Lucid: Job Cuts, Incentives, Demand Risks

Summary:

• A read-through of Lucid’s most recent earnings release shows several contradicting points that may very well be pointing to a setback in its near-term demand environment.
• In addition to macroeconomic challenges, company-specific inefficiencies in managing supply and logistics last year have led to an erosion of demand momentum observed earlier on.
• With productions no longer a gating factor at Lucid, the mediocre sales reported in the fourth quarter have accordingly dialed-up investors’ angst about its near-term prospects as consumption weakens further.
• The following analysis will zero-in on potential drivers of demand risks facing Lucid under the current market climate, as well as the impact of recently announced job cuts and vehicle purchase incentives on the stock’s near-term prospects.

Lucid’s (NASDAQ:LCID) value has declined close to 90% from its peak, with the stock now trading much more in line with the broader peer group. The drag has been primarily driven by a combination of disappointing production and delivery volumes, and a deteriorating macroeconomic backdrop that has pared unfavourably with the company’s capital-intensive and unprofitable nature.

Hopes for a recovery in the broader auto manufacturing sector amid easing supply chain bottlenecks are now also blighted by surging demand risks as affordability takes priority in vehicle purchase decisions amid rising pressures on consumer budgets. And Lucid’s weak delivery results reported for the fourth quarter have only heightened said fears.

The following analysis will discuss Lucid’s recently announced job cuts, purchase incentives, as well as growing concerns over demand risks across the broader auto industry brought upon by deteriorating economic conditions, and gauge their impacts on the stock’s near-term outlook. While recent job cuts alongside other potential cost-savings initiatives amid mounting macroeconomic uncertainties are welcomed developments to reduce the company’s substantial cash burn, it is likely that further evidence supportive of consistent delivery and production ramp-up progress remain key to assuaging investors’ concerns and restoring confidence in the stock.

Demand Risks

Component shortages and logistics constraints were the biggest barriers to auto productions over the past two years, with availability being primarily a function of supply. This has inadvertently pushed prices higher, with the average MSRP for EVs rising towards $66,000, and average MSRP for passenger vehicles to $47,692 from $34,944 prior to the pandemic. Related bottlenecks have also hampered the recognition of sales through 2022, with automakers spanning start-ups like Lucid and legacy names like GM (GM) citing logistics inefficiencies for backed up customer deliveries near period-end.

This improvement was driven by the team overcoming numerous logistics challenges and collaborating with the supply chain to increase parts availability…We continue to face some supply chain and logistics issues, but overall things remain trending in the right direction.

Source: GM 4Q22 Earnings Call Transcript

In 2022, we scaled virtually every part of our business while keeping a sharp focus on execution…We were able to accomplish this despite supplier, supply chain, logistics and quality issues throughout parts of the year…

Source: Lucid 4Q22 Earnings Call Transcript

But deteriorating macroeconomic conditions are now shifting focus in the industry from concerns over supply to worries about demand. Affordability has become a core focus among prospective buyers in the current market. In addition to increasing sticker prices, financing costs on auto loans are also pushing 7% – the costliest since 2009. Meanwhile, consumer spending is also buckling as a result of persistent inflationary pressures. Specifically, U.S. retail sales in February fell 0.4% from the month prior, dragged primarily from auto sales, which fell by a whopping 1.8% over the same period due to a combination of ailing demand and an intensifying price war in the industry.

These concerns remain acutely relevant to Lucid despite its higher MSRP and premium segment placement that was previously viewed as relatively recession-resistant given the more affluent target audience. This is consistent with the early signs of weakening demand as discussed in our previous coverage on the stock, where Lucid’s order book dropped from 37,000+ reservations at the end of the second quarter to 34,000+ reservations exiting the third quarter:

The luxury segment’s relative resilience amid the rocky macro backdrop is further corroborated by Lucid’s order book of 34,000+ vehicles valued at $3.2+ billion as of the end of the third quarter. This compares to 37,000+ reservations outstanding during the end of the second quarter, valued at more than $3.5 billion. Considering Lucid delivered 2,282 vehicles in the third quarter, the company likely lost some of its reservations ahead of changing consumer behaviour under the currently dire macro climate.

Source: “Is Lucid Stock A Buy After Q3 Earnings? Double Miss Implies More Turbulence”

While management had earlier attributed some of production and delivery pitfalls to logistics constraints – in which it has sought to remediate by bringing some of said capacities in-house – it was evident that impacts from the looming economic downturn were inevitable:

We’ve gotten past the major bottlenecks limiting manufacturing, but this had some impact on the demand we generated early on, and this has been exacerbated by the challenging macroeconomic environment.

Source: Lucid 4Q22 Earnings Call Transcript

And the growing chorus about demand risks across the recession-prone auto industry has only been made louder by the weak delivery numbers reported by Lucid for the fourth quarter. Although the company had exceeded the upper range of its revised 2022 production guidance of 7,000 vehicles by 180 units, deliveries came in at a mere 4,369 vehicles. Lucid’s order book has also shrunken from 34,000 vehicles in the third quarter to 28,000 vehicles in the fourth quarter, representing a decline that far exceeds the number of vehicles delivered in the three months ending December. Meanwhile, 2023’s production target of 10,000 to 14,000 vehicles also underperformed consensus calls for 20,000 to 22,000 vehicles, underscoring persistency in headwinds from 2022 that may very well spill into the current year.

Specifically, Lucid ended 2022 with an implied inventory of close to 3,000 vehicles (i.e. 400 vehicles produced as of February 28, 2022, less 125 vehicles delivered in 2021, plus 7,180 vehicles produced through 2022, less 4,369 vehicles delivered in 2022). Paired with the company’s anticipated output of up to 14,000 vehicles in the current year, total units available for sale will only approximate half of its order book of 28,000 vehicles. Considering the increasingly challenging macroeconomic environment, the lagging pace of production and delivery ramp-up could lead to risks of incremental losses in reservation volumes, consistent with management’s acknowledgement on the impact that limited manufacturing has had on “demand generated early on” during 2022:

Now as we indicated last quarter, one part of the variance between production and deliveries is the distribution of vehicles across three areas of the delivery process, and that is vehicles in transit, vehicles awaiting quick delivery inspection and vehicles awaiting delivery to a customer. Now some of the vehicles were also internal fleet cost for test drives and engineering. A further constraint is because latching the precise specification of cars we build to that of the customer selection. But like many other companies, we are not immune from a challenging macroeconomic environment…I want to reiterate that we are not limited by production. We could scale up, but we’re making a conscious decision to match production, whilst focusing upon cost-effective build quality.

Source: Lucid 4Q22 Earnings Call Transcript

The concerns are further exacerbated by management’s confirmation that the company is no longer production constrained, which is consistent with that fact that the upper range of 2023’s production guidance of 14,000 vehicles is consistent with the production run rate exiting 2022. While management has repeatedly cited “customer awareness and growth” as a priority for the year, with assertion that “demand remains very strong”, there is, nonetheless, a disconnect to some extent with reservations and delivery volumes reported, raising questions on whether looming demand weakness is primarily macro-driven or an idiosyncratic headwind. This continues to put delivery and production ramp-up progress at the forefront of investors’ focus, which will likely remain the overhanging theme for the stock until there is consistent positive progress on that front to support a sustained recovery.

Job Cuts

In addition to raising customer awareness and growth, placing a “laser focus on cost” is another strategic priority for Lucid in the current year. And consistent with observations across the broader tech industry, layoffs have been a low-hanging fruit in which Lucid has also opted for.

Earlier this week, the premium EV maker has announced decisions to reduce its workforce by 18%, or approximately 1,300 employees. The undertaking is expected to be complete by the end of the second quarter, with the incurrence of a related one-time charge ranging $22 million to $28 million pertaining to “employee transition, severance payments, employee benefits, and stock-based compensation”. While it is currently uncertain which departments will be impacted most by the cuts, observations of similar undertakings across peers like Rivian (RIVN) indicates that back-office operations will likely be made leaner to reduce excess capacity, while manufacturing staff on the floor will potentially be spared to maintain and improve the current pace of productions.

The recently announced job cuts are likely to result in annualized savings north of $100 million. Although the figure remains immaterial to the substantial annual cash burn incurred at Lucid’s capital-intensive operations (~$2.2 billion cash used in operations in 2022), the job cuts are viewed as a prudent move consistent with management’s goals to improve operational efficiency. We expect the ensuing impact to become more evident in the second half of the year, with related reductions in recurring labour costs more than compensating for the one-time charges pertaining to the layoffs. This will likely complement anticipated reductions in production costs as discussed in our previous coverage, considering supply chain constraints that have been gradually easing alongside benefits of improved economies of scale as Lucid ramps up its output run-rate through the year:

Meanwhile, costs of road transport have also eased, declining by 6% since peaking in March 2022, although they remain 22% higher y/y. This is bound to alleviate some of the near-term input cost pressures and logistics inefficiencies previously experienced by Lucid, leaving margins more reflective of its higher opex related to planned production ramp-up and expansion spending only. And from a long-view perspective, we remain optimistic that Lucid’s vertically-integrated business model and continued production ramp-up will enable competitive profit margins at scale.

Source: “Is Lucid Stock A Buy After Q3 Earnings? Double Miss Implies More Turbulence”

Improved cost and operational efficiencies will also be critical to offsetting the anticipated expansion in capex to support Lucid’s continued efforts in expanding its footprint overseas, as well as start of productions of the Gravity SUV next year. Specifically, Lucid is expected to incur $1.5 billion to $1.75 billion in capital spending this year to support the ongoing growth initiatives. Under the current market climate where boardroom executives are “talking pennies, not millions” ahead of mounting macroeconomic uncertainties, continued focus and delivery on cost optimization efforts is going to be a welcomed feat supportive of the stock’s potential recovery.

Purchase Incentives

In an effort to address its strategic focus on improving customer awareness and growth, Lucid has also opted to match federal incentives for eligible EV purchases under the Inflation Reduction Act (“IRA”). Recall from our previous coverages that Lucid’s flagship Air sedan is not eligible for the federal tax credit offered to EV buyers under the IRA, given the model line-up exceeds the MSRP threshold for eligibility. While this has potentially made variants of the Lucid Air less appealing from a cost perspective for prospective buyers, Lucid’s decision to offer a one-time purchase credit of $7,500 on the Lucid Air Touring and Lucid Air Grand Touring by March 31 is expected to offset some of the ensuing impact and clawback some of the demand that otherwise would have been lost to competitors. The decision also underscores the intensifying price war within the increasingly saturated EV landscape, following EV industry leader Tesla’s (TSLA) decision to pull on its pricing lever – bolstered by its market-leading auto profit margins – and reduce MSRP on its premium segment vehicle models to similarly match incentives under the IRA.

While Lucid does not have the same luxury as Tesla from a profitability perspective, the $7,500 purchase incentive bodes favourably with the company’s strategic priority of improving customer awareness and growth by narrowing its line-up’s pricing gap with competing offerings in the market. Specifically, the Lucid Air Touring and Lucid Air Grand Touring, which are priced at $107,400 and $138,000, respectively, are at least 19% more expensive than the rival Model S and Model S Plaid which start at $89,990 and $109,990, respectively, following their latest MSRP reductions. But taking into consideration the $7,500 purchase incentive makes Lucid’s narrowed price premium much easier to justify considering its “strong technology advantage” pertaining to range, performance, efficiency, and charge times.

The anticipated boost in demand as a result of the promotion offered in the first quarter will likely become more evident in Lucid’s financial during the latter half of the year with related deliveries take place, with related pressure on margins due to the reduced price tag expected to be offset by operational and cost efficiencies – such as the recently announced job cuts – to be implemented through the year.

The Bottom Line

There remains substantial expectations on the execution front from Lucid, as it navigates through lingering supply chain disruptions, a weakening demand environment due to both macro- and company-specific challenges, and a capital-intensive roadmap ahead of a looming recession. While the recent job cuts announced and purchase incentives offered are welcomed news, the key focus remains on the company’s ability to ramp-up production and sales in order to restore investors’ confidence in the stock.

While the broader tech sector has benefited in recent weeks from growing expectations for a Fed pivot in its monetary policy stance before the end of the year, any hopes for sustained valuation gains at Lucid will remain limited until there is greater visibility into execution progress over its cost-savings, margin preservation, and growth efforts. While Lucid looks to be well-positioned for a stronger second half from a fundamental perspective as impacts from operational cost efficiencies and incentive-driven sales flow through, there remains much to be done before its credibility as a potential share gainer in the premium EV segment is restored to support a return in investors’ confidence in the stock.

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Disclosure: I/we have a beneficial long position in the shares of LCID 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.

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