacy automakers, General Motors (GM) and Ford (F) are easily outselling the American startup. GM’s Chevrolet Bolt sales numbered over 38 thousand in the US, a 53% increase from 2021 despite virtually no sales in Q1’22 due to battery issues. Notably, GM’s sales of the Bolt in only Q2 just about matched Lucid’s entire 2022 production, and nearly doubled Lucid’s 2022 sales. Meanwhile, Ford sold about 39 thousand Mustang Mach-E vehicles in 2022, up 45% from 2021 and amounting to several times Lucid’s production.
Let’s not forget Tesla (TSLA), the king carmaker in the US EV space, meeting most EV demand with ~65% market share in 2022. Tesla was, among other things, the best-selling luxury car brand in 2022, and recently received recognition for its superb customer loyalty. To compare to Lucid in terms of sales, the Tesla Models S and X (comparable in price to the Lucid Air) sold ~67 thousand units, again several times as many as Lucid produced. Even this trouncing by Tesla doesn’t hold a candle to Tesla’s Model 3 and Y sales, which made up the rest of its 1.3 million car sales last year. And of course, all of these vehicles were made profitably, unlike Lucid’s. Not news LCID investors would like to hear.
Also worrisome is how many cars were produced vs delivered for these two startups compared to Tesla. Tesla Model S/X production was 71 thousand vehicles. That is to say, 67 thousand of the 71 thousand high-end luxury cars Tesla made in 2022 were put into customers’ hands that year, or 91 percent. Not bad. Of Lucid’s 7180 luxury vehicles produced, only 4369 vehicles were put in customers’ hands, or 61 percent. Not good.
To summarize the foregoing analysis, Lucid is failing to ramp production or sustain demand for its EV products despite high demand in its market, all while burning money and being badly outsold by both Legacy Auto and fellow EV startups. If things sound pretty dire for Lucid right now, that’s because they are.
…But Lucid Could Still Survive
In the end, Lucid needs to stimulate demand, up production and revenues, generate positive cash flow and profit, pay off debt, and stay capitalized to continue operations in the meantime in order to avoid bankruptcy. That will be a tall order, and only a few of the many startups that tried were able to pull it off. But Lucid has some aces up its sleeve.
Lucid has more cash than debt, which will allow it to deal with its losses and overall poor financial situation. It also has multiple sources from which to get more cash or capital if needed. It sells thousands of vehicles at a higher price ($150k price range) than average, so it can draw in more revenue than other vehicle startups could to offset expenses as it ramps up. Lucid also has a very large market cap, ~$13 billion at time of writing, so it can issue shares to raise quite a bit of capital from the market if things get really tough.
If even its revenue stream and a dilutive capital raise isn’t enough, Lucid can lean on its majority shareholder, the Saudi Arabian Public Wealth Fund, for capital. Being favored by a government when market conditions deteriorate has paid off for carmakers before; the US government’s bailout of GM stands as a good example. Considering the Saudi Arabian government’s longstanding ties to and investment in Lucid, dating as far back as 2018, I see no reason why the Saudi government would not support the company as things get more difficult now. As one of the 25 richest countries in the world by GDP per capita, the Saudi government is certainly more than capable of paying off Lucid’s debts and subsidizing its losses until it reaches profitability. Even if it didn’t do so, the Saudis’ large investment alone is a much-appreciated vote of confidence in the firm. Management and those in the know seem confident in the company’s prospects, too – there has been a recent uptick in insider buying of LCID that investors should find reassuring.
All this to say, Lucid’s situation isn’t pretty, but it’s far from hopeless.
Risks to Thesis
Despite Lucid’s status as an early-stage startup clouding its medium and longer-term future prospects, I think it has the necessary ingredients to be a keeper. But that assumes everything goes right for Lucid, and that the company doesn’t go the way of so many startups before it. Don’t let the last section fool you – I believe there are some big question marks surrounding Lucid’s future, highlighted by two major risks.
One risk I see is that, due to ramping up several years after mass EV producers like its pure play peer Tesla, Lucid’s late start to the EV race may doom it to becoming an also-ran among EV makers for the foreseeable future, keeping its sales and share price sluggish at best for a prolonged period. With Lucid’s vehicles stuck in the high-priced range, this also-ran status would be especially difficult to change if luxury vehicle customers, a small consumer base, are solidly won over by other brands before Lucid can introduce them to their vehicles. Should this latter phenomenon also occur in the more affordable $20-30k EV price range, Lucid would be boxed out of most of the auto market as the market switches to EVs. Unless it were to invest heavily into trying to build up brand loyalty, and fight to try to gain some amount of market share from entrenched incumbents in the affordable or high priced ranges, Lucid’s position as a small, niche, luxury EV car seller would be effectively cemented. Without a change in business model to account for its low vehicle volumes, this would severely limit the company’s growth potential and profitability.
Another risk is that Lucid’s cash burn accelerates to such outrageous levels that it manages to catch their backers in the Saudi Arabian government off guard, prompting them to reconsider supplying capital to keep the company afloat. Lucid, at some point, will need to become a profitable business, or the Saudis, their wealth notwithstanding, may dump the company for a more worthwhile investment. No matter how wealthy one is, no one chooses to lose money all the time and get nothing out of it.
These scenarios would demonstrate that the situation for Lucid is much more dire than I anticipated, and would break my thesis that Lucid has a chance of surviving its startup era. Over the next few years, we will see whether my thesis bears out, or if the risk scenarios against it bear out instead.
Conclusion
Although Lucid is facing constraints to production and demand, increasing competition, and deteriorating financials which all threaten its sustainability, the company has some recourse due to its sales and high revenue, large cash pile and market cap, and government ties that offer it security. As such, for long-term focused investors, I would call LCID a hold for the time being.
Disclosure: I/we have a beneficial long position in the shares of TSLA either through stock ownership, options, or other derivatives. 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.