The pain continues for Lucid (NASDAQ:LCID) shareholders, as LCID stock sheds another 12% today. After today’s loss, Lucid is now down more than 25% in 2022. Meanwhile, electric vehicle (EV) competitor Rivian (NASDAQ:RIVN) has lost more than 45% year-to-date (YTD). So, what’s going on with LCID stock and why is it down so much this year?
LCID Stock Falls More Than 25% YTD
Lucid has had a slow start to the new year after surging 280% in 2021. EV stocks gained reputability last year, backed by rising delivery figures and government support. However, interest rates were also extremely low during 2021, with no set timetable for a hike. Now, the Federal Reserve is tightening its grasp on monetary policy.
The Fed hinted yesterday during the Federal Open Market Committee (FOMC) meeting that an interest rate hike could come as soon as March. While the Fed did not confirm a hike in March, it did announce further asset tapering. In February, the Fed is expected to purchase $30 billion of bonds, which indicates that its purchases will likely stop in March. In addition, the Fed did not announce when it would reduce its bond holdings. However, the Fed did release a statement hinting that it is preparing to reduce the amount of asset holdings.
During the meeting, Fed Chair Jerome Powell spoke in a hawkish and cautious tone. Powell admitted that inflation is well above the Fed’s long-term goal of 2%. In addition, Powell reinforced his opinion that “there’s quite a bit of room to raise interest rates without threatening the labor market.”
How Do The Fed’s Policies Affect Lucid?
During Q3, Lucid reported $232,000 in revenue on top of a $524.4 million loss. However, Lucid currently has 17,000 reservations for its Lucid Air model, which represents a book value of $1.3 billion. So, the big question is: Can Lucid’s reservations and future cash flows justify its sky-high market capitalization? Based on Lucid’s recent performance, it doesn’t seem like it.
2022 is a completely different macroeconomic environment than 2021. With the threat of an inevitable interest rate hike, Lucid’s future cash-flows will be reduced when discounted to the present value. This is because interest rates are in the denominator of the widely used discounted cash-flow (DCF) model. With higher interest rates, companies are also incentivized to borrow less, which could stymie future growth opportunities. The bright side is that increasing interest rates should work to reduce inflation. Therefore, an interest rate hike could possibly lower costs of certain resources for Lucid.
On the date of publication, Eddie Pan did not hold (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.