Lucid Stock’s Irrational Exuberance Continues in 2022

Lucid Group, Inc. (NASDAQ:LCID) stock has outperformed Nasdaq in its first year as a public traded company and is already gaining a lot of traction as on its website. It informs investors and prospective buyers about the fact that Lucid Air has been named MotorTrend’s Car of the Year.

The Lucid Motors (LCID) logo is displayed in front of an ad for the Air sedan.
Source: T. Schneider / Shutterstock.com

Is LCID stock after a one-year return of about 310% a stock to own now at its current price of $36.89 at the open of the U.S. stock market on Jan. 5, 2022?

I would say with confidence based on facts that LCID stock is now at a very lofty valuation. What will be the narrative of Lucid in 2022? Here are my thoughts on this.

LCID Stock Latest Positive Factors

The recent award presented by MotorTrend shows that models of Lucid Group combine efficiency, performance, and luxury among other important factors.

Lucid in a press release stated that “MotorTrend Car of the Year judges evaluated six key criteria for Car of the Year, with Lucid Air excelling at each: efficiency, value, advancement in design, engineering excellence, safety, and performance of the intended function.”

Winning over models that included the Mercedes‑Benz S-Class, Mercedes-Benz EQS, Porsche Taycan is not an easy thing. On the other hand, it is highly subjective too.

Two very important factors that I want to mention is the inclusion of LCID stock to the Nasdaq-100 Index in late December 2020 and the pricing of its offering of $1,750,000,000 aggregate principal amount of 1.25% convertible senior notes at a premium close to 50% of its stock price of $36.52 on Dec. 9, 2021.

The Nasdaq-100 index inclusion can be highly beneficial to the stock price as index funds that track the index passively will have to buy LCID shares. Other institutional investors probably will increase their positions in the stock too.

The initial conversion price of approximately $54.78 per share of common stock reflects two things. First, the lenders are highly optimistic about the growth prospects of Lucid Group, second, the notes will be redeemable not before December 2024 only paying interest at a rate of 1.25% per annum.

It should be noted also that these notes are senior, unsecured obligations of Lucid. It is remarkable how an automotive company having just started delivering its luxury electric vehicle (EV) cars in late October 2021 has managed to convince lenders about a 50% premium that is worth it. And second, raising money and issuing debt that is unsecured with very little publicly traded financial performance.

LCID Stock Key Risks

Investors in EV stocks sent shares of Tesla, Inc. (NASDAQ:TSLA) up 13.47% on the first trading session of 2022 upon fourth quarter vehicle deliveries beat. LCID stock jumped 7.52% on no specific news, mostly because EV stocks tend to move in tandem either up or down following wild swings.

Turning to LCID stock-specific news, the firm disclosed in early December 2021  it has received a subpoena from the SEC.

“The company said the probe “appears to concern” the SPAC deal that took it public earlier this year, along with “certain projections and statements.”

This news should be monitored closely, as it may prove to be trivial. Investors for now have not placed much importance on it.

I believe that investors have started investing in 2022 carrying back all the wrongdoings of 2021, meaning neglecting key fundamental facts. For instance, Tesla announced in late December 2021 a recall of half a million cars. Yet on beating vehicle deliveries it rallied.

Lucid in its Q3 2021 financial results reported a loss from operations of ($497,050,000), net loss attributable to common stockholders of ($524,403,000) and free cash flow (non-GAAP) of ($384,377,000). The firm reported cash on hand of $4.8 billion. That was in November 2021 as now the company will also have debt on its balance sheet.

On the valuation side, LCID stock has a price to sales forward of 812.70, compared to the consumer discretionary sector median figure of 1.2. The stock has a price/book forward ratio of 14.49, much higher than the sector’s median figure of 3.5.

Overall LCID stock continues to be very expensive. It has entered 2022 with very high expectations, and a surging price in the past months that makes it too vulnerable to a mass price correction. To me other than the elevated valuation, a major concern is its profitability and free cash flow trend.

Having a net loss and burning cash, Lucid Group now will have debt and should provide positive cash flows from operating activities, which is not the case for Q3 2021.

I continue to not like LCID stock. A lot of caution is suggested as 2022 will be a challenging year with imminent interest rate hikes by the Federal Reserve. In this context, highly elevated stocks such as Lucid Group present more risks to the downside as valuation concerns eventually will become a dominant theme.

On the date of publication, Stavros Georgiadis, CFA  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.

Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.   


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