Lucid Q1 Preview: Business Model Doesn’t Look Sustainable
Contributor since 2023 / 1449 Followers
Summary:
- Lucid Group faces challenges including cash burn, high valuation, and operational struggles, making it a sell.
- The company’s stock price has declined significantly, reflecting operational challenges and inventory surplus.
- Q1 expectations show improvement in losses and revenue, but balance sheet concerns and reliance on equity funding pose risks.
Khosrork
Investment Thesis
Going into this earnings report, Lucid Group (NASDAQ:LCID) faces significant challenges that, I believe, make it a sell. Despite some progress in managing their inventory and likely growing revenue this quarter, the company continues to burn through cash at an alarming rate, with expected losses to exceed $1.1 billion for the year.
Given this, their high Price/Sales valuation ratio, substantially above the sector median, signals what, I believe, is an overvaluation relative to its peers. On top of this, Lucid’s reliance on substantial equity funding in a tightening capital market environment means the company will likely have to tap the capital markets again before they are projected to be profitable in 2029. I do not think the capital markets will be generous given higher interest rates. Given these factors, coupled with operational struggles in scaling production effectively, I’m a sell on LCID as the stock currently presents a high-risk investment with growth prospects.
Background
Since its IPO in 2021 through a SPAC merger with Churchill Capital IV, Lucid Motors has faced significant challenges. While the merger valued Lucid at approximately $24 billion, and the funds were aimed to help the EV startup expand the production of models like their Lucid Air and the upcoming Gravity SUV, the stock price of Lucid (LCID) experienced a sharp decline, losing over 95% of its value from the peak. Their steep stock price decline reflects broader market trends and operational challenges, including issues with scaling production in a competitive EV market that is seeing saturation and aggressive pricing strategies by established manufacturers.
However, while challenges in the EV market are not unique to Lucid, Lucid’s struggles are compounded by high expectations (given such a high expectation to start with) and delays in production schedules. Unfortunately, adding to these operational hiccups, the company has been carrying a decent inventory surplus, leading Lucid to adopt aggressive price cut strategies to manage unsold stock, further hurting their financial performance. While some EV makers like Rivian (RIVN) have large waitlists for some of their products, Lucid does not appear to be in the same boat given that they have had decent inventory overhang.
Q1 Expectations
Heading into the Q1 report on May 6th, Lucid’s challenges persist. The company is expected to report a loss of $0.25 per share, which, while significant, represents an improvement of 37.09% year-over-year. Sell side analysts believe this is part of an overall trend of gradual reduction in losses projected throughout the year, with subsequent quarters also expecting narrower losses.
Revenue expectations for Q1 are set at $179.23 million, marking a 19.94% year-over-year growth. This suggests some level of progress in revenue generation, despite the challenges in production and deliveries. Lucid’s ability to deliver more vehicles than it produced in this quarter, addressing its inventory surplus, provides a potential positive outlook for inventory management. However, with this favorable mismatch (more revenue coming in from Vehicles vs. going out to build new ones) does not mean they will be profitable or have positive free cash flow or operating cash flow. I’m not optimistic.
Balance Sheet Issues
Adding to this, Lucid Motors faces what, I believe, are substantial balance sheet concerns that underline its precarious financial situation as it moves through 2024. The company is expected to report earnings per share (EPS) loss of approximately $0.97 for the year, equating to total losses exceeding $1.1 billion. This is a significant figure that reflects not just operational challenges but also underscores broader concerns about the company’s spending and strategic direction.
Further complicating Lucid’s financial outlook are its substantial liabilities. The company is anticipated to recognize or settle over $2 billion in expenses throughout the year (their current liabilities are just over a billion right now). This includes both regular operating expenses and significant accounts payable, which will collectively strain its financial resources.
As of the end of Q4 2023, Lucid had approximately $3.86 billion in cash and cash equivalents. While this provides a substantial buffer, the rate of cash burn, coupled with ongoing losses, raises valid concerns about the sustainability of its operations without additional capital injections.
Lucid has historically relied on equity funding from major backers, including the Public Investment Fund (PIF) of Saudi Arabia, which has been crucial in supporting its cash-intensive operations such as production scaling and research and development. While the PIF recently infused another $1 billion into the company, bringing total investments to $5.4 billion since 2018, this most recent round came in the form of convertible preferred. One large financing fund continually investing to keep the company afloat may mean the company is not getting the best terms since there is little room to negotiate (keep in mind PIF is the largest shareholder).
The dependence on such equity funding highlights what, I believe, is a critical vulnerability in Lucid’s financial strategy. With the capital markets being increasingly cautious, especially towards high-burn-rate tech and automotive startups in a rising interest rate environment, securing additional funding could become more challenging, especially if PIF slows their pace of funding (or cuts it altogether).
Valuation
Lucid Motors’ current valuation feels expensive to me even though the stock has come down a bit down over 41% YTD at the time I am writing this. Specifically, Lucid’s price-to-sales (Price/Sales) ratio significantly exceeds the sector median. Using forward estimated financials compared to their current stock price, Lucid’s forward Price/Sales ratio is around 6.49 times forward-looking, which is substantially higher than the sector median of 0.88. This discrepancy is much higher than the 1.92 forward Price/Sales ratio Rivian has. In my opinion, Rivian has a much more sustainable path to breaking even and becoming profitable.
On the other hand, the price-to-book (P/B) ratio, which can be an indicator of how much shareholders are paying for the net assets of a company, is the only valuation metric where Lucid falls below the median. Lucid’s P/B ratio is approximately 1.45 forward-looking, compared to the sector median of 2.38. This lower ratio is primarily because a significant part of Lucid’s book value is constituted by its cash holdings. However, this cash is dropping quickly as the company continues to incur substantial losses. As a footnote here, since the new investment of funds from PIF does not come in the form of common stock but rather in convertible preferred stock. What that means is that this will not increase the company’s common equity book value and as they use this cash, this will further cause the decline in book value.
Representing this in a table:
| Ticker/Average | RIVN | LCID | Sector Median | Decline if Valued On RIVN P/S Multiple |
| FWD Price/Sales Multiple | 1.92 | 6.49 | 0.88 | -70.41% |
In my opinion, I do not think that Lucid should have a forward Price/Sales that is any higher than Rivian’s. If we see the stock’s forward Price/Sales ratio come down to 1.92, this would represent an 70.41% decline in shares from current prices.
Bull Thesis
One potential upside for Lucid Motors is the value of their accrued Net Operating Losses (NOLs), which can be used for tax relief and are particularly attractive in a strategic acquisition scenario. These NOLs are not listed on the balance sheet as an asset but could offer substantial fiscal benefits to a competitor in the EV space who might be interested in utilizing Lucid’s established brand and technological prowess. The acquisition would allow the buyer to leverage Lucid’s NOLs to offset taxable income from accelerating the growth of their brand or using the corporate shell to place current business operations into to offset gains, making a deal more financially attractive.
However, these NOLs are hard to capture (there are tax implications that would have to be followed), and some company that have net income are interested in acquiring them. At this point, given that most large scale automotive OEMs are also making their own EVs, I do not see a reason why they would necessarily buy Lucid.
Conclusion
Heading into earnings, Lucid Motors appears to be on shaky ground. Despite some progress in managing inventory and projected year-over-year revenue growth, Lucid is burning through its cash reserves at a heavy rate. The company’s future hinges on its ability to control costs, increase sales, and possibly secure more capital. However, its overvaluation in the market, coupled with ongoing operational challenges, paints a complicated picture. Given these factors, I believe Lucid currently presents a high-risk investment, leading to my recommendation to sell the stock. Potential investors or existing shareholders should closely monitor Lucid’s forthcoming financial decisions and their execution, which will be crucial for the company’s sustainability. I am unfortunately pessimistic about their ability to reach scale in time.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of RIVN 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.
Noah Cox (account author) is the managing partner of Noah’s Arc Capital Management. His views in this article are not necessarily reflective of the firms. Nothing contained in this note is intended as investment advice. It is solely for informational purposes. Invest at your own risk.
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