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Beyond the Lucid SEC Subpoena: 3 Recent Events Affecting This EV Growth Stock

By Daniel Foelber – Dec 11, 2021 at 2:33AM

Key Points

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Lucid is in the hot seat as regulators investigate and insiders sell stock.

As if broader market volatility weren't enough, electric car stocks have seen their share prices whipsaw up and down as investors grapple with upside potential and valuation concerns. Few electric vehicle (EV) stocks embody EV euphoria better than Lucid Group (LCID -1.04%), which has captured investor imaginations with hopes it could become the next Tesla (TSLA 0.72%).

However, Lucid only began mass-producing cars in September and delivering them in October. It plans to deliver only 20,000 cars in 2022, which is about what Tesla delivered every eight days in its third quarter. Here's how three events from this week affect the long-term thesis for Lucid stock.

A bronze Lucid Air sedan parked on pavement.

Image source: Lucid Group.

1. Lucid receives SEC subpoena

Lucid is back in the spotlight as if it never left. The latest news came from the U.S. Securities and Exchange Commission (SEC), which subpoenaed documents from Lucid on Dec.3. The details of the investigation remain mostly unknown for now. Lucid said that the SEC appears to be looking into its merger with Churchill Capital IV (which happened on July 23), and "certain projections and statements." On Monday, share prices of Lucid were down as much as 19% but finished the day down just 5%. However, Lucid stock finished the week down over 20% (more on that in the next section).

2. Senior note offering

Share prices of Lucid plunged 18% on Thursday after the company announced a proposed convertible senior note offering. As of the third quarter, Lucid had $4.8 billion in cash, $4.4 billion of which was a direct result of its merger with Churchill. Although the company said its existing cash position can fund its 2022 operations, it will need to raise more cash in the future as it increases manufacturing capacity, hires more employees, and take its business international.

The $1.75 billion aggregate principal of convertible senior notes is due in 2026 and includes an option to purchase an additional $262.5 million in notes. All told, Lucid estimates that the net proceeds of the offering will be $1.727 million or $1.987 million if the initial purchasers exercise the option to purchase more notes. 

Lucid released a press release on Friday saying that the notes are scheduled to settle on Dec. 14. The interest rate is just 1.25% per annum, paid semi-annually starting June 15, 2022, with the final payment coming Dec. 15, 2026. Unlike a normal corporate bond, unsecured senior note obligations include the option to convert the principal amount of notes into shares of common stock. In this case, the initial conversion rate is 18.2548 shares of common stock per $1,000 principal amount of notes, which translates to $54.78 per Lucid share. That's a 45% premium to the $37.66 per share that Lucid stock closed on Friday.

Not only did the convertible notes get priced near an all-time high in Lucid's stock price (which is great for Lucid), noteholders can also only convert their notes on certain dates and if certain events occur. More specifically, the language of the proposal states that "Lucid will settle conversions of notes by paying or delivering, as applicable, cash, shares of its Class A common stock (the "common stock") or a combination of cash and shares of its common stock, at Lucid's election."

Senior convertible notes are a great low-interest rate option for Lucid to access more cash and grow its operations. Given the extremely low interest rate, the real kicker for the initial purchasers of the notes is the option to convert their principal into Lucid shares. In this way, the notes function like a call option in that the purchasers have the right to buy Lucid's stock at essentially $54.78 per share no matter what the current price is. But given the price of Lucid stock is a lot lower than that "strike price" right now, the convertible function of the notes is essentially worthless. Put another way, the convertible function is only valuable if the notes become "in the money", meaning Lucid's stock price is above $54.78 per share.

Not only did Lucid secure an incredibly low interest rate on the notes, but it also issued them when its stock price was very high. This move is exactly the kind of thing that Lucid shareholders should welcome. Just as management noted during its Q3 conference call, Lucid should have no problem raising more cash in a way that keeps debt off its balance sheet. This senior note offering accomplishes just that. For long-term investors, the news should be seen as a positive and certainly not be confused with Lucid diluting its stock out of fear. The senior note issuance will bring Lucid's cash position to over $6.5 billion, which could further accelerate its growth.

3. Insider selling

Another piece of news came out on Dec. 7 when it was announced that Lucid CEO Peter Rawlinson sold 466,749 Lucid shares on Dec. 6. However, even after the sale, Rawlinson still holds 29,751,533 Lucid shares, meaning he only sold 1.6% of his position and still holds over $1.2 billion in Lucid stock. The fact that Rawlinson sold Lucid the first trading day after the SEC subpoena news is a bit of a red flag. But given it was such a small sale relative to his overall position, and he remains very much invested in the company, it's probably best not to exaggerate the negativity of the news. That being said, investors would benefit from keeping an eye on Rawlinson's trading activity to make sure he doesn't begin a habit of unloading Lucid stock.

How to move forward from here

Although an SEC subpoena may seem scary, the truth is it could actually end up being a good thing for Lucid shareholders who will want to know if something is wrong, and can breathe a sigh of relief if everything checks out. The senior note offering is yet another piece of news that seems to have been viewed as a negative. On the surface, it looks like Lucid thinks its stock is overvalued at $54.73 per share, but in reality, it's just taking advantage of the massive surge in its stock price to raise more cash (which it needs to deliver on its long term promises). The timing of the senior note offering was brilliant and provides a much better option for Lucid than a traditional bond. 

While skeptics may say that Lucid should use debt instead of equity to raise cash, the reality is that Lucid has a pretty high valuation given its lack of revenue and uncertain trajectory. For it to succeed, it needs cash so it can accelerate production and solidify an entrenched position in the luxury sedan market. Ultimately, this week's moves have little effect on Lucid's long-term thesis, which is more tied to production and delivery numbers and the company's ability to produce industry-leading technology.

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. The Motley Fool owns and recommends Tesla. The Motley Fool has a disclosure policy.

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