Sometimes, I’ll root for an underdog. However, I just can’t get behind electric vehicle (EV) manufacturer Lucid Group (NASDAQ:LCID) in 2023. LCID stock has been a poor performer and could easily continue to lose value this year.
I’m not the only commentator who’s concerned about Lucid Group’s future prospects. As we’ll see, at least one expert on Wall Street is unafraid to point out Lucid Group’s major problems.
In addition, Lucid might soon expand its operations into a highly populated region of car buyers. At first blush, this may seem bullish. However, be sure to consider the implications as Lucid Group potentially endeavors to step outside of its comfort zone.
An Analyst’s Warning for LCID Stock Traders
If you’re ultra-optimistic about LCID stock, I encourage you to tap the brakes and heed the warning of Baird analyst Ben Kallo. He published a lukewarm “hold” rating on the stock, along with some cautionary comments about Lucid Group.
To be fair, Kallo actually praised Lucid’s automotive technology. He stated that Lucid Group’s software and drivetrain are “both developed in house to enable industry-leading performance in range, efficiency, charging, and more.”
That’s high praise, but the Baird analyst also noted some red flags. First, Kallo Group asserted that Lucid Group faces a “challenging near-term setup” due to “high starting prices and a niche-market segment.” I tend to agree with this assessment, as many customers simply can’t afford Lucid’s high-end EVs during these challenging economic times.
Furthermore, Kallo observed that “[p]rofitably ramping EV production has proven to be a difficult task” that “has already challenged [Lucid] in its short operating history.” On top of that, Kallo expressed concerns that “[c]omponent shortages and supply-chain tensions have led to [Lucid] reducing its vehicle production guidance multiple times and could adversely impact results yet again.”
Could Lucid Group end up having to borrow money or issue shares? It’s entirely possible, as Kallo suggested that Lucid “will need to raise more capital to execute on its strategic growth plan, which may more more challenging in a high cost-of-capital environment.”
Lucid Group’s Potential Foray Into China Would Be Risky
With Kallo’s assistance, I’ve already conveyed multiple issues that Lucid Group will need to overcome. Yet, if the company follows through with a potential expansion plan, Lucid might only end up compounding its problems.
Recently, CNBC broke the story that Lucid Group is “exploring selling its cars in China.” However, the company apparently has “no timeline” for this.
Actually, there’s more to this story. Eric Bach, chief engineer at Lucid Group, reportedly announced that selling vehicles in China is “something we are exploring, we are investing in.” To me, “investing in” China EV sales sounds more serious and definite than just “exploring” it.
Bach practically admitted that a venture into China would be risky for Lucid Group. “If you enter China on the wrong terms, you can make a lot of mistakes,” he acknowledged. Plus, Bach seemed to offer more questions than answers: “[H]ow are we going to enter? What’s the pricing strategy? What’s going to be our manufacturing strategy?”
Until these questions are answered specifically and decisively, I’m skeptical about Lucid Group’s ability to succeed in China’s ultra-competitive EV market. Bear in mind, Lucid hasn’t been extremely successful in the U.S.
As I’ve pointed out before, Lucid Group has literally halved its 2023 EV production forecast from 20,000 to 10,000 units. Moreover, Lucid Group missed Wall Street’s call for second-quarter sales of $182 million and an earnings loss of 34 cents per share. The actual results, unfortunately, were roughly $151 million in sales and an earnings loss of 40 cents per share.
LCID Stock Has ‘Trouble’ Written All Over It
By now, Kallo’s cautionary notes should have made you think twice about investing in Lucid Group. Also, consider whether it might be a costly mistake for Lucid to venture into China’s competitive EV market.
Lucid Group’s loyal shareholders haven’t been long-term winners, and I’m not optimistic about the coming quarters. Hence, at the end of the day, the best policy is to avoid LCID stock altogether.
On the date of publication, David Moadel 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.
