Let’s Shine a Light on Lucid Motors as It Slides Downhill

Lucid Motors (LCID) has seen its market cap slashed and investors hitting the brakes on speculative electric vehicle stocks that had been riding high before the bear market.

At its peak in November, Lucid’s market cap was over $80 billion. With the stock down 70% in seven months, has all the air come out and does the valuation now seem reasonable?

Bear markets, after all, have a way of bursting asset bubbles and cleaning the froth from risky stocks.

Lucid now has a $28 billion market cap with about $3 billion in net cash. The automaker is booking huge losses as it attempts to ramp up manufacturing, and the stock has a high price/sales ratio — around 9-times expected 2023 revenues. That’s on par with Tesla (TSLA) , which is already booking meaningful profits and cash flow.

Note that legacy automakers trade at far less than 1-times sales. LCID, by that measure, still seems far overvalued with plenty of downside risk. Lucid is racing in the capital-intensive auto manufacturing business against deep-pocketed competitors. Investors should anticipate additional capital raises to replenish the $3 billion net cash since the company is expected to lose $1.5 billion this year.

Lucid’s close EV competitor, Rivian (RIVN) , is sitting on $17 billion in net cash to invest in the ramp-up of manufacturing and to withstand losses until its business turns cash-flow positive. With Rivian’s $23 billion market cap, the enterprise value is only $8 billion, less than one-third of Lucid’s. Raising cash and maintaining sufficient liquidity will be an ongoing concern and challenge for these automakers.

“Unless something changes significantly with Rivian and Lucid, they will both go bankrupt. They are tracking toward bankruptcy,” said Elon Musk of Tesla in a recent interview. “I hope they can do something, but unless they can cut their cost dramatically, they are in deep trouble.”

Granted, there is a self-serving aspect to these comments for Musk, but it’s a caution input for investors nonetheless.

Lucid has a deep-pocketed majority owner in the Saudis, who own 60% of shares outstanding. But additional capital raises will still be equity dilutive or come with a steep interest rate. The 60% stake is partly responsible for Lucid’s overvaluation; there’s a limited float of shares. Short interest is high as a percent of the float, at 23%, but much smaller as a percentage of shares outstanding, at around 8%.

Like other automakers, commodity prices and availability, supply chain constraints, and other cost pressures have worsened the outlook for profitability at Lucid. Starting on June 1, Lucid raised prices for most of its vehicle lineup by about 11%. While the luxury EV maker does serve an affluent consumer, demand can suffer.

Also, Lucid shut down the assembly line for a week due to manufacturing issues, according to a recent report by Business Insider. Rivian has had similar manufacturing difficulties. This speaks to the costs and challenges ahead and supports Elon Musk’s quote, “Manufacturing at scale is extremely hard.”

Even after the significant decline in LCID this year, down 55%, investors are still paying a valuation difficult to justify. In a bear market, this froth will likely get wrung out, leaving LCID at far lower levels.

It’s tempting to think back to the skepticism of Tesla and imagine buyers can catch short sellers on the wrong side again. But, at a minimum, Tesla had the field to itself as it expanded. Now, Tesla is part of a competitive EV landscape that only looks to become stronger in time. There are too many reasons in a harsh investing climate to avoid owning shares of Lucid.