Shares of electric-vehicle maker Lucid Group (LCID 5.25%) came under fire Monday in response to a U.S. Securities and Exchange Commission (SEC) probe that was issued on Dec. 3. At the close, the stock was down about 5% for the day and as much as 19% at one point in the morning.
Are investors correct to mostly shrug off this news or is the electric car company in trouble?
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Investing lessons: 101
Howard Smith: Lucid shocked investors Monday with news that it is the subject of an SEC investigation. This wouldn't be the first company that recently went public by merging with a blank-check company to come under scrutiny by the SEC. But it comes as regulators are looking more closely at the merger process for special-purpose-acquisition companies (SPACs) -- and how investors can be negatively affected.
One name that is perhaps the poster child for such a situation was electric vehicle (EV) start-up Nikola (NKLA 1.87%) and its founder and former chairman, Trevor Milton. After a short-seller called the company out on some claims about its trucks and technology, Milton eventually resigned and now faces fraud charges. Meanwhile, Lordstown Motors (RIDE -2.26%) has also replaced key executives, including former CEO Steve Burns, after questions about the accuracy of preorders for its Endurance electric pickup truck.
Investors betting on these companies have taken a big hit over the past year.
Data by YCharts
The lesson for investors is one that should not come as a surprise. Buying any equity involves risk. That is why it should be approached with a long-term mindset; any money put into stocks shouldn't be needed for other purposes for a multi-year timeframe. But even beyond that, investors should know what they are investing in and what the risk-reward profile is.
EV start-ups could fail for many reasons, including poor technology, too much competition, or lack of execution. That makes them only appropriate for aggressive investors from the start. And the SPAC process brings in another layer of risk. Prior to becoming public, these operating companies are able to give potential investors projections and predictions without the accountability of public companies.
That doesn't mean Lucid did anything wrong here. We simply don't know exactly what the SEC is looking into. And the company has so far remained on its timeline for producing its first vehicles. This notification isn't a reason to panic. Panic never is a good investing emotion. But it is a reminder that investors should be sure not to forget the risk side when thinking about potential rewards.
Let's remember that the SEC is the good guy
Daniel Foelber: No investor likes to see their stocks go down. So Lucid shareholders may turn a sour eye toward the SEC as the stock declined today. However, it's important to remember that regulators are there to educate and protect investors by enforcing federal securities laws. The advent of SPACs has accelerated the pace by which companies can go public. As Howard mentioned, this can sometimes lead to suspect claims that ultimately have the potential to misinform investors and potentially lose them a lot of money.
Turning to Lucid's probe, let's start with the facts. The exact language from the SEC filing is as follows:
On December 3, 2021, Lucid Group, Inc. (the "Company") received a subpoena from the Securities and Exchange Commission (the "SEC") requesting the production of certain documents related to an investigation by the SEC. Although there is no assurance as to the scope or outcome of this matter, the investigation appears to concern the business combination between the Company (f/k/a Churchill Capital Corp. IV) and Atieva, Inc. and certain projections and statements. The Company is cooperating fully with the SEC in its review.
As of now, we don't know the details of what the SEC is looking at. What we do know is that the July 23 merger with Churchill Capital Corp IV gave Lucid the critical $4.4 billion in cash needed to fund its 2022 operations. So making sure that the merger was legit is vital to Lucid's long-term future. However, the part that really sticks out to me is the comment on "certain projections and statements."
A big issue with all SPACs, not just ones in the EV space, has been borderline exaggerated projections into how a company expects to perform into the future. When talking about companies like Lucid that have next to no sales and are far away from profitability, these projections are closer to speculation. As mentioned in the past, the forecasts that Lucid laid out in its February, May, and July presentations should be taken with a grain of salt. The picture that these projections paint is an idealistic scenario that is probably not going to happen as hoped and is potentially unhelpful to investors. In many ways, the idea that the SEC could be cracking down on these forecasts is something that investors should welcome. However, it bears repeating that we don't know what exactly the SEC is looking at right now.
Lucid could remain a great long-term buy
Investors should take solace knowing that Lucid has incredibly impressive technology, high manufacturing capacity, and strong demand for its cars. The Environmental Protection Agency (EPA) awarded Lucid with range results that actually exceeded Lucid's own projections. Plus, the company has received glowing reviews for its Lucid Air sedan's performance.
So the SEC probe doesn't change any of Lucid's accomplishments, but it's certainly a wake-up call for investors to pay closer attention. In the end, investors should welcome it. If the SEC finds issues with the company, you'll want to know. And if it doesn't, a clean investigation only serves to reinforce the investment thesis.
As mentioned, investing in equities warrants a baseline amount of risk. Investing in companies like Lucid requires a much higher risk appetite because it is a relatively unproven growth stock. Finding companies that match your risk tolerance is the best way to make sure you are comfortable with what you own and can navigate volatility in a way that lets you sleep at night.
