Lucid Stock’s Cash Burn Remains a Major Concern

  • Lucid (LCID) stock will remain sideways or lower with economic headwinds likely to impact deliveries growth
  • Cash burn will sustain for an extended period and this implies equity dilution
  • Long-term outlook remains positive with the company focused on innovation driven growth
LCID stock - Lucid Stock’s Cash Burn Remains a Major Concern

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Lucid (NASDAQ:LCID) stock has been significantly volatile since the SPAC (special purpose acquisition company) listing. The stock traded at 52-week highs of $57.8 in November 2021. With the bear market punishing growth stocks, LCID stock touched lows of $13.3 last month. A relief rally from oversold levels was due and the stock trades 37% higher at $18.2.

I believe that for this high-beta stock, there will be ample trading opportunities. In particular, with the broad market outlook remaining uncertain.

However, it might still be too early to consider long-term exposure to LCID stock. In my view, there will be better entry opportunities in the next 6-12 months.

LCID Lucid Group $18.39

Bearish on Deliveries Growth

It’s worth noting that Lucid has already disappointed investors by lowering the guidance for 2022 deliveries. The company now expects production volume of 12,000 to 14,000 vehicles for the year.

Further, Lucid will disappoint in terms of production and sales in 2023 and 2024. There are two reasons for this view.

First, Lucid had provided very optimistic growth numbers at the time of SPAC business combination. For 2023, the company expects to deliver 49,000 vehicles and clock revenue of $5.5 billion. Also, for 2024, the company’s initial guidance was for delivery of 90,000 vehicles and a turnover of $9.9 billion. These estimates seem too unrealistic considering multiple near-term headwinds for the industry.

Further, the first model of the company is a luxury car. Goldman Sachs expects 30% probability of recession in the U.S. in 2023. Bank of America also believes that the U.S. economic growth will stall in the second half of 2023 and the following year won’t be any better.

Given the challenges, it’s unlikely that the company’s luxury model delivery will gain significant traction.

Extended Period of Cash Burn

As of Q1 2022, Lucid reported cash and equivalents of $5.4 billion. The current liquidity buffer is likely to last well into 2023.

The concern here is as follows: With very aggressive vehicle delivery estimates, Lucid expects to turn free cash flow positive in 2025. However, the company’s initial estimates almost seem meaningless. I would not be surprised if the cash burn extends well into 2025 and 2026.

There is a case for equity dilution in 2023. Given the cash burn outlook, there will be potentially further dilution of equity in 2025. In simple words, existing shareholder will continue to be negatively impacted.

Another point to note is that Lucid is already taking online orders from 17 countries. The company will also be investing in a manufacturing plant in Saudi Arabia. With aggressive investment in international markets, the cash burn is likely to be more than expected.

LCID Stock Will Gain Market Share

There can always be a case where the stock remains sideways to lower, but business developments are positive.

I believe that Lucid has a technological edge and this factor will help the company gradually gain market share. Some of the initial product highlights include EPA-estimated driving range of 446 miles and an ultra-fast charging system. The company also has a proprietary powertrain technology.

It’s also worth noting that Lucid is targeting to commence production of Project-Gravity SUV in 2024. If the company can achieve this within the time-line, it’s a catalyst for deliveries upside.

In terms of regional expansion, Lucid is already making inroads in the Middle-East. In the next few years, the company will have presence in Europe and China.

Another point to note is that Lucid is potentially looking at a mass market car that’s priced around $25,000. If there is a breakthrough on this front, it can help the company gain market share.

The Bottom Line

Lucid seems to be among the electric vehicle companies that’s positioned to survive intense competition and grow. However, the company is still at an early stage and it implies an extended period of cash burn. Even if deliveries growth gains traction, dilution of equity will impact LCID stock.

I therefore consider the volatile stock as a good trading bet. It might be too early to take long-term positions. Amidst volatility, time correction seems likely even if there is no price correction from 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 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 modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

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