Lucid Group (NASDAQ:LCID) stock raced higher this week after the company announced a deal with Saudi airline Riyadh Air at the Dubai Airshow. The two companies will collaborate on marketing, commercial, and operational opportunities. Although it looks like yet another coup for the EV stock, it’s really not that big of a deal.
The announcement is just a memorandum of understand for future cooperation. Riyadh Air just launched in March and won’t go into service until 2025. Lucid seems more important to the Saudi government than the U.S. EV market and investors shouldn’t get caught up in the hype of paper deals like this.
LCID Stock and Its Backers
Lucid Group is majority-owned by the sovereign wealth fund of Saudi Arabia. The Public Investment Fund owns a 60% stake in the EV company. It invested over $5.4 billion in Lucid, a stock that lost some 90% of its value since going public in 2021.
Until the MOU announcement, LCID stock was still falling. Third-quarter earnings revealed the automaker expects to manufacture as few as 8,000 EVs this year. Lucid previously promised to make 10,000 vehicles. Lucid calls it “prudent” to reduce guidance based on deliveries, but it doesn’t bode well for building a viable car company.
It’s already making cars for a limited, niche market of the well-heeled who can afford to buy one of its $100,000 cars. There is little wiggle room available for it to stop hemorrhaging cash. The only reason it’s able to stay afloat is Saudi inflows. That’s why many investors expect (or hope) Lucid gets taken private by the PIF.
EV Demand on the Decline
The EV market is in a bind. Demand general for electrified vehicle is declining just as competition grows more intense. Ford (NYSE: F) and General Motors (NYSE:GM) are reining in their prior ambitious growth plans, while price cuts become the rule. The average price of an EV fell to $50,683 in September from over $52,000 the month before. Last year, the average price was more than $62,000.
Yet dealer inventories are soaring 500% compared to a year ago as cars sit on lots an average of 82 days versus 64 days for gas-powered cars.
The MOU announcement is just another in an expanding list of press releases LCID is sending out. Among those were its EVs adopting Tesla‘s (NASDAQ:TSLA) North American Charging Standard beginning in 2025 and the launch of a $77,000 model.
This is not news the average EV buyer can act on and it won’t help move more Lucid cars. A manufacturer shakeout is what eventually disrupts the EV market.
Paying the Piper
The Saudi government has promised to buy as many as 100,000 vehicles over the next decade. Lucid is shipping vehicle parts to its new plant in Jeddah for final assembly.
The facility has the capacity to finish 5,000 of its EVs per year. So it’s clear the partnership is not just all talk and cash infusions. The Riyadh Air agreement might put Lucid cars in front of the 330 million travelers the airline is targeting by 2030.
Yet it’s also clear that deals made with Lucid aren’t necessarily for the benefit of retail investors. Even a taking-private agreement might not unlock the sort of premiums shareholders expect. And it’s doubtful anyone else will swoop in to get into a bidding war with PIF for Lucid.
At the depressed price of around $4 a share, it’s natural shareholders will grasp at any straw that might boost the stock. Yet outsider investors shouldn’t be fooled. The agreement with Riyadh Air is not a reason to rush in to buy LCID stock.
On the date of publication, Rich Duprey 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.