Lucid: Why Hope Isn’t An Investment Strategy

Summary:

• Lucid Group stock performance has been disastrous, losing nearly 95% since its highs in early 2021.
• The company’s recent Q4 earnings release unveiled weak production guidance for 2024, as its premium-priced segment has failed to take off.
• Lucid Group is still priced for growth, with the Saudi PIF’s support as its cornerstone investor.
• Lucid is not expected to post free cash flow profitability through the FY28 forecast period.
• I strongly urge investors to consider reallocating their Lucid Group positions, as hope isn’t a viable investment strategy.

I admire Lucid Group, Inc. (NASDAQ:LCID) investors still holding on to their positions, notwithstanding the disastrous performance of LCID since its early 2021 highs close to the $65 level. With LCID plunging into penny stock territory, as I elucidated in my previous update in November 2023, it has lost nearly 95% since its frothy highs. It worsened in late January 2024, as LCID collapsed toward the $2.55 level. I assessed short covering likely occurred, although LCID remains a short-seller favorite. With a short interest as a percentage of its float of more than 30% as of mid-February 2024, the market hasn’t given up its bearish thesis on LCID.

Lucid reported its fourth-quarter earnings release in late February. Much to the chagrin of its investors, Lucid posted highly disappointing forward production guidance that came in well below Wall Street’s estimates. Accordingly, Lucid management telegraphed a 2024 outlook of 9K vehicles, significantly lower than analysts’ estimates of 12K. Lucid’s deliveries/production ratio also fell to 72.5% in Q4, down sequentially from Q3’s 94%. Management highlighted that Lucid wasn’t immune from macroeconomic and high-interest rate challenges that battered the EV industry. Furthermore, Lucid’s focus on the premium segment has likely worsened the headwinds as the growth momentum in higher-priced EVs wanes.

Moreover, investors hoping for a mass-market version to expand its total addressable market, or TAM, will be disappointed. Lucid management explained that it’s working on a mid-market model to be ready for series production by late 2026. In other words, Lucid investors will still need to trudge along through 2027 before seeing a more pronounced improvement in its EV sales cadence. While the optimism over the launch of its Gravity SUV model could reinvigorate sales, deliveries are only anticipated from 2025. In other words, 2024 could be another year of significant uncertainties, even as Lucid prepares to increase CapEx while burning more cash to meet its medium-term production targets.

Lucid management projects about $1.5B in CapEx spending in 2024. The company also cautioned investors to expect possible inventory impairment charges as it increases its purchase of “Gravity components ahead of production.” As a result, it could affect its near-term gross margin accretion potential, behooving Lucid management to improve its cost optimization strategies markedly.

With Lucid’s tepid production guidance for 2024 pointing to another downcast year ahead in manufacturing ramp, should investors capitalize on its newfound penny stock status and bet on its medium-term ramp potential? LCID is still priced as a growth stock with a forward enterprise value/revenue multiple of 7.9x. It’s also well above its industry peers’ median multiple of 1.2x. Hence, the market has likely accorded a steep premium to account for the Saudi PIF’s backing as its cornerstone investor to sustain its long-term outlook.

Investors should note that the Saudi PIF’s commitment to purchase up to 100K vehicles could lift its valuation significantly. However, that’s still predicated on Lucid’s ability to deliver a much better-than-expected production trajectory moving ahead.

Notwithstanding the Saudi PIF’s backing, I urge investors to consider that Lucid Group, Inc.’s growth premium is based on weak foundations. With Lucid not anticipated to post positive free cash flow through the FY28 forecast period, I believe significant caution must be heeded. Seeking Alpha Quant’s worst-in-class “F” profitability and momentum grades corroborate my conviction that investors should consider reallocating their positions and save themselves the agony of hoping for the better.

Rating: Maintain Sell.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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