Lucid (NASDAQ:LCID) stock has been a relatively high-beta stock since the announcement of the special purpose acquisition company (SPAC) merger agreement. After an extended period of consolidation around $20 levels, LCID stock surged to closing highs of $55 in November 2021. The rally has, however, failed to sustain, with the stock slipping to current levels of around $27.
I believe that from a technical perspective, LCID stock has strong support in the range of $18 to $22. On the upside, there is significant potential with the company leveraging its technological edge and benefitting from industry tailwinds.
It is important to understand the reasons for the recent correction.
First and foremost, the correction has been broad-based for electric vehicle (EV) stocks. Even Tesla (NASDAQ:TSLA) is below $1,000 levels from highs of $1,200 in the beginning of January 2022. The point here is that the correction in LCID stock is not a result of any company specific headwinds.
Furthermore, in December 2021, Lucid Motors announced the full exercise of convertible note greenshoe. This helped the company raise $2 billion. With the PIPE lockup expiration last month, there was some expectation of a sell-off.
In the near-term, supply chain concerns for the industry have also impacted stock sentiment. However, the long-term outlook remains bullish and I believe that the correction is a good accumulation opportunity.
Let’s talk about the catalysts for a reversal rally.
Deliveries Growth Acceleration
As of November 2021, Lucid Group had orders for 17,000 vehicles. This implied an order backlog of $1.3 billion. The latest backlog numbers are a likely catalyst for stock upside.
One reason to be bullish is the fact that Lucid has already opened online reservations for multiple countries. The 18 countries include the U.S., Germany, Saudi Arabia and the U.K., among others.
It seems clear that the company has an aggressive geographical expansion strategy. As of July 2021, the company already had an employee base of 2,300 with marketing presence in the North America, Europe and the Middle East. With this, it is very likely that the backlog of orders will swell through 2022.
It is worth noting that The Lucid Air Dream Edition already has a U.S. Environmental Protection Agengy (EPA) estimate of 520-miles of range. The model has also been selected by MotorTrend as the Car of the Year for 2022. There is more likely to be a brand-pull similar to Tesla than a brand-push.
Lucid seems to be preparing for strong growth in deliveries in 2022 and 2023. The company’s initial annual production capacity in Arizona was reported at 34,000 vehicles. However, Phase two of expansion has already commenced with production capacity to be ramped-up to 90,000 vehicles.
For now, there are minimal concerns from a balance sheet perspective. As of third quarter (Q3) 2021, Lucid reported cash and equivalents of $4.8 billion. The recent fund raising of $2 billion has improved the cash buffer to $6.8 billion (un-adjusted for Q4 2021 cash burn).
Ambitious Long-Term Growth Plans
For Lucid Motors, it is still early in an industry that has tailwinds beyond 2030. I believe that Lucid will be gaining market share in the coming years. A key factor is focus on innovation and technology. The company’s 520-mile range in a single charge is an example.
Lucid also seems to be following Tesla’s strategy in terms of geographical expansion. The company has indicated that it will build a factory in China by mid-decade.
A factory in Saudi Arabia is also planned for 2025 or 2026. This is similar to Tesla building Gigafactory in all key markets. Multiple production sites will further boost deliveries visibility and provide operating leverage.
Of course, it would be unrealistic to expect positive cash flows anytime soon. The company’s own guidance estimates positive free cash flow by 2026. However, if deliveries growth remains robust coupled with improvement in vehicle level margin, LCID stock is likely to trend higher.
Concluding Views on LCID Stock
Lucid faces intense competition in the electric vehicle industry. However, the company has the financial flexibility to survive and grow. Additionally, Lucid is investing in technology, a factor that will decide the survivors in the EV industry.
The recent correction is therefore a good opportunity to gradually accumulate LCID stock. With the stock markets on an edge due to potential rate hikes in 2022, it makes sense to consider gradual exposure and average down if broad markets correct. However, I believe that the downside is capped from current levels.
On the date of publication, Faisal Humayun did not hold (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.
