Peter Rawlinson spent time working with Elon Musk before he joined Lucid Group (LCID 1.84%), first as its chief technology officer and then also as its CEO. He's now finding out firsthand what Musk meant when he famously said "Production is hard" as he worked to help turn Tesla profitable.
Lucid began production of its high-performance electric sedans late last year expecting to manufacture 20,000 of them in 2022. For the second time this year, however, the company has cut its guidance. When it reported its second-quarter results Wednesday, Lucid said it now expects to produce only 6,000 to 7,000 vehicles this year.
No lack of demand
Rawlinson summarized Lucid's production issues saying the company was experiencing "extraordinary supply chain and logistics challenges." It only delivered 679 EVs in the second quarter, generating revenue of $97.3 million. Analysts had expected the company to bring in revenue of about $147 million.
As Musk noted years ago, it's not unexpected to see glitches as a major manufacturing process ramps up. Tesla has shown that an EV maker can overcome those challenges and become very profitable. The good news for investors in Lucid and other EV companies is that demand remains robust. Lucid's vehicles range in price from $87,400 to over $150,000. Yet the company's reservation backlog has steadily increased this year.
| Metric | Aug. 3, 2022 | May 5, 2022 | Feb. 28, 2022 |
|---|---|---|---|
| Lucid Air reservations | 37,000 | 30,000 | 25,000 |
| Potential revenue | $3.5 billion | $2.9 billion | $2.4 billion |
The company said that the current order book represents potential sales of about $3.5 billion. Lucid's market cap of over $30 billion equates to almost nine times that level of revenue, however.
Known risks
For investors, the key questions are whether those reservations will hold, if the company can fulfill that demand -- and importantly, how much the risks on that front are already baked into the stock's valuation. Lucid's share price has already dropped by 45% year to date, but even so, its potential forward price-to-sales ratio is still far from cheap.
It wouldn't be surprising to see the stock fall much further in the near term, especially as the company works through its production issues. After all, it looks like it will take at least until the end of 2023 for Lucid to clear its current reservation backlog.
Moving forward
Lucid isn't resting on its laurels as it struggles to ramp production, though. The company ended the second quarter with $4.6 billion in cash and equivalents -- funding that will keep it afloat well into next year. The company now says it will restructure its logistics, bringing that operation in-house with its manufacturing. Lucid also has announced the hiring of a new head of operations to lead that effort -- Steven David, formerly an executive with Chrysler parent Stellantis.
Looking ahead further, Lucid plans to build a second manufacturing facility -- its first outside the U.S. -- in Saudi Arabia. Its plans there are supported by a commitment from the Saudi government to purchase 50,000 to 100,000 vehicles over the next 10 years.
That might seem like the company is getting ahead of itself, considering its current and pressing production issues. But investors in EV start-ups should view them through the lens of a long-term time horizon. The industry is still in an early stage. While Lucid's Q2 report wasn't great for its current shareholders, investors with the right investment timelines might soon have the opportunity to buy shares at even lower levels than they're trading at today.
