Electric vehicle manufacturer Lucid Group (LCID 5.92%) recently filed paperwork to sell up to $8 billion worth of securities to raise money as it builds up its factory production.
Lucid's need for new cash isn't ideal, but it's understandable; building high volumes of vehicles is hard and expensive. However, investors should look closer because there are some red flags in this latest announcement that should make you pause before buying the stock.
Here are three big problems I see.
Red flag No. 1: Added shares mean significant stock value dilution
It's normal for a growing business to need new infusions of cash; a young company doesn't typically want to take on debt, and selling new shares of the company is a simple way to raise cash. But as a company adds new shares of stock, each share represents a smaller piece of the business. It's like cutting a pie into four slices and then again into eight; the pie is the same size, but everyone gets less because there are more mouths to feed.
This reduction in a stock's value is often called dilution, and it's normal; most shareholders accept and are OK with dilution as long as it's not excessive. At some point, a company can risk diluting shareholders so much that it cancels a lot of the growth a company can have. For example, if a company doubles its share count and earnings, the earnings-per-share (EPS) remains the same -- there's no benefit to shareholders.
Lucid's potential $8 billion raise is significant; today, the company's market cap is just under $26 billion. If it were to raise that money at the current valuation, it could increase the share count by almost a third, which is pretty much a punch to the gut of shareholders. Nobody knows the exact structure and size of the raise yet, but it's almost certainly going to dilute shareholders by a solid amount.
Red flag No. 2: Mixed signals from management?
It's bad enough that such a hefty raise is coming, but what's worse is the odd timing and communication from management. The company reported its second-quarter earnings just last month and underlined its $4.6 billion cash position with an additional $1 billion in committed credit. Management noted in its presentation that it believed its liquidity was sufficient until well into 2023.
Lucid stated in its official press release about the new filing that it has up to three years to raise the money, starting once its filing is approved. But why not mention it during earnings? One might suspect management knew the raise was coming and decided not to mention it. There's also no way of knowing that the stock's 73% price decline from highs isn't the only reason management put out a three-year window. Perhaps management is just waiting for a rebound in the share price.
It's a bad look for Lucid all the way around; it could give the impression that management was dishonest with shareholders. Management might benefit from opening some dialogue; otherwise, it potentially leaves shareholders scratching their heads and assuming negative things about the company.
Red flag No. 3: Excessive stock-based compensation
Lastly, it's alarming that Lucid Group would line up a significant raise in shares after it went public in July last year. The process of going public is supposed to raise the money a young company needs for growth and to take it to the next level. But Lucid has struggled to ramp up production while dishing out a lot of stock-based compensation in the process:
LCID Stock-Based Compensation (TTM) data by YCharts.
Lucid can make a great product; its flagship sedan, the Lucid Air, was awarded Motor Trend Car of the Year for 2022. But good products alone don't make good investments. Lucid has a lot of work ahead to get its factories running and is burning a lot of money.
Nobody should assume that Lucid's management team is intentionally doing wrong by its shareholders, but it's hard to deny the bad optics of the situation. The considerable stock-based compensation and additional dilution from this new raise should give investors some pause before buying the stock. It might be best to see some concrete improvement in Lucid's operating results before revisiting an investment.
