Share prices of electric car stocks like Lucid Group (LCID 13.59%) have been tumbling of late as rising interest rates, inflation, and geopolitical tensions ripple through markets. On Tuesday, Lucid stock took a further hit after it sent an email to customers saying that it found a defect in certain Lucid Air vehicles. The notice, in accordance with the National Traffic and Motor Vehicle Safety Act, marks the electric vehicle (EV) company's first recall.
Let's determine the severity of the recall and whether it affects the long-term thesis for owning Lucid stock.
Image source: Lucid Group.
The recall isn't a big deal
Recalling a Lucid vehicle for a battery or motor issue would be a serious problem that would raise questions as to the reliability of Lucid's tech. But that isn't what's going on here.
Rather, the issue appears to concern one of Lucid's suppliers. To quote the customer email:
Front strut dampers installed on certain 2022MY Lucid Air vehicles may have been manufactured by the supplier with the snap ring, located directly below the coil spring seat, installed in the wrong orientation. This condition may result in sudden loss of ground clearance, vehicle vibration, and front brake line damage, increasing the risk of a crash.
Lucid said the recall affects 203 vehicles, but that only two or three of them would actually have the defect. Moreover, Lucid said that its Lucid Studios, Lucid Service Centers, or Lucid Customer Care team can perform the inspection in around an hour. If one or both front strut dampers need replacement, Lucid can perform that service in under four hours. In short, Lucid can fix the problem in a day at no cost to the customer.
The importance of showrooms and service centers
Lucid has spent the last few months rapidly expanding its network of U.S. and Canadian showrooms and service centers. On Feb. 17, Lucid issued a press release announcing the opening of its newest studio in New Jersey, marking the 22nd location in North America. In July, Lucid had eight locations and set the goal of opening 20 locations by year-end 2021.
Lucid deserves credit for expanding its store count so quickly. But when it comes to customer service, let alone responding to a recall, Lucid is far less equipped to handle the issue than a legacy automaker with a dense dealership network -- or even Tesla (TSLA 5.77%), for that matter.
Tesla has just under 150 U.S. service centers in major cities across 35 states. Building a network of service centers and showrooms is one of the necessary steps to become a direct-to-consumer automaker that functions independently of the franchise dealership model. Although the direct-to-consumer strategy has proven that it can boost profit margins over the long term, it also leaves a company vulnerable to issues when it's still in the early innings of its growth trajectory.
Where to go from here
The recall isn't serious, and therefore it really shouldn't alter the long-term investment thesis in Lucid stock. But it could provide a litmus test of the capabilities of Lucid's customer service.
Investors should consider tuning in to Lucid's fourth-quarter 2021 conference call on Feb. 28 to gauge management's response to the recall, its guidance for this year's total production and deliveries, how it is navigating rising costs and supply chain constraints, and its comments on its manufacturing process. There's no denying that Lucid has impressive technology. But mass-producing and delivering vehicles at scale is an entirely different skill set.
With so many unanswered questions, Lucid remains a high-risk, high-reward bet in the EV industry that's best approached with a multi-year investment horizon and a high risk tolerance.
