- Lucid (LCID) stock has corrected sharply, but I would wait for some more correction to accumulate.
- Macro-economic headwinds can impact deliveries and translate into a long-term than expected period of cash burn.
- Aggressive global expansion is a positive catalyst with a strong cash buffer and focus on innovation.
Lucid (NASDAQ:LCID) stock has witnessed a sharp decline from November 2021 highs of $57.75. Being a quality growth stock, there is a temptation to accumulate at current levels of $17.
While I am bullish on LCID stock with a long-term investment horizon, I believe that further correction might be on the cards. With a cautiously optimistic view, LCID stock can be considered for gradual accumulation in the range of $10 to $15.
In terms of challenges, a key factor in the next few quarters is macro-economic headwinds. Lucid’s first model in the U.S. is a luxury sedan. The company also plans to launch luxury sedans in Europe later in 2022.
With the possibility of a recession or stagflation in 2023, it’s likely that demand for premium EVs will decline on a relative basis. It’s worth noting that Lucid has already lowered the production guidance for 2022 to 12,000 to 14,000 vehicles. In the coming quarters, the production and deliveries guidance for 2023 might also come lower than expected.
The implication is as follows: In July 2021, Lucid had guided for negative free cash flow of $7.5 billion between 2022 and 2024. The company expected to be FCF positive in 2025. However, as deliveries growth is relatively muted, cash flows are likely to remain negative beyond 2024.
Cash flows are the key valuation driver, and it’s not surprising that LCID stock has been trending lower. Additionally, an extended period of cash burn would imply that Lucid needs to further dilute equity.
Positive Growth Catalyst
There are near-term headwinds for the electric vehicle industry. However, the long-term outlook remains positive as countries look to reduce dependence on fossil fuel.
With a cash buffer of $5.4 billion, Lucid is well positioned to finance growth over the next 12 to 18 months. For the current year, Lucid is expected to incur a capital expenditure of $2 billion. Beyond this period, further dilution of equity is likely.
The company has also reported encouraging reservation of 30,000 Lucid Air vehicles. This implies a potential sales backlog of $2.9 billion.
Recently, Lucid also announced a deal with the Saudi government for purchase of up to 100,000 vehicles through 2030. This adds to the long-term revenue visibility. With the company planning it’s first overseas manufacturing in Saudi Arabia, the growth outlook from the region seems positive.
Lucid also has aggressive expansion plans for Europe. Excluding the United States, the company is already taking online orders for Lucid Air from over a dozen countries. The focus is largely on Europe. With Project Gravity SUV on-track for production on 2024, there is visibility for steady growth upside.
Bottom Line on LCID Stock
Even with intensifying competition, Lucid is positioned for sustained growth with focus on innovation. Further, with an aggressive international expansion plan, the deliveries growth outlook is positive.
Of course, the markets are likely to focus on near-term challenges of raw material inflation, chip shortage and a potential economic downturn. These factors seem to be largely discounted in the stock.
Given the jittery market sentiment, it makes sense to gradually accumulate LCID stock in the range of $10 to $15. In the next few years, the stock is likely to be meaningfully higher than these levels.
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.