The Nasdaq sell-off intensified after the Federal Reserve indicated it would begin raising interest rates in March. The index fell roughly 5% between where it was before the Fed meeting (midday Wednesday) and the market close on Thursday.
The electric vehicle (EV) industry hasn't been immune to the broader market sell-off. Share prices of Lucid Group (LCID +0.32%) and Tesla (TSLA +2.59%) are down over 20% year-to-date (YTD) while share prices of another up-and-coming EV player, Rivian Automotive, are down nearly 50% YTD.
Here's the bull and bear case for buying Lucid stock now.
Image source: Lucid.
Lucid's cash position sets it up nicely for 2022 and 2023
Daniel Foelber: At first glance, it can appear that Tesla's Q4 and full-year earnings release after market close on Wednesday were responsible for Lucid stock's painful 14% decline on Thursday. However, at times like these, it's important to differentiate between Lucid the stock and Lucid the company.
Lucid the stock has been loud all year, up over 20% YTD less than two weeks ago and now down nearly 30%. But Lucid the company has been quiet.
Since reporting earnings on Nov. 15, there have only been a few noteworthy news items for Lucid, and they've been generally quite positive. The standout news came on Dec. 10 when Lucid announced $1.75 billion in aggregate principal of convertible senior notes due in 2026. Lucid made the deal when its stock price was much higher. In fact, 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.
Although the market can sometimes view deals like this as a bearish signal that management believes the stock isn't worth more than the conversion rate, the senior note offering looks brilliant in hindsight given Lucid stock is now below $30 a share. Lucid finished the third quarter with $4.8 billion in cash -- which the company said was enough to fund its 2022 operations. The senior note offering will give it around $6.5 billion in total cash.
Having a treasure trove of cash on its balance sheet will help protect Lucid from rising interest rates. Given that Lucid is likely to remain free cash flow negative for years, the company has been upfront about the need to raise more cash in the future either through equity or debt. Timing the first major capital raise since its reverse merger with a special purpose acquisition company when its share price was higher did Lucid a big service. It now has the cash cushion to continue expanding its production capacity at its Arizona factory, increase its storefront and service center footprint, and make due on its promise to produce and deliver 20,000 Lucid Air electric sedans this year.
Lucid stock remains a speculative high-risk high-reward option in the EV industry. Although Lucid remains a top growth stock to buy in 2022, it's an investment best included in a diversified basket of other electric car stocks that expose a portfolio to upside while also protecting it from a catastrophic loss in case Lucid fails.
There's just one thing I don't like about Lucid stock
I've been saying for several years now — long before it went public — that there's a lot to like about Lucid. The company's leadership is a nice mix of old-auto veterans and EV folks, nicely fitting CEO Peter Rawlinson's vision of a company that learns and builds on the lessons of Tesla's visionary-yet-chaotic early days.
Rawlinson told me a few years ago that the Lucid Air was conceived as the car that Tesla's Model S could have been if Tesla had invested in a second iteration: Still a big, powerful electric sedan, but with more range, more luxury, a better-thought-out interior, better build quality, and so forth.
The reviews are in: Lucid's Air is a superb automobile. But the company will need a lot more than one great model to deliver on its still-lofty valuation. Image source: Lucid Group.
I thought then that the Air had the potential to be a great foundation for the business — if Lucid could actually create and build the car it wanted to build. Now, here in 2022, we know that Lucid delivered: The Air is a splendid product that delivers on all of the company's bold goals.
So why am I not bullish on the stock right now? It's all about the valuation.
Lucid's stock has fallen a long way from its peak. But as I write this, the company still has a market cap of $47 billion. That's — still — a lot of money for a company that has only shipped a few thousand cars, that operates in a relatively low-volume niche of the auto market (expensive luxury sedans), and that still has a lot left to prove.
To be clear, I think that Lucid's prospects are very good as EV start-ups go. But I also think that a big shakeout is coming, that many of the much-hyped EV start-ups won't be around in a few years, and that the major automakers' big-budget moves into EVs won't leave a lot of room for new entrants when all is said and done.
If you already own Lucid's shares and you're planning to hold them for the long term, I won't tell you to sell. But I do think there's a good chance that they could go a lot lower from here in the near-to-intermediate term, even if the company continues to execute well. If you're thinking of buying, be very careful.
A great story at an expensive price
Lucid stock's volatile swings to the upside and now the downside are a painful reminder of the difficulty of evaluating a company based on what it hopes to be in a few years and not what it is today. Lacking meaningful revenue, cash flow, or earnings, Lucid's investment thesis is built upon trust -- which can wane in an instant when macro headwinds accelerate.
John and I agree that Lucid, the company, is worth following for years to come. But now more than ever, it's important to tread lightly into Lucid the stock while also maintaining a multi-year investment time horizon if you do decide to buy or hold shares.
