Contemplating an Investment in Lucid Motors as its Share Price Hovers Under $2.50?
There's no doubt that electric vehicles are on an upward trajectory, making up a growing share of cars sold worldwide. Yet, not every electric vehicle company is a wise investment. The auto industry is tricky to profit from, and competition is surging into the market swiftly.
Lucid (LCID, priced at $2.01 per share as of recent market close on Friday) has faced some of these hurdles head-on. Is it a good time to invest in this EV stock, under $2.50?
Competition poses a challenge for Lucid
Let's start by examining Tesla (NASDAQ: TSLA), Lucid's ideal competitor. Tesla boasts decent profit margins and positive cash flow, as shown in the graph below. However, profit margins reached their peak during the pandemic, when vehicle supply was limited. In 2023, Tesla had to lower prices to maintain sales, avoiding growth in revenue. Margins took a hit during that period.
This applies to all automakers. Automobiles are a physical product with high marginal costs, substantial inventory costs, and concrete supply and demand dynamics. As electric vehicles become more widespread, demand is not keeping pace, causing prices and margins to drop.
Lucid faces even greater challenges than Tesla
Like most electric vehicle manufacturers, Lucid's challenge isn't just selling more cars; it's making a profit from the vehicles it sells. As shown below, Lucid's gross margins are a negative 106% and show no sign of improvement.
Lucid faces two main challenges that aren't improving. Firstly, its vehicles are costly, starting at $69,900, which makes it difficult to cater to the average buyer. This restricts its market reach as the expected production of only 9,000 vehicles this year won't generate enough demand. It's a struggle to sell a $70,000 car with more affordable alternatives available.
Secondly, costs remain high, despite Lucid's large scale. The luxury market has inherently lower volumes, making it challenging for companies to make a profit at low volumes at such high price points.
Debt and cash flow
Lucid's financial struggles are evident in its growing losses. Investors must consider how long Lucid can sustain current loss levels. Conventional wisdom suggests that Lucid's major shareholder, the Saudi Arabia Public Investment Fund (PIF), will provide salvation.
In August, the fund announced plans to invest $1.5 billion in Lucid, dividing the investment between $750 million in preferred shares and $750 million in an unsecured delayed draw term loan facility. This seems like good news, but these new funds are higher in priority than common shareholders. Lucid might face bankruptcy, with the PIF still retaining control.
Lucid's future is tough. The company carries a $2 billion debt burden and its cash reserves are dwindling. Its resources will run out within a year or two without securing additional funding. A declining stock price can complicate a new capital raise.
Lucid is in a precarious position
The mounting losses, balance sheet, and competitive environment present a daunting challenge for Lucid. The company's survival depends on raising new capital, yet achieving a sustainable position remains challenging.
Lucid's stock is not a sensible purchase now, and I don't foresee a recovery in the near future. The risks are high, and the declining stock price is beanstalking a downward spiral that won't cease anytime soon.
Investors should be cautious when considering investing in Lucid, as its high operating costs and expensive vehicle prices make it challenging to generate profits. The company's financial struggles, including a lack of cash reserves and a large debt burden, further add to the risk.
Given the intense competition in the electric vehicle market and the challenges Lucid is facing, it may not be the best investment choice at this time. With its stock price declining and mounting losses, it could be difficult for Lucid to secure new funding or turn its situation around in the near future.
