Share prices of Lucid Group (LCID -3.95%) and Nio (NIO -1.68%) have tumbled from intraday highs of $64.86 and $64.60, respectively, down to less than $25 per share. Both companies have been wrapped up in the industrywide sell-off in electric car stocks due to valuation concerns, supply chain constraints, heightened competition, rising interest rates, and geopolitical risk.
Here's why the sell-off in Lucid stock and Nio stock could present a buying opportunity for patient investors.
Image source: Lucid Group.
Opening a starter position in Lucid could have its benefits
Daniel Foelber (Lucid): Markets can do wild things in the short term, namely mispricing stocks to the upside and the downside. But in Lucid's case, its stock arguably deserved to sell off.
Lucid let investors down by lowering its full-year 2022 production forecast from 20,000 units down to a new range of 12,000 to 14,000 units. A slew of red flags points toward a challenging year for Lucid, a letdown from what many had hoped would be its breakout year.
Like other electric vehicle (EV) companies such as Rivian Automotive (RIVN -1.76%), Lucid has been hit hard by supply chain constraints. The timing has been terrible, as both recently public companies are fighting an uphill battle to scale production even as components are hard to come by. Navigating the issue by switching suppliers, expediting orders for higher fees, or simply having to order parts way ahead of time and hold excess inventory is a burden on a young company like Lucid. But in the short term, it has few alternatives other than to bite the bullet and just try to endure.
What Lucid has going for it is its technology, strong demand for its products, sizable existing manufacturing capacity, and a rich cash position that should help it weather the storm. Lucid also has a unique relationship with Saudi Arabia, which, in many ways, is its ace in the hole. The Saudi Arabia Public Investment Fund is the largest shareholder of Lucid Group stock. And for that reason, it has a vested interest in the company's success.
More specifically, that means supporting Lucid as it plans to build a manufacturing facility in the heart of Saudi Arabia. The new site brings Lucid closer to its second-largest end market, which is Saudi Arabia, and neighboring countries it has free trade agreements with, such as Kuwait, Qatar, Bahrain, the UAE, and Oman.
Lucid remains an expensive stock. But the company's industry-leading range and in-house built powertrain, along with its unique access to the Middle East, could make it a worthwhile addition to a diversified basket of EV stocks.
It's time to ask which risks are already priced in
Howard Smith (Nio): Nio shares have dropped from January 2021 highs above $60 per share to a price recently near $15. That resulted in a drop in market capitalization from above $90 billion to a much more reasonable level under $25 billion as the company moves closer to profitability. But the recent drop wasn't just due to valuation. Nio shares have been volatile lately due mainly to risks associated with U.S.-listed Chinese stocks and more general geopolitical uncertainties.
But with recent reports that U.S. and Chinese regulators are working toward a plan of cooperation for U.S.-listed Chinese stocks, it may be time for investors to put that concern on the back burner and focus again on Nio's business.
Nio ES8 electric SUVs preparing for shipment to Europe. Image source: Nio.
The recent price drop has at least partially compensated investors for the uncontrollable risks unrelated to the company's business itself. That makes now an opportunity for investment for those who want exposure to both the Chinese and European EV markets.
Nio brought its business to Europe for the first time last year with initial operations in Norway. The company also plans to further expand on the continent into Germany, the Netherlands, Sweden, and Denmark in 2022. And Nio isn't just growing its geographic reach. It has also announced that it will introduce three new product offerings this year. The ET7 luxury sedan is expected to begin deliveries by the end of March, with the smaller ET5 beginning production this fall. These will be the first sedan models offered by the company.
Investing in stocks will always include risks. Fluctuating share prices can increase or alleviate some of that. With shares of Nio still below $20, some non-company-specific risks have been priced in. Now investors can research the business and see if it's a fit for their portfolio.
Command control of your investment strategy
Lucid and Nio are both exciting companies, but volatile stocks. And for that reason, many investors may find it too risky to invest in either company now. One of the greatest advantages of being an individual investor is that you have complete control over when you buy or sell a stock. That means you could open a starter position in Lucid or Nio now, or wait a few years to make sure the investment thesis has a greater chance of playing out.
By waiting, an investor can gain a clearer picture of where a company is headed and management's ability to execute on targets. At the same time, an investor usually misses the highest gains or avoids the steepest losses by waiting.
The stock market hates uncertainty, and investors are often rewarded or punished by dancing with companies that are chock-full of uncertainty. Lucid and Nio both have tremendous potential and compelling products. But they are unproven, and for that reason, their stocks are likely to remain volatile for years to come.
