LCID Stock Alert: Why Is Lucid Motors Stumbling Today

Shares of electric vehicle maker Lucid Motors (NASDAQ:LCID) are down more than 5% this morning after the company announced that it is offering $1.75 billion in senior convertible notes.

Exterior of Lucid Motors (LCID) building

Source: gg5795 / Shutterstock.com

What does this mean?

A senior convertible note is a debt instrument that companies use to raise money from investors. Markets are reacting unfavorably to Lucid issuing nearly $2 billion of senior convertible notes because the company is taking on debt to fund its operations, which is viewed as a negative. Additionally, senior convertible notes are eventually converted into a predefined amount of the issuer’s shares that are given to investors in exchange for financing. This conversion results in a company issuing more of its own shares, which leads to stock dilution. This is also viewed negatively by investors.

What Happened With LCID Stock

In a news release, Lucid Group said that it plans to use the money to finance or refinance its ongoing operations, including the manufacturing of its Lucid Air electric sedan and various energy storage systems. Lucid also said it will use the proceeds of the offering to expand and grow its overall business and for “general corporate purposes.” Taking on debt in the form of senior convertible notes is not unusual for a company such as Lucid that is still relatively young, in startup mode and growing at a fast clip.

Many startups use senior convertible notes to fund their operations when they are growing rapidly and need financing to expand. However, the added debt and resulting stock dilution never sits well with existing shareholders who see it as having a negative impact on their investment. Lucid Group likely needs to raise the funds to ensure that it meets its stated goal of producing 20,000 vehicles in 2022 and 50,000 in 2023. Its first vehicle, the Lucid Air, entered production in October of this year.

Why It Matters

News of the debt financing comes when LCID stock was already under pressure.

Earlier this week, the company reported that it received a subpoena from the U.S. Securities and Exchange Commission. Although the nature of the probe is unclear, investors do know the SEC is looking for more information on its SPAC merger. As a refresher, LCID stock came public through a deal with Churchill Capital IV, a blank-check firm from Michael Klein.

Prior to this news, LCID stock has been a highflyer, rising to a peak near $65 at the end of November. Since then, though, shares have been on a decline. Over the past five days, the stock is down roughly 15%. Those declines look set to continue as concerns intensify about the company and its operations. The negative sentiment is surprising given how bullish Wall Street had been on Lucid. Many analysts had said that the company, with its focus on luxury electric vehicles, was one of the few legitimate competitors likely to challenge market leader Tesla (NASDAQ:TSLA).

What’s Next for Lucid Motors

LCID stock is positioned to fall today when the opening bell rings. The double whammy of an SEC investigation and large debt offering in the same week are pushing the company’s share price down sharply. How deep the rout goes is not yet known. But shareholders should be on guard for any other negative news that comes out related to the company that may further depress its share price, and be ready to hit the “sell” button if things get worse.

On the date of publication, Joel Baglole 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.


Article printed from InvestorPlace Media, https://investorplace.com/2021/12/lcid-stock-alert-why-is-lucid-motors-stumbling-today/.

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