- Lucid (LCID) has lowered production estimates for 2022, which has negatively impacted stock sentiments
- Positive free cash flow is unlikely before 2026 and further equity dilution will impact the stock
- Long-term outlook remains positive with innovation being the key growth catalyst. Big addressable market with an increase in global presence
With the commencement of deliveries and positive reviews for its first model, Lucid (NASDAQ:LCID) stock surged to highs of $57.8 in November 2021.
The rally was however short-lived with multiple factors dragging LCID stock lower.
One of the key reasons for the stock trending lower is the fact that vehicle deliveries are likely to disappoint in 2022. At current levels of $25, LCID stock might seem attractive. However, I believe that the stock is likely to remain range-bound in the coming quarters.
At the same time, it’s worth mentioning that Lucid is an attractive business to consider for the long term. It makes sense to gradually accumulate on any further correction.
Back in July 2021, Lucid Motors had guided for vehicle deliveries of 20,000 in 2022. The company further expected deliveries to increase to 49,000 in 2023.
However, Lucid now expects to produce 12,000 to 14,000 vehicles in 2022. Supply chain and logistics concerns are the reasons for the revised guidance. Even with an encouraging order backlog, the markets are likely to focus on the actual production visibility.
Also, in July 2021, Lucid had estimated that its second model, Lucid Gravity, will be launched towards the end of 2023. The production of Gravity is now shifted towards the first half of 2024. It goes without saying that production and delivery estimates for 2024 and 2025 will also be negatively impacted.
This does translate into a relative decline in investor confidence. More importantly, the revenue and cash flow estimates will be revised and that will have implications on the valuation.
Equity Dilution and LCID Stock
With Lucid Motors still at an early growth stage, cash burn is likely to sustain in the next few years. Furthermore, with delays in production and deliveries, the cash burn can be higher than expected.
Lucid Motors has guided for negative free cash flow of $2.8 billion for 2022 and $3.3 billion for 2023. This would imply a total cash burn of $6.1 billion in the next 24-months.
Interestingly, as of December 2021, Lucid reported cash in hand of $6.2 billion. The company seems fully financed through 2023.
However, Lucid needs to build cash buffer as FCF is expected to remain negative even in 2024. At the same time, with production and delivery estimates likely to change, the cash burn can be longer than anticipated.
It’s possible that Lucid will look for opportunities to raise funds. If there is a stock rally, it can quickly fizzle out on potential dilution.
Lucid is also preparing for its first international plant in Saudi Arabia. The company believes that the plant will result in $3.4 billion in value for Lucid over the next 15-years. With new investments, the company’s capital requirement is bound to increase.
Keeping Lucid Stock in Investment Radar
Purely from a business perspective, Lucid stock seems to be moving in the right direction. The company’s focus is on innovation and quality. Lucid Air has already set new standards with the longest range on a single charge. Also, with online bookings available for multiple countries, the addressable market is significant.
However, it would take few years before any significant scale-up in production. It would be unrealistic to expect positive free cash flows before 2026 against an earlier estimate of 2025.
It also does not imply that LCID stock will remain rangebound through the next few years. The markets will however be in wait-and-watch mode. Management needs to deliver on revised expectations for 2022. Additionally, there needs to be a realistic guidance beyond 2022.
In general, SPAC business combinations have been associated with lofty growth projections. Market scepticism is likely to keep the stock sideways in the foreseeable future. However, if LCID stock trades near $20 levels, I would not hesitate in accumulating.
On the date of publication, Faisal Humayun 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.