EV startup Lucid Motors (NASDAQ:LCID) is one of several electric vehicle companies that investors are watching closely in an attempt to find the next Tesla.
Lucid has had some early successes and is currently delivering vehicles, but it may not have enough of an argument behind it for the stock to stand out as a buy.
If you don’t know the company well, Lucid is a manufacturer of luxury electric vehicles. The company’s flagship model, called the Lucid Air, is a high-end luxury sedan with over 400 miles of range and an upper horsepower of 1,050.
With this and similar offerings, Lucid hopes to capture market share in the growing market for premium electric vehicles.
Growth, But At What Cost?
In Q3, Lucid reported total revenues of $195.5 million and deliveries of 1,398 vehicles. During the quarter, the company also reached a total of 34,000 future reservations. Once these reserved vehicles are delivered, Lucid is expected to realize total revenues of $3.2 billion from these sales.
Although deliveries were more than triple what Lucid was able to achieve in Q2, the company extended its losses in Q3. Lucid motors reported a loss of $0.40 per share, below the analyst consensus estimate of $0.33. The Q3 earnings also represented a greater loss than Q2, when Lucid only lost $0.33 per share.
This year, Lucid’s losses are expected to be steeper than the trailing 12-month period. Analysts forecast losses of $1.29 per share, down from $1.11. While Lucid could see revenue growth of over 70 percent this year, analysts expect the company’s growth to turn negative over the next five years.
Growth notwithstanding, profitability seems to be a long way off for Lucid. The company’s current return on equity is -39.15 percent, while its reported return on assets is -19.61 percent.
Although a period of losses associated with sales and production growth is understandable for a young EV company, Lucid must eventually improve these numbers in order to bolster investor optimism.
High Multiples A Worry?
Despite steeper projected losses, analysts almost universally expect Lucid’s stock to rise over the coming 12 months. The consensus intrinsic value for Lucid is $14.50, up 77.9 percent from the most recent price of $8.14.
It should be noted, however, that Lucid appears very overvalued at today’s prices. At over 35 times sales, the share price trades at a premium that does not seem to be justified by the prospects of the underlying business.
The company’s rapidly diminishing cash stockpile could also be concerning for value investors. Between December of 2021 and September of 2022, Lucid’s reserve of cash and cash equivalents fell from $6.3 billion to $1.3 billion.
While the company requires new investment to drive future growth, this rapid cash burn rate could eventually force it to seek out external financing.
As such, Lucid’s stock price and future projections are based almost entirely on rapid growth. If the company fails to deliver or grows more slowly than expected, there’s a good chance the stock could stagnate.
Capacity Concerns, & Competition Is Stiff
Beyond the financial risks already discussed above, Lucid has struggled to raise its production capacity.
This is understandable in a global economy marked by shortages and supply chain difficulties. Due to its massive cash investments over the last year, however, Lucid may not be able to afford failures in ramping up production capacity.
Like other EV startups, Lucid also faces the risk of competition from established automakers. Legacy companies like Ford and GM, as well as dominant EV manufacturer Tesla, could all squeeze a company as tiny as Lucid for market share with relative ease. Although Lucid has generated a great deal of excitement for such a small company, the auto majors can still produce more vehicles at greater efficiencies.
Lucid may also suffer from its own pricing model as consumers turn to more affordable options. Inflation and a perceived risk of recession going into 2023 have both made consumers more conscious about spending money. With the Air starting at over $100,000, Lucid could face difficulties in scaling up its business as consumers cut back.
Is Lucid a Good Stock Buy?
While Lucid faces steep challenges, the company could have a bright future. The company’s vehicles have won broad customer appeal and generated real excitement in the luxury EV market.
As the Q3 earnings report shows, a small but fast-growing group of consumers are putting reservations in on Lucid’s vehicles. Down the road, these reservations and future production capacity could combine to make Lucid a lucrative investment.
Lucid is also expanding its line with an SUV that could drive further sales. SUVs have soared in popularity in recent years among American car buyers, and electric versions are currently in high demand.
The EV manufacturer plans to begin accepting reservations for the new vehicle early this year. Further reservations could give Lucid a dependable future revenue stream, though it will still have to significantly increase production to capitalize on these sales.
As of now, however, Lucid is simply too risky for the vast majority of investors. With minuscule production relative to Tesla, deepening losses and a rapid cash burn rate, Lucid appears to be a very high-risk investment.
Marrying these risks to the broader problems of competition and waning consumer confidence, Lucid seems to be a poor candidate for investment at present.
Although Lucid could be a real success someday, the stock does not appear to be a buy at the moment. Thanks to its low share price and modest size, though, Lucid could have a very long runway if and when its earnings begin to improve.
As such, investors may want to keep an eye on this company for a more promising buying opportunity. A future version of Lucid that’s more mature and closer to profitability could look appealing, but the company must prove itself first.
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