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Did the Lucid and Rivian Bubble Burst Just Signal a Stock Market Top?

By Daniel Foelber – Nov 24, 2021 at 6:56AM

Key Points

  • There is a disparity between the real economy and the stock market.
  • High valuations for unproven companies are a red flag.
  • Investing in fundamentally sound businesses is a good way to prepare for a market sell-off.

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Rivian may be overplayed, but Lucid has real value.

The stock market, crypto market, real estate market -- even Pokémon cards are hovering around all-time highs. Meanwhile, the real economy is facing 30-year-high inflation rates, ongoing supply chain challenges, and a way of life that remains very much impacted by COVID-19.

There are different viewpoints on the disparity. But when investors see companies like Lucid Group (LCID -0.35%) and Rivian Automotive (RIVN 0.85%) valued at a combined $200 billion -- it raises some red flags. Here's why Lucid and Rivian could signal a market top, how to approach those two companies, and what to do if you're worried about a downturn.

A Lucid Air sedan parked in front of a modern home.

Image source: Lucid Group.

Symptoms of an unhealthy market

If there ever were a sign of a market top, then seeing Rivian blast to a market cap of over $150 billion at its peak is probably it. Older investors may painfully remember the dot.com bubble of 2000 to 2002 where tech companies with little to no sales fetched valuations in the billions for little more than a business plan. Rivian isn't even delivering its vehicles yet, but it's already the second-most valuable U.S. automaker behind Tesla (TSLA 2.28%).

By comparison, Lucid is valued at around $100 billion. It's a little more understandable considering the company is producing and delivering cars and has the six highest range ratings of any EVs rated by the environmental protection agency (EPA). It also offers versions of its Lucid Air luxury sedan that sport over 1,000 horsepower. Lucid also has some incredibly impressive technology that can go toe-to-toe with Tesla. However, even Lucid is looking more and more expensive as its stock price strays from fundamentals.

Did the bubble burst?

The euphoria seemingly peaked, at least for now, on Nov. 16 when Rivian reached an intraday high of $179.47 per share. The stock is now down around 30% from that high as investors take profits.

LCID Chart

Data by YCharts.

Meanwhile, Lucid was down around 30% from its all-time intraday high of $64.86 per share before Friday's 17% gain. Investors looking for high-risk, high-reward options in the EV sector could consider Lucid over Rivian, or buy other leading EV names like Ford or Nio that have lower valuations despite being more established

No one knows where Rivian or Lucid is headed in the short term. But we do know that sky-high valuations, even for companies with a lot of potentials, are cause for concern.

What to do now

Even if you think the Rivian and Lucid bubble signaled a market top, you're still probably better off staying invested in the U.S. stock market (which has proven to be one of the best ways to generate wealth over time). A good pivot could be to transition toward stocks that don't give you a meme stock migraine. Foundational companies like Microsoft or Amazon offer a lot of growth without nearly as much volatility.

In the electric car sector specifically, building a basket of multiple stocks is a great way to include high-growth names like Lucid and Rivian without betting the farm on them in case they fail.

Stick to investing fundamentals

Ultimately, the best way to approach a market top is by investing in companies you understand, are interested in, and will stick with through thick and thin. Investing in growth stocks like Lucid to make a quick buck is probably a bad idea. But if you believe in the company and want to let the investment thesis play out (and are willing to stomach the volatility), then it could be a good move.

However, for most investors, choosing companies that are industry leaders on a slow and steady growth trajectory is probably the best bet.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Daniel Foelber owns shares of Lucid Group, Inc. and has the following options: short December 2021 $20 calls on Lucid Group, Inc., short February 2022 $20 calls on Lucid Group, Inc., and short November 2021 $22 calls on Lucid Group, Inc. The Motley Fool owns shares of and recommends Amazon, Microsoft, NIO Inc., and Tesla. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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