Share prices of Lucid Group (LCID 0.41%) are down over 61% from their all-time high and 41% year-to-date as investors digest disappointing 2021 results and guidance.
Even after the sell-off, Lucid still fetches around a $40 billion market cap as Wall Street remains mostly optimistic about Lucid's long-term potential in the luxury electric sedan and SUV market. Let's discuss the bear and bull case for the electric vehicle (EV) company to decide the best way to approach an investment in Lucid right now.
Image source: Lucid Group.
The bear case for Lucid
The bear case for Lucid is valid and worth knowing so investors understand why Lucid stock has lost half its value in just a few months. Lucid plans to spend $2 billion on capital expenditures (capex) this year as it funds factory expansions, builds showrooms and service centers, and invests in research and development.
Lucid had planned to produce and deliver 20,000 Lucid Air luxury electric sedans in 2022, but just lowered that guidance to a range of 12,000 to 14,000 units. As of Feb. 28, Lucid has an estimated 25,000 reservations for the Air, representing over $2.4 billion in potential revenue. If it hits its 2022 goal, and that's a big if, then it would earn around half of that revenue, which would help to offset operating expenses and capex. Even if Lucid sees strong demand for its vehicles and keeps growing production, it is likely three to five years away from profitability.
The company blew through $750 million in 2021 on R&D, and it shelled out over $500 million in stock-based compensation. Lucid finished 2021 with $6.26 billion in cash on its balance sheet. But given its rate of spending, that cash may not even last through the entirety of 2023. Therefore, Lucid will probably have to raise more cash through capital markets, which are looking less attractive given the electric car stock's lower price and rising interest rates in the bond market.
What's more, legacy automakers are investing heavily in EVs, along with several pure-play EV companies. The competition is heating up. Lucid may have one of the best products out there right now. But that's a lead it could easily lose in the coming years.
The bull case
The bear case is bleak. But it's worth knowing where sellers are coming from so that you can understand both sides of the argument.
The bull case would argue that the company must ramp spending so that it can stay ahead of the competition. Demand has so far outpaced what the company can produce. So the priority should be on making cars and investing in new technology.
Lucid has the longest range, highest voltage, and fastest charging EV on the market today. Its battery pack can charge 300 miles in just 22 minutes using DC fast charging. The Dream Edition has a max range of 520 miles. Given its range and charging advantage, Lucid doesn't have to build its own fast-charging network and can instead rely on third-party companies or government-backed programs.
Lucid's MultiCore Boost Charger has A/C two-way charge power of 19.2 kw, D/C charge power of 300 kw/400 hp, and max voltage of 1,000 volts. Image source: Lucid Group.
The Lucid Air has faced a slower-than-expected production ramp, but that's largely due to supply chain problems that management believes will begin to ease in the second half of the year. The focus should be on the car and Lucid's technology more than anything else. CEO and CTO Peter Rawlinson said the following on Lucid's Q4 2021 conference call.
At the time of our last call, Lucid Air had just been named MotorTrend 2022 Car of the Year. Since then, we've continued to rack up industry accolades. We were named Best New Car to Buy in 2022 by Green Car Reports, the 2022 Luxury Green Car of the Year by Green Car Journal, and MotorWeek 2022 Driver's Choice Award for the Best EV. The [environmental protection agency] EPA has efficiently certified the Lucid Air Dream addition with the longest range of any EV at 520 miles. And subsequent to the end of the quarter, Inside EVs conducted a real-world driving test to validate our 500-mile range at a steady 70 miles per hour.
Given third-party validations and favorable customer feedback, Lucid has so far delivered on its promise to build a truly impressive vehicle.
Lucid has plenty of cash on its balance sheet to get through the lean years, and management remains confident in Lucid's ability to tap capital markets as needed. By 2024, Lucid should be generating a sizable amount of revenue that will largely offset costs and reduce the need for too many further capital raises. Lucid's management team is well paid, but they are competent and have plenty of experience at successful companies.
Image source: Lucid Group.
How to approach Lucid stock now
When a stock falls in the short term, it can be due to factors outside the company's control. In Lucid's case, its timing to ramp production coincided with the COVID-19 pandemic and brutal supply chain challenges, which is bad luck. At the same time, it went public through a merger with a special purpose acquisition company (SPAC) at one of the best times possible, when optimism toward unprofitable growth stocks was near its peak -- which was lucky.
Given the valid points discussed in the bear case, Lucid stock arguably deserved to lose a lot of its value. And it could very well continue falling from here. However, Lucid's potential shouldn't be ignored. Its technology is game-changing, and its efficient and compact battery pack and integrated powertrain are all developed in-house.
Investors are probably best served taking a wait-and-see approach to Lucid or including the stock in a diversified basket with other EV stocks so that downside risk is controlled.
