Amid a broader market correction, most electric-vehicle (EV) stocks have fallen sharply this year. Young EV makers like Lucid Group (LCID 5.58%) fell harder on valuation concerns, as well as higher perceived risks. The company attracted high interest from buyers and investors alike after it delivered cars that offered far-longer ranges than other available options in the market.
However, Lucid is facing challenges in ramping up production. It delivered just 360 EVs in the first quarter. The company has a lot to prove, and its partnership with Saudi Arabia will likely play a key role in its growth. Let's discuss why.
Lucid's Saudi connection
Last month, Lucid announced a deal with the government of Saudi Arabia under which the latter committed to purchase up to 100,000 cars from Lucid in 10 years. The deliveries under this deal should commence before the second quarter of 2023.
The deal further strengthens the bond between Lucid and the Kingdom. This relationship dates to September 2018, when Lucid entered a securities purchase agreement with Saudi Arabia's Public Investment Fund (PIF). In 2020, Lucid received a total of $800 million from PIF.
In February 2021, PIF supported Lucid's listing through a PIPE (private investment in public equity) investment. As of March 31, 2022, PIF and its affiliates hold nearly 61% of Lucid's common stock.
Further, Lucid has signed agreements to build a manufacturing facility in King Abdullah Economic City in Saudi Arabia. The plant's planned capacity is up to 150,000 vehicles per year. So Lucid has deep links with the Kingdom.
Saudi car market is dominated by Toyota
Lucid plans to deliver 12,000 to 14,000 vehicles in the U.S. in 2022. It has received a lot of interest from buyers in the U.S., as evidenced by its rising number of preorders. The reservations have risen from 25,000 in February to more than 30,000 now.
Starting 2023, as per the signed agreement mentioned above, the company expects to deliver 1,000 to 2,000 units in Saudi Arabia, rising to 4,000 to 7,000 units annually starting in 2025. That means, even though the 100,000 vehicle purchase commitment looks big, it's spread over 10 years. Lucid's U.S. production will also ramp up significantly in the meantime. Still, Saudi Arabia will be Lucid's second-largest market after the U.S.
Lucid should benefit by expanding in the Saudi market. Roughly half-a-million cars are sold every year in Saudi Arabia, with Toyota controlling 28% of the market.
Hyundai is the second-biggest player controlling nearly 17% of the Saudi car market.
Key benefits to Lucid
Saudi Arabia is looking to reduce its economy's reliance on oil and is thus investing in other industries. It's also providing various loans, incentives, and exemptions to attract automakers to the country.
Lucid estimates that its Saudi facility may result in up to $3.4 billion of value to the company over 15 years. At the same time, the country is promoting electric vehicles, which form a negligible portion of its total car sales right now. A manufacturing facility in Saudi Arabia will help Lucid to expand its sales in the neighboring Middle East countries, too.
On the flip side, a 61% stake gives PIF substantial control over Lucid and its key decisions. In case of any conflicts, PIF may make decisions in its own favor, irrespective of whether they are in the best interests of other common shareholders. This may occur if, say, PIF invests in another automaker that competes with Lucid. Investors should consider this potential risk when making an investment decision.
Except in a situation of a conflict of interest, PIF, as Lucid's largest shareholder, will benefit most with Lucid's growth and will generally strive to promote such growth. Overall, Lucid's manufacturing facility, as well as its deal with the government for 100,000 EVs, are clearly positive for Lucid and its stock.