In the last two months, Lucid (NASDAQ:LCID) stock has witnessed a strong rally. This came after an extended period of correction and consolidation.
When I wrote about LCID stock in September 2021, I opined that the stock is likely to continue trending higher. However, investors need to be cautious of a potential correction with equity dilution as a likely catalyst.
I maintain that view and I believe that it’s time to book profits in LCID stock after the big rally.
I would again talk about the potential of equity dilution.
However, let’s first look at a relative comparison. This will elaborate on the point that LCID stock might be stretched at current levels.
LCID Stock Seems Expensive on a Relative Basis
Nio (NYSE:NIO) stock currently trades at a market capitalization of $64 billion. On the other hand, LCID stock has a market capitalization of $65 billion.
Further, Nio reported a cash buffer of $7.5 billion as of second-quarter of 2021. Additionally, the company raised $2.0 billion in a recent at-the-market offering. The cash buffer will be utilized for international expansion and manufacturing capacity enhancement.
On the other hand, Lucid expects the current cash buffer to suffice for operations through 2022. Furthermore, by the company’s own estimates, free cash flow will not be positive until 2025. Between 2022 and 2024, Lucid Motors expects cash burn of $7.5 billion. This would imply significant external funding through equity and debt.
Of course, for a growth company, this is natural. However, the point that I am trying to make here is that LCID stock seems expensive as compared to peers. For now, it makes sense to book profits and re-enter at lower levels.
It’s also true that timing the market is impossible. Since the stock has gained momentum, there can be a case for another 10% to 15% upside. The risk-reward ratio is however weighted towards higher risk than meaningful upside from current levels of almost $43.
Coming back to the point on equity dilution, it is entirely likely that the management will leverage on the current rally to mop-up funds for expansion beyond 2022. This is just a speculative view, but seems very probable considering the cash burn outlook.
Positive Business Developments
If we leave aside the valuations, there are several positives to talk about.
First and foremost, Lucid Air Dream Edition has been fully reserved with total Air reservations in excess of 10,000. The markets also seem to be optimistic with the initial response. It’s worth noting that Lucid has already opened its first Canada studio location. In the coming quarters, the first model is likely to be marketed in other countries. Lucid already has an employee base of 2,300 in North America, Europe and Middle East.
Furthermore, Motor Trend has provided a strong positive review for Lucid Air. According to Motor Trend, Air is the “most compelling American luxury car in recent memory.” Positive review coupled with the initial booking response is encouraging.
Back in September 2021, Lucid Air received an official U.S. Environmental Protection Agency rating for 520 miles of range. This puts Lucid ahead of peers and underscores the point that the company is focused on innovation.
Another point worth mentioning is that Lucid is starting with a luxury car. However, the company plans to address the mass market in the coming years. It’s very likely that the company will be licensing its technology for production of a mass market car.
Lucid has ambitious long-term plans with several models in the pipeline in the next few years. However, for the near-term, LCID stock seems stretched.
I believe that the management is likely to use this opportunity to dilute equity and raise funds for expansion.
For now, it makes sense to book profits and consider a re-entry at lower levels.
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 modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.