Lucid Motors Stock Should Keep Rallying, But Beware Future Dilution

The euphoria phase for Lucid Motors (NASDAQ:LCID) stock was over even before the completion of this year’s special purpose acquisition company (SPAC) business combination.

Exterior of Lucid Motors (LCID) building
Source: gg5795 / Shutterstock.com

After plunging from highs of nearly $65, LCID stock has been in an extended period of consolidation. It trades just barely above $24 at this writing.

I believe that LCID stock is positioned to rally in the coming quarters. Further, the broad trading range of $20 to $25 is likely to serve as a long-term support level for the stock.

It’s worth noting that in the beginning of September, LCID stock traded at around $17.80. It seems likely that this rally will sustain.

The electric vehicle industry is already very competitive. However, I want to point out two important factors.

First and foremost, according to the International Energy Agency, there were three million electric vehicles on road in 2020. The number of electric vehicles is expected to increase to 145 million by 2030. Clearly, there is a big addressable market.

Secondly, Tesla’s (NASDAQ:TSLA) market share has declined to the lowest level in two years. As of April, the company had an 11% share in the electric vehicle market.

With innovation, the market is likely to remain competitive and new entrants are likely to gain market share.

LCID Stock Upside Catalysts

It’s worth noting that Bank of America recently initiated coverage on LCID stock with a price target of $30. Innovative technology and attractive product are among the key reasons for the bank being bullish.

Lucid Motors recently confirmed that “Lucid Air Dream Edition Range has been officially accredited with a range of 520 miles by the EPA.” This is a good example of the point on ‘innovation’ that Bank of America made in their thesis.

The company’s first model, Lucid Air Dream Edition, is already fully reserved with over 10,000 orders.

Lucid Motors has already completed the first phase of construction of the AMP-1 factory. Once the company begins delivering the first model, the stock is likely to witness further upside.

It also seems as if Lucid is likely to pursue aggressive geographical expansion.

The company already has an employee base of over 2,300 with a presence in North America, Europe and the Middle East. For now, the company plans to open more retail and service locations in the United States and Canada.

Further Fund Raising in the Cards

In terms of revenue, Lucid Air will be the growth driver for 2022 and 2023. The company plans to launch the SUV model (Project Gravity) towards the end of 2023. At the same time, Lucid said it plans additional manufacturing expansion in the next few years.

With sustained cash burn in the foreseeable future, equity dilution is a key risk. The company said it believes that there are ample funds for planned operations through 2022 but cash outflow is estimated at $3.3 billion for 2023 and $1.5 billion for 2024 by its own estimates.

This would require nearly $5 billion in cash infusion.

Lucid Motors expects to be free cash flow positive in 2025. However, sales estimates are optimistic and cash burn might sustain even in 2025. The key point here is that significant equity dilution is a certainty, though the dilution risk factor will be offset to some extent if vehicle deliveries growth is robust.

Therefore, if there is a significant rally from current levels, I would look to book some profits. Bank of America’s  (NYSE:BACprice target of $30 seems like an attractive point for profit booking.

Concluding Views

Lucid Motors has ambitious growth plans for the next few years. In a very competitive space, innovation seems like the key catalyst for the company.

In the near term, a LCID stock rally is due after consolidation.

The company’s Lucid Air Dream Edition range of 520 miles in a single charge is already one upside catalyst. Commencement of production and vehicle deliveries is another impending catalyst.

On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.


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