The recent decline of electric vehicle maker Lucid Motors (NASDAQ:LCID) stock presents a buying opportunity for investors willing to endure some short-term pain.
LCID stock has fallen 6% in the last week and is down 11% over the past month to $40 per share on news that the Newark, California-based company is the subject of an investigation by the Securities and Exchange Commission (SEC) related to its initial public offering earlier this year.
Also hurting the shares has been news that the company is issuing $1.75 billion of senior convertible notes to fund its operations. However, investors playing the long game should see the current decline as an opportunity to buy the shares of one of the more reliable electric vehicle start-ups.
From Bad to Worse
Wall Street reacted negatively to the issuing of Lucid Motors’ senior convertible notes, seeing the move as the company taking on additional debt to fund its daily operations. Plus, senior convertible notes are often eventually converted into a predefined amount of the issuer’s shares that are given to investors in exchange for their loans.
This conversion results in a company issuing more of its own shares, which leads to stock dilution that is never a good thing in the view of investors. News of the stock dilution was enough to send LCID stock down 5% the day after the news was announced.
Coming on the heels of media reports about the SEC probe, the debt financing announcement accelerated the slide of Lucid’s shares. The company reported that it had received a subpoena from the SEC seeking information related to its reverse merger with a special purpose acquisition company (SPAC) that took Lucid public on July 26.
Lucid went public through a deal with blank-check firm Churchill Capital IV, a SPAC . News of the SEC investigation casts a cloud of uncertainty over LCID stock. Before the end of November, the shares had been going gangbusters, rising to an all-time high of nearly $65. Even with the recent decline, the company’s shares are up 50% from their first day of trading back in July.
Brighter Days Ahead
The debt financing by Lucid Motors is not so concerning. After all, it is not unusual for rapidly growing companies to take on debt in the form of senior convertible notes, especially when they are still in start-up mode and expanding at a rapid rate.
Lucid has said it needs to raise the money to help it meet 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, putting it well ahead of many other electric vehicle companies that are stuck in the concept phase of development.
The fact that Lucid is already producing its luxury electric vehicles and bringing them to market is the reason why Wall Street has been so bullish on LCID stock. Many analysts say that the company, with its focus on luxury electric vehicles, is one of the few legitimate competitors to the EV market leader, Tesla (NASDAQ:TSLA). Fundamentally, the growth story around Lucid Motors has not changed despite its debt financing and the SEC probe. The company said in a July presentation to its investors ahead of its market debut that it expects its sales to exceed $2 billion next year.
Lucid plans to introduce its next vehicle, the Gravity luxury sport utility vehicle (SUV), in 2023. The Gravity should lift its revenues to $10 billion by 2024. The company’s first car launched on schedule earlier this fall, and the Air sedan has won several international awards, including MotorTrend’s 2022 “Car of the Year.”
The Air sedan also has the highest battery-range of any electric vehicle — outpacing all of Tesla’s models — with an Environmental Protection Agency (EPA) rating of 520 miles on a single battery charge. Clearly, Lucid Motors has a lot working in its favor. In the end, the SEC investigation could prove to be a speed bump in the road for Lucid and its shareholders.
Buy LCID Stock on Weakness
Lucid Motors’ stock is not likely to be down for long. The company is growing too quickly and achieving too much success for the share price to remain depressed over the long-term.
While the SEC investigation is a blight on the company’s otherwise sterling reputation, it could end up being “Much Ado About Nothing,” as Shakespeare would say. With its first vehicle rolling off the assembly line and winning awards, and its production and growth ramping up in the year ahead, it will take a lot to slow down Lucid Motors. So even with its recent headwinds, investors should still buy the dip in LCID stock.
Disclosure: 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.
