Lucid Group (NASDAQ:LCID) stock is not having a great time since dropping its second-quarter financial report. The numbers did not do much for market sentiment. Investors appear disappointed despite the fact earnings matter very little for most EV start-ups with no sales yet.
On a big picture level, LCID is one of the better EV start-ups out there. The second-quarter balance sheet shows the company has about $2 billion in cash. In addition, the company also received about $2.4 billion, net of fees, in a PIPE, short for private investment in public equity, when the merger closed. In total, Lucid has roughly $4.4 billion in cash on its balance sheet. That is a lot of capital to build and commercialize its products.
Plans are in place for Lucid to commence production of its first vehicle, dubbed Air, at Lucid’s new manufacturing facility in Arizona in 2021 and ramp up production in 2022.
Lucid hopes to generate about $2.2 billion in 2022 sales and a mouthwatering $22.8 billion of sales in 2026. By that time, Lucid Motors expects to sell 250,000 automobiles annually, generating approximately $3 billion of profits and $1.5 billion of free cash flow.
Are the plans ambitious?
Yes, absolutely, but Lucid’s management consists of experienced hands. And they have the capital to deliver on their targets, which makes LCID stock worth a small position in your portfolio. Remember, LCID has a 52-week high of $64.86. For the last few weeks, shares have meandered between $21 and $23. Considering the risk-reward ratio, this looks enticing.
Reward-to-Risk Ratio Is in Your Favor
There is a propensity nowadays to look at EV companies and shrug. After tremendous triple-digit gains last year, EV stocks are fast losing steam as the number of vaccinated increases. That is partially correct. Yes, recovery plays are doing very well, but that doesn’t mean it’s a death knell for EV plays.
Major players like Tesla (NASDAQ:TSLA), Nio (NYSE:NIO), and the ilk are up substantially year to date, and although they have given up some of their gains, the stock price is holding steady. Why is that the case? Governments worldwide are still conscious of the need to shift towards electric vehicles to combat climate change.
In short, the trend is secular.
Even though there will be ebbs and flows along the way, the trajectory is upwards. Now let’s turn our attention towards LCID stock, which I believe is uniquely positioned to do well compared to its peers.
Lucid Motors began trading on July 26 under the ticker symbol LCID after completing a merger where it fetched an eye-watering $4.5 billion in fresh capital. The equity value of the merger paid existing company shareholders $11.75 billion and generated over $4 billion in cash for expansion plans, including Lucid’s current factory in Arizona.
According to Lucid CEO Peter Rawlinson, The funding puts Lucid “in a very enviable position” compared with rival Tesla, which secured about $226 million in its 2010 initial public offering. He is not wrong, considering the size of the funding and that we secure Lucid’s financial runway through the end of 2022.
Lucid Could Be The Next Tesla
There has been a near-obsession among investors in finding the next Tesla. The EV giant has a five-year return of 1491%. That kind of growth is hard to come by. But contenders are slowly emerging. Lucid expects to deliver its first vehicle, the Lucid Air, in the second half of 2021. It will beat the Tesla Model S when it comes to range. Lucid will offer a range of more than 4.5 miles per kilowatt-hour, while Tesla’s Model S offers over 4 miles per kWh, according to Lucid’s July 13 investor presentation.
If you think the price is too high, I will point to an astute observation made by my colleague Josh Enomoto. EVs remain, to a large extent, a luxury. Yes, we have come a long way in the last ten years. But still, for the average American, the purchase of an EV is a costly endeavor. So, one need not worry about the pricing of these vehicles right now. This is a high-end luxury segment and will remain so for the foreseeable future.
Moving onto production, Lucid expects an 88% average annual increase in production volume between 2022 and 2026. Its July 13 investor presentation is projecting under 1,000 units produced in 2021, 20,000 in 2022, 49,000 in 2023, and 251,000 units in 2026. Revenues are expected to increase from $97 million in 2021 to approximately $23.8 billion in 2026. Lucid is anticipated to produce positive EBIT in 2025.
LCID Stock Can Be a Small Position in Your Portfolio
All things considered, Lucid is not a bad investment. Yes, there is no guarantee it will be the next Tesla. But this is a company with a solid plan, able management, and aggressive forecasts.
Since it’s still a nascent EV manufacturer, I would not want to dedicate a substantial portion of my portfolio to this one. But a small position will not hurt.
One thing you should keep in mind, though, is that at a $35.1 billion market cap, it’s not like the stock is trading purely on fundamentals. There is a lot of built-in speculation, and therefore there will be ebbs and flows in the coming quarters — the electric vehicle industry is a news-sensitive space, after all. But if you are looking at the company as a long-term investment, then you can rest easy.
On the publication date, Faizan Farooque 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.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan does not directly own the securities mentioned above.
