Editor’s Note: This article is part of Joanna Makris’ Behind the Wall series, where she provides retail investors with the insider scoop on the hottest technologies and trends from today’s business leaders, industry experts and money managers. Today’s discussion is with Garrett Nelson, Senior Equity Research Analyst at CFRA Research.

No doubt about it: the Lucid Air Dream Edition by Lucid Group (NASDAQ:LCID) is one gorgeous hunk of metal. Most of us, however, don’t have the bling for a $169,000 luxury electric vehicle (EV). And even those of us that do still can’t get their hands on one — yet.

Lucid officially started commercial production at its Casa Grande AMP-1 factory on September 28, and deliveries began in October. The company plans to produce just 520 of the Dream Edition models, in a nod to the car’s EPA range.

If you haven’t seen the Air in the wild, or in a showroom, you can still swoon over the car’s television acting debut on Amazon Prime’s (NASDAQ:AMZN) “Goliath.” In the final season, the Air acts as chauffeur-driven limousine for one of the main characters, Sam Margolis, who runs a prestigious global law firm (a woman who can clearly afford both the car and a driver). This positioning of Lucid as an ultraluxury vehicle underscores statements made by Lucid CEO Peter Rawlinson himself: the company is more a rival to Mercedes Benz S-class or EQS than anything made by Tesla (NASDAQ:TSLA).

Here’s something Amazon and Lucid investors have in common: they both love an underdog story. In Goliath, my favorite underdog, down on his luck attorney Billy McBride (an adept Billy Bob Thornton) takes on Big Pharma and opioid companies. But unlike the story of David, it’ll take more than faith in order to win against giants.

The same holds true for investing. LCID investors are taking on Goliath, Tesla.

With EV giant Tesla commanding close to a $1 trillion market capitalization, LCID stock looks like a drop in the bucket at $70 billion. Add to that an insatiable appetite for finding the next big electric vehicle stock, and just like that, Lucid has stepped into the role of David perfectly (Though I’m unsure I’d cast Billy Bob as Peter Rawlinson).

Does Lucid have what it takes to take down Goliath in the highly competitive EV market? To answer that question, we sat down with one of LCID’s biggest sell-side bulls: Garrett Nelson, Senior Equity Research Analyst at CFRA Research. Nelson rated Lucid Group a Buy with a $35 price target on Oct. 5, a target that has since been raised to $65. He told me he liked the stock for its “management team and financial backing, the attractiveness of and reservations for their initial vehicle model, the Lucid Air Dream.”

Here’s what happened.

LCID Stock Is the Next TSLA

Let’s get one thing out of the way. Even if Lucid sells every car it makes for the next 12 months, I don’t think the company’s luxury niche is worth a $90 billion valuation.

Clearly, most LCID bulls disagree with me — and they love to tell me so. The counter-Tesla narrative running on Twitter (NYSE:TWTR) goes something like this:

• Tesla stock, now hovering at $1000 per share, has limited upside.
• Lucid is, simply put, a better-looking, better battery-wielding car, backed by an industry-leading EPA-certified driving range of 520 miles and leveraging superior, “race-derived battery technology” (check out speed comparisons with Bugatti).
• Ultimately, Lucid will erode Tesla’s market share. LCID chatter on social media continues to #DreamAhead, buzzing with speculation on timing of first deliveries and plenty of Apple (NASDAQ:AAPL) name drops.

Lucid bulls argue that the stock’s valuation is justified by superior real-world performance. In the electric vehicle David-versus-Goliath, Lucid wins the battle of battery efficiency and design. As CFRA’s Nelson points out, “when you look at the specs of the vehicle… we think that puts [Lucid] in a class of their own.”

“Goliath,” the Amazon version, casts Billy Bob Thornton as the underdog. He’s a rough and tumble, tattooed rocker kind of guy. The electric vehicle market’s David, Lucid CEO Peter Rawlinson, is quite the opposite. Rawlinson exudes California cool, from his elegant descriptions of “the prowess of electrification” in a mellifluous English accent to his cryptic 4 fingered hand gestures.

So when Lucid kicked off  Production Preview Week at AMP-1 on September 27, it wasn’t surprising that retail investors got revved up. Rawlinson’s keynote address told the story of a small company with big dreams:  “I joined [Altieva, Lucid’s predecessor company] with a crazy vision that we could take electric car to a whole new level that no one had done before.”

And so, our EV David takes aim, delivering “an absolute mic drop” — an electric luxury car whose initial drive reviews have been nothing short of spectacular.

Are Luxury EVs A $90 Billion Niche? 

If the initial buzz proves true, Lucid may indeed prove to be a class of its own as a luxury electric vehicle maker. But, the question you should be asking yourself is this: Is this luxury niche really worth $90 billion?

Here’s a place to start: production. Lucid 2021 production targets 500 Air Dream Editions, ramping to 20,000 in 2022 and 50,000 in 2023. After the Dream Edition, the next car to come off Lucid’s production line is the Lucid Air sedan. An entry-level Air starts at $77,400 before an up to $7,500 federal tax credit for plug-in vehicles. Lucid said it has received more than 13,000 total reservations so far.

In contrast, Tesla’s 2021 production is pegged around 861,800 vehicles, ramping to 1.3 million total vehicles in 2022. Lucid is shipping a fraction of Goliath Tesla, but LCID bulls say that doesn’t matter. CFRA’s Nelson says “[Lucid] won’t need to sell as many vehicles to be successful.” More importantly, on a relative basis, LCID bulls say the stock is cheap. As Nelson points out, “Lucid trades at a fraction of the multiples at which Tesla trades.”

David And Goliath

Whether we agree or disagree on Lucid stock, one thing’s clear: Lucid needs to get cars in customers’ hands so they can kick the tires on real world performance. As Nelson points out, “I think the more Lucid vehicles that consumers see on the roads, the more that they will help their own cause at the time.”

That means all eyes are on Lucid’s production and delivery numbers.

As a Lucid stock bear, I don’t believe the current valuation is priced for risk — particularly in a supply-constrained market. Nelson thinks Lucid should be relatively immune to global supply chain challenges, because “Lucid is producing at a manageable volume relative to major global automakers who are producing millions of vehicles a year, we think they’ll successfully be able to navigate the semiconductor shortages– at least for the next couple of years.”

For the record, Nelson also thinks Tesla is going to pull through in the supply chain, confirmed by the company’s Q3 production numbers, which were the highest quarterly increase on record. “[Tesla] procured chip supply earlier than a lot of the other automakers,” he points out.

Near-term financials and sustained operating losses are another concern. But as Nelson points out, Lucid’s IPO timing was perfect.  “They’re coming off that cash infusion and they’re not going to face a very prolonged pre-production phase in which they’re burning a lot of cash with first vehicle sales still a ways off.”

So is Peter Rawlinson the electric vehicle market’s Billy McBride? As Nelson points out, “I think we’re encouraged to see that the market’s starting to differentiate the winners from the losers.”

Since chatting with Nelson on Oct. 5, a lot has happened in the market. The S&P 500 is now up 110% from its bear market bottom in March of 2020. At the same time, LCID stock, and the electric vehicle space in general, has exploded.

Lucid was $24. It’s $54 now. Tesla was $780. It’s almost $1200 now.

The excitement around new EV makers is enormous. Take all-electric truck maker Rivian Automotive (NASDAQ:RIVN), now valued at $140 billion, whose IPO is  the biggest since Facebook (NASDAQ:FB).  Shares of pre-merger SPAC Gores Guggenheim  (NASDAQ:GGPI) have jumped to 40% over trust value — and the company hasn’t even merged with EV target Polestar yet.

Read on and watch the video to see who’s king of the road. Share with me your take on LCID and TSLA and which Hollywood actor you’d cast as Peter Rawlinson at jmakris@investorplace.com.

Joanna Makris: You’ve got a Buy rating on Lucid and a $35 target. Talk to us about what you’re thinking on the stock.

Garrett Nelson: We derive our price target using a combination of a discounted cash flow forecast combined with conventional valuation metrics for pre-revenue companies, such as price-to-sales. So that’s how we come up with a $35 price target.

[Editor’s note: This conversation took place on Oct. 5; Following Lucid Motor’s Q3 earnings report, Nelson has since revised his price target for LCID stock higher to $65.]

Now, we think Lucid really stands out relative to other EV startups for a few reasons. Their management team and financial backing. The attractiveness of and reservations for their initial vehicle mode — the Lucid Air Dream, as you mentioned. And also their assets, [they have] a brand new factory they just finished building in Arizona. Their CEO is a former Tesla chief engineer, Peter Rawlinson. And they’ve had the longtime backing of the Saudi Public Investment Fund (PIF), which continues to own about 62% of the company.

The stock trades at a fraction of the multiples at which Tesla trades and we think they have some near-term catalysts in terms of making first deliveries… of the Lucid Air Dream and other catalysts ahead. So we like the stock here.

[Lucid is] coming to market with a $170,000 vehicle. To what extent do you view Lucid right now as a niche player in the luxury car market? Or do you see Lucid as ultimately cannibalizing a more significant piece of this overall car market?

We like Lucid because of the initial model. We think it’s really a threat to Tesla. When you look at the specs of the vehicle, [it has] 520 miles of EPA-rated range… [that’s] more than 100 miles more than the highest-range Tesla vehicle. So we think that puts them in a class of their own. And we like their strategy of targeting the high-end luxury market because they won’t need to sell as many vehicles to be successful. We think if it’s a superior product, the luxury consumer will buy it.

Let’s talk a little bit about the valuation, which can often be a sticking point for investors looking at the stock. It’s trading at almost a $40 billion valuation [currently $90 billion]. We’re not yet in commercial production. Is this a $40 billion niche? How do you think about the company’s addressable market and the valuation?

What we’ve seen with other companies such as Tesla is the valuation well exceeds other comparable companies. For example, a traditional auto maker — such as Ford (NYSE:F) or GM (NYSE:GM) — trades at a P/E [price-to-earnings] multiple less than 10 times forward year earnings. Tesla’s currently trading north of 100 times 2022 earnings.

So we think the market ascribes higher valuations to promising new EV manufacturers such as Lucid. And for that reason, we see the possibility of significant multiple expansion in Lucid shares.

What are your thoughts in terms of Lucid’s production estimates and their ability to ramp? What kind of timeframe do you think Lucid needs to get to the kind of volume that we’re seeing from companies like Tesla, this half a million vehicles per year? How quickly can this company get there?

It will take some time, but it’s part of their business plan — focusing on the luxury market. As of their last update, they only had 13,000 reservations for the Air Dream edition. It’s a manageable number.

The biggest problem in the auto market recently has been semiconductor shortages. It’s a reason why new vehicle prices are hitting all time highs and a reason why U.S. new vehicle inventories are at record lows. Because Lucid is producing at a manageable volume relative to major global automakers who are producing millions of vehicles a year, we think they’ll successfully be able to navigate the semiconductor shortages, at least for the next couple years.

Let’s talk about that shortage a little bit. Tesla just reported very strong production and delivery numbers despite what appears to be a global chip shortage. The legacy car makers clearly did not show those kind of numbers. What are your thoughts on how Tesla pulled that off and whether that’s an indicator for what we might see at Lucid?

Tesla’s been able to navigate the global chip shortage better than other automakers because they were planning on a big production ramp heading into this year… They continue to ramp up their factory in China [and] their production and sales are going to ramp up even more next year after the two new factories in Texas and Germany come online. We think because they were planning on this production ramp, they procured chip supply earlier than a lot of the other automakers. That’s why they haven’t been as affected as, say, a Ford or General Motors from the chip shortages.

Lucid also has a product roadmap that includes getting into the SUV market. I did want to ask you a little bit about your thoughts on that space. We are getting a lot of attention focused on Rivian — the latest IPO in this space — and some of the legacy car makers making investments in electric vehicle companies. [What are] your thoughts on the competitive outlook, particularly in that SUV market going forward?

Our thoughts on Lucid’s move into the SUV market is that they’ll be successful if their initial vehicle models really catch on with consumers in such a way that I think they will. As we’ve seen with Tesla, sales success tends to breed more success. I think the more Lucid vehicles that consumers see on the roads, the more that they will help their own cause at the time.

That said, by the time Lucid actually brings their SUV to market, they should have a lot more competition in that segment of the vehicle market.

Your take on the balance sheet for Lucid relative to other companies in this space? Rivian is coming to market with [substantially more] assets. Lucid has talked about building out in Saudi Arabia. What are your thoughts on cash burn and whether or not the company will need some sort of future capitalization down the road?

The nice thing about Lucid is that they’ll be generating revenue very soon with the first deliveries expected by the end of October. That’s going to really help offset some of their expenses and it’s going to help with their cash burn rate.

Unlike a lot of other SPACs in the electric vehicle space, Lucid just went public a few months ago. So they’re coming off that cash infusion and they’re not going to face a very prolonged pre-production phase in which they’re burning a lot of cash with first vehicle sales still a ways off.

We really like the timing, the fact they just completed the IPO. And really, the same can be said for Rivian with their SPAC IPO transaction expected by year end… They’ve just started producing their initial vehicle model — the R1T — and so they’re not going to face that period of several quarters in which there’s still pre-production and pre-sales. Both of these companies will have revenue coming in very soon.

What are your thoughts on stocks of some of the legacy automakers, Ford and General Motors? Obviously, the valuation discrepancy is pretty massive. But what do you think about those stocks right now?

The domestic automakers have really been caught off guard, I think, by the success of Tesla. Tesla’s market cap now exceeds every traditional automaker by a wide margin despite having only a fraction of the sales volume. And so they’re all playing catch up. They’re announcing huge EV investments, trying to close the gap. I think they figure that if they produce more EVs, the market might start rewarding them with a valuation more similar to Tesla’s and less similar to the single-digit P/E multiples at which they’ve traded historically.

As far as Ford and General Motors, we like Ford more than GM here because we think they have more positive momentum with their new vehicle portfolio. They also have a relatively new CEO that we think is going to really make a difference in terms of cutting costs and right-sizing the global operations.

GM, by contrast… they’re making a big gamble in terms of making a pledge to make their entire vehicle portfolio electric by the year 2035. We aren’t as bullish on GM’s management team or their vehicle portfolio from a sales perspective.

Lucid is expected to report sometime in November, first earnings report as a public company. [The] stock has had a big run now into the report. What are you looking for and what do you think are the next real catalysts for the stock?

The first thing people will look at will be the reservations number — how much higher has it moved from when they last disclosed that, which was about 13,000 vehicles. Then people will be looking at their operational plans into 2022. What are they forecasting in terms of sales? Also, any guidance and disclosure surrounding the chip shortages. Will they be affected or won’t they?

But we’re very bullish on Lucid. You look at them relative to other new players in the electric vehicle space and being right on the cusp of first deliveries, we think they’re much better positioned. And at the end of the day, it’s a superior product to really anything that’s out there. The only thing comparable is really a Tesla vehicle… Product is the most important thing and that’s why we like Lucid.

Tesla has made a lot of comments about how hard it is to get to full commercial volume production. We’ve yet to see that from Lucid and clearly they’ve got to show us some good product and volume. What are your thoughts on the manufacturing ramp and how relatively successful you think Lucid is going to be at doing this?

They just need to be successful in selling vehicles, but we think they have a product consumers want. When they see more of those vehicles on the road, when they have their friends [or] their neighbors buying a vehicle, we think it will create the demand.

They certainly have the production capacity with this brand new state-of-the-art factory they just completed about 45 miles from Phoenix. It’s a brand new state-of-the-art facility. And they’ve really benefited from the backing of the Saudi Arabia Public Investment Fund in being able to get to this point, the point of first production and deliveries. [So] they seem to check all the boxes in terms of an auto manufacturer with staying power over the long term.

Final thoughts? This stock has had a lot of momentum on the upside and the downside. What do you think the market is missing and what would you say to retail investors that are looking at the stock? What’s important and what’s noise here?

I think there [has] been a lot of confusion just given the number of new names in the electric vehicle market. There’s been a flood of SPAC names which have gone public in the last year or two. And I think what you’re starting to see are investors differentiating from the higher-quality names — those that are going to be around 5, 10 years from now versus those that aren’t and might not even get to the point where they produce and sell a single vehicle.

We’re encouraged to see that the market’s starting to differentiate the winners from the losers. And we think Lucid will be in that category of winners. But I think one thing that investors don’t understand about the auto manufacturing business is how high the barriers to entry are and how difficult it is to succeed in the auto market, which is an inherently high-cost, low-margin industry.

In fact, aside from Tesla, the last U.S. auto manufacturer that’s still around today to enter the market was Chrysler [Stellantis (NYSE:STLA)]. That was back in 1925. So there’s been dozens and dozens of new auto manufacturers [that] have come and gone in that time. The only one that has really succeeded and is still around is Tesla. It’s a very difficult market to enter into and then to be a sustainable player [in] over the long term.

Your comments and feedback are always welcome. Let’s continue the discussion. Email me at jmakris@investorplace.com.

Disclosure: On the date of publication, Joanna Makris did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Joanna Makris is a Market Analyst at InvestorPlace.com. A strategic thinker and fundamental public equity investor, Joanna leverages over 20 years of experience on Wall Street covering various segments of the Technology, Media, and Telecom sectors at several global investment banks, including Mizuho Securities and Canaccord Genuity.

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