I wouldn’t go as far as to call myself a “Lucid skeptic.” But if you’ve read my prior coverage of Lucid Group (NASDAQ:LCID) stock, you’ll know I’ve said this popular electric vehicle (EV) play has more room to pullback from here.
Mostly, due to the risk that a possible stock market correction knocks it down to lower price levels. How low? As I put it in my last article, market-specific concerns could sink it to $10 per share, which was the initial offering price for this former SPAC (special purpose acquisition company).
Giving this more thought, assuming that it’s set to fall back to $10 per share may be wishful thinking. Even if a correction happens, it may not see a 56%+ move back to $10 per share. Instead, with the hype still surrounding it, possible declines may wind up being not as severe.
However, don’t assume the buzz still surrounding Lucid today is guaranteed to stay in place. Positive headlines notwithstanding, there’s still a lot that could go wrong with this “too hot to touch” early-stage EV company.
LCID Stock: High Hopes Could Minimize Impact of Correction
As you’re likely aware, excitement surrounding Lucid remains high. Recent headlines, like news of the EPA giving one of its models, the Air Dream Edition Range, its highest EV range rating ever are helping to drive this, along with upcoming events like its Production Preview Week.
The analyst community is starting to sing the praises of LCID stock as well. Earlier this month, Citigroup’s Itay Michaeli came out with the first Wall Street sell-side rating for it. Rating it a “buy,” with a $28 per share price target, he believes the company could sell $2.2 billion worth of vehicles next year. Impressive given that the EV startup is still in its pre-revenue stage. Analysts at Bank of America have also come out with a bullish call on it. With a price target of $30 per share, you can also say BofA’s analyst team laid it on thick, calling it both the Tesla (NASDAQ:TSLA) and Ferrari (NYSE:RACE) of the many EV upstarts.
Mostly-bullish analyst coverage, along with positive news coverage, may not only be enough to keep shares steady right now. It may enable the stock to avoid big downside risk. Assuming factors like Federal Reserve tapering, and rising bond yields, change investor sentiment this fall. In articles about other growth stocks, like DraftKings (NASDAQ:DKNG), I’ve talked about how richly-priced names could see big declines if this happens, due to multiple compression.
However, what ends up playing out may not be so dramatic. We could see only a modest correction. Along with the high hopes investors and analysts alike have for Lucid? Downside risk in the near-term may not be so substantial. So, does that mean it’s time to hop in its shares? Not so fast.
Company-Specific Risks Remain on the Table
If it’s not at risk of taking a big dive if markets get rocky, what’s the risk in buying LCID stock today at around $22.75 per share? Market sentiment about it could keep it steady in the near-term. But in the coming year, company-specific issues could be its undoing.
Above, I mentioned that analyst coverage for shares today is mostly bullish. But there’s one key exception. Last week, Morgan Stanley’s Adam Jonas, known for his coverage of Tesla and other EV plays, came out with his rating. The analyst’s take? Bearish, with a “sell” rating and a $12 per share price target. In his research note, Jonas cited both high competition from legacy automakers, as well as higher execution risk, as factors that make this an EV stock to avoid right now.
More or less, I agree with Jonas’ assessment. In my view, high competition is an overlooked concern when it comes to Lucid. As more established luxury brands, like Daimler’s (OTCMKTS:DMLRY) Mercedes-Benz and BMW (OTCMKTS:BMWYY), pivot to electrified fleets, it’s going to be tougher for the company to grow its sales fast enough to justify, much less grow, its current valuation (shares today trade for nearly 20x projected 2022 sales).
When it comes to execution risk? As our Chris Lau recently pointed out, the company continues to face ongoing production delays. This may signal further hiccups and hurdles are in store. Buying this stock now, with “out of the gate” success already factored into its valuation, appears to be a risky move.
Lucid May be Safe For Now, But Be Careful
The current buzz surrounding it may be enough to keep Lucid steady in the near-term. Even if a much-feared correction/sell-off ends up happening between now and the end of 2021. That said, company-specific risks remain.
Execution hiccups, and well as underwhelming sales figures due to high competition, remain big risks that could affect the performance of LCID stock going forward.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
