The electric vehicle (EV) market is undergoing a rapid transformation in 2023, as more automakers enter the fray with new models and technologies. However, there are also concerns that demand will weaken in the near term as high interest rates begin to bite at consumer spending. In this context, investors should be wary of Lucid (NASDAQ:LCID), a luxury EV maker that faces several challenges in its quest to become profitable and competitive. Below are three reasons to be bearish on Lucid.
Deliveries are declining
Lucid’s deliveries have been on the decline in 2023. According to its Q1 2023 financial results, Lucid produced 2,314 Air sedans and delivered 1,406 vehicles in the first quarter, down from 3,493 and 2,780 respectively in Q4 2022. At the time, CEO Peter Rawlinson said he believed “too few people are aware” of the company, which surely doesn’t bode well for Lucid’s growth prospects. The second quarter delivery results were not too dissimilar. Lucid delivered 1,404 Air sedans in the second quarter. Lucid’s second-quarter deliveries compared 679 in the second quarter of 2022.
The luxury EV automaker’s third quarter delivery results continued to underwhelm investors, further solidifying fears that slumping EV demand is harming Lucid’s potential to grow.
Revenue growth and profitability margins are compressing
Lucid’s revenue growth is significantly slowing down amid EV demand pressures. Lucid reported revenue of $149.4 million in Q1 2023, which is a 159% increase year-over-year but a 42% decrease quarter-over-quarter. The company also posted a net loss of $779 million, widening from $472 million in Q4 2022. Second quarter financial results were not any better. While revenue came in $151 million, increasing by 55% year-over-year, from a quarter-to-quarter perspective, revenue increased only by barely 1%.
As deliveries decline, the automaker’s ability to become profitability becomes further out of reach, which will disappoint long term holders. Lastly, while Lucid’s balance sheet remains robust with $5.2 billion in cash, if losses continue to expand, this cash balance could dwindle and force the company to raise equity or debt, which could dilute current investors or further compress bottom-line margins.
Valuation remains a problem
Lucid’s valuation is concerning. Although the luxury EV maker is trading at 7.9x forward sale, the company is yet to be profitability and thus its profitability metrics make the stock a tough sale. Lucid expects to achieve positive EBITDA by 2024 and positive free cash flow by 2025, but these projections are contingent on reaching lofty delivery targets. Given the way production and deliveries have been lackluster in 2023, it’s hard to believe the company will be approaching EBITDA or bottom-line profitability any time soon.
Intense competition from other luxury EV makers, including Tesla (NASDAQ:TSLA) itself and a host of German automakers, including Mercedes-Benz (OTCMKTS:MBGYY) and BMW (OTCMKTS:BMWYY), has not helped Lucid’s growth either. These companies not only are better known, but have the capital and resources to sell a large number of vehicles even in a difficult market. Lucid will need to bring a lot more to the table in order to displace these competitors.
On the date of publication, Tyrik Torres 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.
