As the electric vehicle bubble pops, Lucid Group (NASDAQ:LCID) stock is too risky to hold at the moment after the company lowered production forecasts for 2022.
Before its most recent quarterly results, Lucid shares traded as high as nearly $30. The bubble in LCID stock popped again after Lucid not only posted a big quarterly loss, it reported barely any revenue. It also reset its 2022 production outlook. Even at the lower production forecast, Lucid is highly unlikely to meet expectations.
Lucid, whose market capitalization is approximately half that of Ford (NYSE:F) and General Motors (NYSE:GM), is high-risk speculation. Its luxury EV has a limited addressable market, its operational risks are rising, and investors lost patience holding the stock.
What went wrong with this investment?
Quarterly Losses Weigh on LCID Stock
On Feb. 28, Lucid posted fourth-quarter GAAP earnings per share loss of 64 cents. Revenue rose by a seemingly impressive 627% year-over-year. However, the revenue of $26.39 million is practically a rounding error compared to its market capitalization in the tens of billions.
Lucid production exceeded 400 vehicles and delivered 125 units as of the end of 2021. Still, at 300 deliveries to date, total revenue is no more than around $80,000 per unit or $24 million. What is disconcerting is the annualized rate is 125x four quarters, or 500 units a year. This is far below the 12,000 to 14,000 production outlook for Lucid Air.
Lucid said customer reservations are now over 25,000. Investors may assume that Lucid meets its 12,000 annual production rate forecast. That leaves it with only two full years of reservations left.
Strong Balance Sheet
Speculative growth investors may forgive Lucid for its weak quarterly performance. It just started producing EVs. Its balance sheet has $6.26 billion in cash, up from $614,412 in 2020. Debt is close to $2 billion.
In Q4, Lucid spent $163.6 million on research and development and $750.2 million for the year. Assuming that rate continues, the company could run out of cash in a few years. The company forecasts a capital expenditure of around $2 billion in 2022. It needs to support manufacturing facilities and its associated machinery tooling and equipment. In addition, it has to build a retail network and service center, both domestically and internationally.
Short-term investors will realize that cost growth will greatly exceed revenue. The company has no hope of reporting a profit in the next few years. In the long term, its business model has a better chance of surviving investor scrutiny. Shareholders need to expect input costs to fall. Prices for metal and computer chips are a small portion of costs. Lucid and the EV industry need prices of batteries to drop dramatically.
Upside Opportunity
Ignoring the risks of the EV stock bubble deflating further, Lucid’s flagship Lucid Air model is a compelling product. The company’s mission is to have the best product in the world. It offers the highest range certified by the U.S. Environmental Protection Agency. It has a high voltage, fast charger.
Lucid is not experiencing a supply shortage with semiconductors. Whereas other automotive firms use inexpensive chips that are in short supply, Lucid has high-end printed circuit boards. It prints them in-house. Therefore, Lucid adapted to the tight supply conditions by revalidating its designs. It realigned its resources by leveraging its relationship with suppliers.
Despite Lucid’s in-house talent designing chips, it still relied on around 250 parts from among its 3,000 suppliers. This includes exterior trim parts, finish parts, carpet, and glass. Fortunately, for Lucid customers, the company is not compromising on quality. It is building a business and has a 10-year plan.
In the first half of 2024, Lucid will release a potentially disruptive SUV. From there, its next step is scaling the business. Once the company achieves economies of scale, strong consumer interest will drive demand higher. Lucid will produce EVs at a profit.
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As shown in the chart, Lucid’s revenue will grow. It will not post a profit until after 2024 at the earliest, according to SimplyWall.St.
Operating losses are typical for growth firms that are just starting out.
Lucid Gravity SUV production will also start in 2024. Previously, the company expected a 2023 launch. For now, it may leverage its learning from the production of Lucid Air. As it fixes its mistakes related to operations, investors should expect no delays in SUV output.
Risks
Lucid must establish a service center footprint to support customers. It has only 125 active customers, so those locations will operate at a loss. In the next few years, its customer base will grow. Customers will have over-the-air updates, and superior post-sales and service quality.
Lucid has a high capital expenditure budget. Fortunately, it budgeted spending around $900 million in 2021. Instead, it spent $421 million. By 2022, it originally budgeted $1.3 billion. The actual spend for this year will be closer to $500 million. From 2025 to 2026, capital expenditure should fall to around $350 million.
Your Takeaway
Speculators lost sight of Lucid’s near-term prospects. The EV hype blinded them from planning for the downside risks of supply constraints. The EV sector is also in a downtrend. Nio (NYSE:NIO) and XPeng (NYSE:XPEV), based in China, fell in the last few months. In addition, on the stock market, Tesla (NASDAQ:TSLA) is barely holding up.
Lucid’s valuation multiples (measured by price-sales) risks compressing more. While the lower stock price gives long-term investors a better entry point, consider this stock a “sell.”
LCID stock is a 10-year investment. The business needs that time to realize its growth prospects. For the next three years, expect high costs to burn through Lucid’s cash on hand. Once the dust settles, it will re-establish an uptrend.
On the date of publication, Chris Lau 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.
