Electric vehicle (EV) companies have seen their valuations compress in recent months as Wall Street takes a sledgehammer to growth stocks in favor of businesses with stable earnings and inflation resistance.
Rivian Automotive (RIVN 1.67%) and Lucid Group (LCID 1.64%) saw their market caps peak at $153.3 billion and $91.4 billion, respectively. Today, Rivian is worth $42.6 billion, and Lucid is worth $37.5 billion.
Is either automotive stock a buy now, or should investors steer clear of Rivian and Lucid?
Image source: Rivian Automotive.
Long-term potential could come after more short-term downside
Howard Smith (Rivian): Rivian and Lucid are at similar points in the development of their businesses, so it isn't a surprise that investors would react to news from one with action in the stock of the other. Rivian shares dropped alongside Lucid after the latter announced it is lowering its production estimates for the year. With ongoing supply chain disruptions and other more typical challenges that come with manufacturing start-ups, it won't be surprising to hear similar news when Rivian reports its fourth-quarter and full-year results on March 10.
Anticipation of negative news regarding production goals and other widely reported problems has driven Rivian shares to a record low. For long-term investors, that might mean it's a good time to ease into the stock.
First, however, investors should put things into perspective. The company only produced about 1,000 vehicles after starting production in 2021, which was still almost 200 less than management had predicted. Yet, even at its record low, Rivian's market cap is still over $40 billion. Because of high valuations, investors who believe in the vast market potential for electric vehicles may want to own a basket of EV names -- and buy them in multiple portions -- to help mitigate some risk.
With the manufacturing shortfall in 2021 coming from supply chain issues, there is a precedent for the company to reiterate those problems when it updates investors next week. That may drive shares even lower. But with the stock already down more than 54% just in 2022, now could be a good time for some money allocated for EV investments to go into Rivian.
The company made a misstep recently by announcing a major price increase to offset growing costs. It has acknowledged that and reversed course to allow those holding more than 71,000 reservations to pay the original prices for its R1T pickup truck and R1S SUV.
And the company plans to ship up to 100,000 electric delivery vans to Amazon over the next several years. With solid demand both from consumers and the e-commerce giant, Rivian has plenty of long-term potential. Investors should just realize there very well may be more downside before any long-term gains can be realized.
Lucid's dreams are slipping away
Daniel Foelber (Lucid): On a dime, Lucid went from a company that was delivering on its promises to delaying basically every major announcement investors were hoping to hear in 2022 and 2023. As Howard mentioned, Lucid slashed its full-year 2022 production forecast from 20,000 units down to a range of 12,000 to 14,000 units. It also delayed the rollout of its highly anticipated Gravity SUV from 2023 to the first half of 2024. Finally, Lucid had previously said the expansion of its manufacturing plant from a capacity of 34,000 units per year to 90,000 units per year would be done by 2023. Instead, Lucid indicated that the first phase of this expansion, which would increase capacity to just 53,000 units per year, would be done by the end of 2023 -- leaving investors wondering when the full 90,000-unit expansion will be complete.
The scarlet red flag for Lucid is that it has only produced 400 vehicles and delivered 300 of them since announcing the start of production in late September and deliveries in late October. Lucid sees the worst of the supply chain challenge persisting through the next few months and then easing in the back half of the year.
I would not be surprised if Lucid finishes the first half of the year with only a couple thousand deliveries, which would set it up to miss its revised production goal or stage a miraculous recovery in the second half of the year. Put another way: Investors should not take the 12,000 to 14,000 guidance for granted.
Image source: Lucid Group.
Management was a little cavalier about the supply chain issues, saying they weren't related to fundamental inputs needed for battery packs or the powertrain but rather for carpets, glass, and other cosmetic components. But at the end of the day, it doesn't matter whether it's a single screw or an entire circuit board that prevents Lucid from making cars. All that matters is that quality cars roll off the assembly line and are put into customers' hands. Even if the issues seem minor, they are preventing Lucid from making cars. And for that reason, its stock sell-off is justified in many ways.
Lucid still has the longest-range, highest-voltage, and fastest-charging electric sedan out there. It has a vital relationship with the Saudi Arabia Public Investment Fund, which owns 61.7% of Lucid stock and is supporting the construction of Lucid's second manufacturing plant in Saudi Arabia. But Lucid is taking a blowtorch to its cash reserve and could burn through it before year-end 2023. With so much doubt and so many problems, I don't blame investors for taking a wait-and-see approach to Lucid right now, even though I love the company's long-term potential.
From darlings to down in the dumps
The swift and steep sell-offs in unprofitable growth stocks are a painful reminder that Wall Street can do crazy things in the short term. In hindsight, it's easy to see that Rivian and Lucid had no business being worth as much as they were, given they are several years away from profitability. And even at their lower valuations, both companies are priced to become viable players in the EV space.
Rivian and Lucid both have sizable cash positions and killer products -- which could help them become long-term winners. Given that the market's patience went from seemingly endless to virtually nonexistent in a matter of months, now looks to be a much better time to open a starter position in Rivian or Lucid. As long as investors realize that both stocks could fall quite a bit more if they issue more guidance cuts as the year progresses.
