Lucid Group (LCID 0.39%) reports earnings after market close Monday, Feb. 28. It's a highly anticipated report, as investors will catch a glimpse of how the electric car company's production and deliveries are coming along, as well as how it is navigating inflation and ongoing supply chain constraints.
Lucid's production, deliveries, reservation numbers, progress on the Lucid Air electric sedan line, and plans for the Gravity SUV are important points to focus on. But so are the electric vehicle (EV) company's cash position and spending plans, and how short-term headwinds including inflation and rising interest rates could impact its financial position.
Image source: Lucid Group.
Cash position
As of Sept. 30, 2021, Lucid had a net cash position of $4.8 billion in large part due to the $4.4 billion it raised in July through its merger with special purpose acquisition company (SPAC) Churchill Capital IV. In early December, Lucid announced a $1.75 billion aggregate principal of convertible senior notes due in 2026. The deal included an option to purchase an additional $262.5 million in notes.
Lucid raised this additional cash when its stock price was much higher. The initial conversion rate was 18.2548 shares of common stock per $1,000 principal amount of notes, which translates to $54.78 per Lucid share -- more than double what the stock price closed at on Friday. The deal looks brilliant in hindsight because Lucid was able to leverage its skyrocketing stock price to raise more cash to invest in the business.
On Dec. 20, 2021, Lucid announced the full exercise of the convertible notes, giving it $2.01 billion in additional cash. Investors should therefore expect Lucid's cash position to have been close to $7 billion by the end of 2021.
Spending plans and inflation impact
During its third-quarter 2021 conference call, Lucid management said $4.8 billion was more than enough cash to fund the company's 2022 operations. Management also announced it was accelerating Lucid's capital expenditures (capex) by 6% to 7% between 2021 and 2026, including moving forward $350 million in capex from future years into the 2021 to 2023 time frame. Investors should listen to Monday's earnings call see if Lucid provides an update on its spending plans and if its now higher cash position is enough to cover most of its 2023 expenses.
Sustaining a net positive cash position is all the more important during a rising interest rate and inflationary environment. Higher costs and interest rates make financing more expensive and increase project costs. Avoiding the debt markets by raising cash early thanks to its previously higher stock price was a clutch move. But given the company is unlikely to be profitable for years, Lucid will likely need to raise more cash in 2023 or 2024.
In addition to inflation's impact on Lucid's cash position, investors should look to see how management expects inflation to impact its short- to medium-term goals, and if it could derail some of its production plans or even delay profitability.
Supply chain challenges and a minor recall
Tesla, Ford Motor Company, and other EV companies have indicated that the chip shortage could persist throughout 2022. As a younger company, Lucid is vulnerable to supply chain challenges as it works to build relationships with suppliers. Investors should listen to management's comments on the impact of supply chain challenges on the company's battery production and manufacturing capabilities.
Speaking of supply chain challenges, Lucid sent an email to customers last week saying it was recalling 203 of its Air sedans but expects only two or three of the vehicles will have the actual defect. The reason for the recall is minor, but Lucid did say it was due to front strut dampers manufactured by one of its suppliers. Investors should listen for updates on the recall if Lucid expects further recalls this year, and if its supplier network is reliable enough to avoid future issues.
Keep a long-term perspective
Lucid has a compelling investment thesis but remains a high-risk, high-reward option in the EV space. Filtering out the noise and focusing on what is important for the company's long-term success is the best way to keep emotions at bay during periods of heightened volatility.
