The continued automobile scarcity in the U.S. continued in August, according to J.D. Power. Investors may react to the auto shortage by buying car companies dependent on internal combustion engines. Watching the electric vehicle market unfold is a better growth opportunity. Lucid Group (NASDAQ:LCID) is an especially compelling trade, with LCID stock stuck in a narrow trading range.
The shares are hovering at around $20-$25. Speculators bought the stock on heavy volume after the private investment in public equity (PIPE) expiry.
Besides those who bought the stock in the high teens, will Lucid break out above $25? If it does, when will that happen?
Lucid Motors has yet to sell a vehicle, leaving speculators to bet on the stock price relative to Tesla, a trade that will prove too risky.
Short-Sellers Bet Smartly Against LCID Stock
Covid-19 disrupted the supply chain as it swept the world 18 months ago. This led to a chip shortage that is ravaging the automobile market. Both internal combustion engine car makers and electric vehicle firms faced tight supplies. They lowered their revenue for upcoming quarterly sales. The disruption is so severe that Toyota Motor (NYSE:TM) lowered its October output forecast after already cutting its September global production by 40% from planned levels.
Investors considering Lucid cannot ignore the struggles of the established automotive firms. Absent real vehicle sales, short float is almost 22% because bears are betting that operational delays will lead to big losses.
To be sure, Lucid already delayed the production of the Air electric sedan to second quarter 2021. The chip shortage extended the first shipments, leaving 10,000 customers waiting longer. Investors cannot count on the availability of Air Grand Touring and Air Dream Edition as positive catalysts. The EVs cost $139,000 and $169,000, respectively, before incentives. While early adopters will take delivery of those models, total sales won’t move the stock price by much.
Lucid sold out of the Dream model, which it plans to sell only 500 units. That amounts to around $850 million in revenue. At a $30 billion market capitalization, Lucid, then, is valued at around 35 times sales based only on Dream sales. By comparison, Nio (NYSE:NIO) trades at a P/S of around 15x. Li Auto (NASDAQ:LI) trades at 13x P/S. Those firms are based in China, so as investors avoid the region, the comparison is not fair.
Tesla’s (NASDAQ:TSLA) P/S of around 17x is a better comparison. The incumbent has global operations and is widely held. It is relatively cheaper LCID stock.
Don’t Ignore Risks in Production Delays
Investors should not ignore the ongoing production delays that Lucid faces. By the time Lucid achieves significant production levels, it faces competition from a slew of EV firms. This includes Fisker (NYSE:FSR).
Tesla will have no trouble competing with Lucid at the top end of the market. It launched A Model S Plaid to reclaim unparalleled performance advantages. For example, Plaid achieved an official lap time of 7 minutes and 35.579 seconds. The average speed was 102 mph. CEO Elon Musk, wrote, “Tesla Model S Plaid just set official world speed record for a production electric car at Nurburgring. Completely unmodified, directly from factory.”
Early adopters seeking the best-performing vehicle could consider buying Tesla’s latest model instead of waiting longer for Lucid’s first release.
Elevated stock market valuations could lead to a multiples contraction for EV stocks. Lucid has no revenue or earnings yet. Speculators may dump LCID shares, to the benefit of short-sellers. Value investors may close their long positions in EV stocks and buy Ford (NYSE:F), Toyota, or General Motors (NYSE:GM) stock instead.
On Wall Street, Lucid’s special purpose acquisition company structure bypassed the initial public offering path, leaving little incentive for sell-side analysts to recommend the stock. The consensus of the three tracked by TipRanks, reveals with a $23.33 price target, or 10% upside from current levels.
The chip shortage that led to the automotive shortage offers no positive catalyst to help lift LCID stock. The post-SPAC company remains a highly speculative trade. Lucid has major barriers ahead.
Its first delivery could trigger a “sell on the news” event that sends the stock lower. In a few quarters, investors will get a better grasp on its lack of profitability. As it increases production, expenses may rise faster than revenue.
Once Lucid completes the sale of the premium models, the production of mid-range EVs will have lower profitability. That will shell-shock investors and will hurt Lucid’s stock performance. In the end, Tesla remains the incumbent to beat. Having established a global moat, that will prove very difficult.
On the date of publication, Chris Lau 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.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.