Electric vehicle (EV) companies have been featured in plenty of financial headlines recently. One of the more popular EV stocks getting some attention has been the luxury start-up Lucid Group (LCID +3.47%). But headlines shouldn't be enough on their own to warrant a stock purchase.
Buying a stock is buying part of a business, and investors should consider the details of both when researching potential investments. In investing, the stock generally represents what valuation the market has assigned to the business. But the underlying business is what will determine if it is a winning investment over the long run.
With that in mind, here are five things to know about both Lucid's business and its stock before committing to an investment.
Image source: Getty Images.
1 and 2. It's expensive, but some investors have to buy it anyway
The first thing to know about Lucid stock is that it's pricey. By any traditional metric, its valuation defies reason. As a start-up, it's currently being valued solely on potential. With a market capitalization of around $62 billion, it's pretty clear that investors are not looking at any of the current financial results. That's OK, as long as an investor approaches it with the right risk tolerance and allocation amount.
High-risk growth stocks can make great investments in the long term, but the "high-risk" part of the name suggests that these stocks should be bought with money that you could afford to lose if things go wrong. Based on the price, it seems plenty of investors have bought into the Lucid story. Its share prices are up more than 59% since it went public through a merger with a special purpose acquisition company back in July, and that's even after an almost 30% correction this month.
But others will be buying now anyway, as the stock was included in the Nasdaq 100 index as of Dec. 20. That compels some Nasdaq-focused index fund managers to hold the shares.
3. Vehicle sales have started
Commercial sales have gotten off to a good start at Lucid. The early-stage company maintained its timeline and began selling the high-end Air Dream Edition model last month. It filled its allotment of 520 reservations for the $169,000 car, and the Air was named Motor Trend's 2022 Car of the Year just after initial deliveries began.
Total reservations for all versions of Lucid's electric sedan jumped 30% in the first six weeks of the fourth quarter, but that still only amounted to 17,000 vehicles. It's too early to know if Lucid's product will continue to grow at the volumes needed, but it's off to a good start.
4. Management's expectations are aggressive
As previously mentioned, the stock is priced based on potential, not current sales or vehicle reservations. Some of the details surrounding that potential come directly from management. Investors should remember that, and consider it a risk, as a company's management isn't exactly a neutral forecaster.
Lucid believes it will produce 20,000 Air sedans in 2022, bringing in revenue of about $2.2 billion. In a July 2021 presentation, management said it expects to have annual revenue approaching $10 billion in 2024. Those projections were made prior to Lucid's public debut, and the Securities and Exchange Commission (SEC) has issued a subpoena to the company related to some unspecified projections and statements made in preparation for the public debut. Those company estimates should be taken with a grain of salt, and the potential for missing them remains another risk factor for the stock.
Lucid plans to begin production of the Gravity SUV (the concept vehicle is shown here in a teaser image) in late 2023. Image source: Lucid Group.
5. There are multiple plans for expansion
Those revenue projections come as the company expects to not only grow production of the Air sedan, but it also plans to start production on its Gravity luxury SUV at the end of 2023. It also anticipates that more models will be announced in 2025.
Growth will also come from planned expansion into Europe, the Middle East, Africa, and China over the next two years. Lucid raised additional capital earlier this month, and it is nearing $7 billion in cash for these future investments. The company even plans to use its in-house battery technology for energy storage systems.
Investor takeaway
There will be a long runway to get to profitability and justification of the stock's current high multiple. Investors just need to be vigilant and know the risks before buying Lucid stock.
