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Better Buy: Lucid or a 50/50 Split of Nio and XPeng?

By Daniel Foelber and Howard Smith – Dec 11, 2021 at 3:31AM

Key Points

  • The electric vehicle (EV) industry has been very volatile as of late.
  • Share prices of Lucid are all over the place, but the company’s technology speaks for itself.
  • Owning Nio and XPeng includes unique risks, but there are reasons they could be better buys at this stage in EV sector growth.

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The race for electric vehicle stardom is intensifying, with moves from U.S. and Chinese automakers.

While the broader market is dealing with its own wave of ups and downs, electric car stocks have been even more volatile. Luxury electric sedan maker Lucid Group (LCID -0.61%) has seen its stock price dip below $20 and surge past $60 a share within just a four-month time frame.

Not even Chinese automakers Nio (NIO -1.54%) and XPeng (XPEV 0.94%) have been immune from the volatility. In fact, both stocks are underperforming the S&P 500 so far this year. Let's determine whether it's better to buy Lucid or a 50/50 split of Nio and Xpeng right now.

A car symbol embedded on a circuit board.

Image source: Getty Images.

Know what you're signing up for

Daniel Foelber (Lucid): Whether it's regulatory scrutiny via a U.S. Securities and Exchange Commission (SEC) subpoena or just the inherent nature that new electric vehicle (EV) makers are likely to be a volatile industry for some time, Mr. Market's mood can shift on a dime. Lucid hasn't been a public company for long, yet it is no stranger to downright wild fluctuations in its share price.

A picture is worth 1,000 words. And few pictures show Lucid's insane volatility better than the chart below. Note that Nio and XPeng are included in the chart for reference even though they are Chinese automakers.

LCID Max Drawdown (1Y) Chart

Data source: YCharts.

Lucid has the highest max drawdown of U.S. automakers over the last year. A drawdown represents a peak-to-trough decline, meaning in the last year, Lucid's share prices have fallen, at most, 70.3% from their previous all-time high. More specifically, that decline happened in late August and early September when some early investors cashed out of Lucid before it announced it reached mass production and customer deliveries.

By comparison, it's worth mentioning that the S&P 500 has a mere 5.2% max drawdown over the last year, indicating just how strong the index has been despite the volatility we've seen in smaller growth stocks.

By now, it should be clear that Lucid is arguably one of the most volatile -- if not the most volatile -- EV stocks out there. But if your risk tolerance is high, it could also be one of the best EV stocks to own over the long term. Just as Lucid has the highest drawdown over the past year, so too does it have the best year-to-date return of any major U.S. automaker.

LCID Chart

Data source: YCharts.

What Lucid has going for it is a rich cash position, competitive technology, high manufacturing capacity, a great management team, and strong customer demand. Lucid remains a good option for investors who value the importance of battery technology in the EV industry.

It's all about risk/reward

Howard Smith (Nio and XPeng): As my colleague Daniel has shown, Lucid stock has been volatile, and it has recently been pushed to a market cap of about $70 billion. That comes as it has only just begun shipping its first cars. Nio and XPeng have each delivered over 100,000 vehicles, so they are more established businesses at this point. They have shown they can grow and successfully manufacture at scale.

China is the world's largest automotive market and is predicted by the International Energy Agency (IEA) to be the biggest EV market, along with Europe, throughout this decade at least. Nio has already moved into Europe and recently announced a strategic partnership with Royal Dutch Shell to build out a charging and battery-swap network there. Shell's existing charging network in Europe will also be available to Nio customers.

Lucid does appear capable of becoming a leader in EV technology. But Nio and XPeng have a lead over Lucid right now. Nio's battery-swap technology allows customers to receive a fully charged battery in about three minutes rather than wait for a recharge. The company has already planned a network of battery-swap stations in Norway, where it began selling vehicles earlier this year. The battery-as-a-service option gives customers a lower upfront cost for the vehicle and brings subscription revenue for Nio over the life of the vehicle.

Both Nio and XPeng have announced they are launching new vehicles soon. And both Nio's ET7 luxury sedan and XPeng's G9 smart SUV will show off the companies' technology leads. The G9 will be XPeng's first to support XPilot 4.0, the company's newest advanced driver-assistance system scheduled to be available in the first half of 2023. XPilot 3.5 already has the ability to perform in city driving environments and is a challenge to Tesla's Autopilot offering.

Both Nio and XPeng achieved record monthly deliveries in November. They also have lower valuations than Lucid, with market caps of about $55 billion and $40 billion, respectively. Even though they are more proven businesses, that discount may be due to unique risks associated with U.S.-listed Chinese stocks.

That risk is real, and Chinese regulators have caused stocks in several other sectors to be punished. But China's government is supportive of EV companies and renewable energy. XPeng President Brian Gu recently told Bloomberg the company has been "following closely" how U.S.-listed Chinese technology companies have been affected. He added, "We have the preparation already done to prepare for any eventualities."

All equities involve risks. And any investment needs to balance potential risks and rewards. Lucid may be a great long-term success, but at this stage, investors looking for EV growth could get better value by splitting ownership between Nio and XPeng to take advantage of the largest markets.

Pick multiple eggs to fill your EV basket

Lucid, Nio, and XPeng all have their strengths and weaknesses. For most investors, picking multiple EV stocks, including some EV charging stocks, could be the best way to invest in the industry without getting cleaned out by a single poor performance.

Daniel Foelber owns Lucid Group, Inc. and has the following options: short December 2021 $20 calls on Lucid Group, Inc. and short February 2022 $20 calls on Lucid Group, Inc. Howard Smith owns Lucid Group, Inc. and NIO Inc. The Motley Fool owns and recommends NIO Inc. and Tesla. The Motley Fool has a disclosure policy.

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