Electric vehicles look like the future of the automotive industry, and new and existing companies are sprinting to market to get their piece of the pie. That includes upstart electric vehicle company Lucid Group (LCID -4.76%), which came public with a lot of hype behind ex-Tesla leadership, and investment backing from Saudi Arabia.
The company's had its share of growing pains, and the stock has fallen quite a ways in this ongoing bear market. Now trading at roughly $10 per share, can Lucid rebound to $20 or higher in 2023? Use caution; the automotive industry is ruthless, and investors should consider some red flags before riding with Lucid in their portfolios.
Stumbling out of the blocks
Building vehicles isn't easy. They are expensive, and the factories and machines producing them cost even more. Tesla is seen as a juggernaut today, but many forget that ramping up production of the Model 3 almost put Tesla out of business. Lucid Group is just beginning to increase its production, and it's already getting into trouble.
Lucid proclaimed a production goal of 20,000 vehicles for 2022 in the third quarter of last year. But it's come up short and has been steadily lowering the bar. The company reduced production guidance to 12,000-14,000 vehicles in the fourth quarter of last year and again to 6,000-7,000 cars in the second quarter of 2022. Even hitting the high end of guidance is still 65% short of Lucid's original goal for 2022.
Growing pains are understandable, but they could impact the company. The entire automotive industry is racing to bring electric vehicles to market, and Lucid risks missing out on potential sales the longer it spins its wheels (no pun intended). Lucid's reservations slipped in Q3 to 34,000 from 37,000 three months earlier. That's almost a 10% decline in backlog, and investors should monitor how much more reservations suffer if production continues struggling to ramp up in 2023.
Gobbling up cash
The financial ramifications of Lucid's low production volumes are an even more significant concern. Running factories costs a lot of money, which means they lose a lot of money if they aren't producing units. Lucid came public with a ton of cash, but it's quickly spending it. Third-quarter cash burn was $859 million, bringing cash losses to $2.8 billion over the past four quarters. The company is down to $3.3 billion in cash and short-term investments, enough to fund the company for roughly another year at this pace.
LCID Cash and Short Term Investments (Quarterly) data by YCharts
Lucid recently moved to address its financial position, announcing plans to raise another $1.5 billion from stock sales to Saudi Arabia's sovereign wealth fund and the public markets. That raise is equivalent to approximately 9% of Lucid's current market cap, meaning investors' existing shares will be diluted and worth a little less of the overall company.
The company seems miles away from generating cash profits. Hence, investors have to consider how much more money Lucid may need over the long term, and how much dilution shareholders might face.
Resetting the stock's valuation
Lucid's low production numbers and cash burn set the stage for the most significant reason the stock might fail to hit $20 per share in 2023. A stock's valuation largely reflects Wall Street's expectations for that company. Below you can see that Lucid's stock still trades at a considerable premium to Tesla on a price-to-sales ratio basis.
LCID PS Ratio data by YCharts
Tesla is the industry leader, has robust cash profits, and has a long growth runway ahead in its own right. Can the case be made for Lucid to command a premium for its stock compared to Tesla? It seems hard to believe. Maybe Tesla's valuation rises, or Lucid's business grows into the valuation it's trading at, but expectations still seem very high for Lucid.
Ultimately, it's hard to see Lucid's fundamentals changing enough in one year to move the stock 100% and have the valuation still make sense. Lofty stock rallies are not as likely in a market with rising rates pouring water on the euphoria that powered massive stock moves in 2021. Gains must be earned, and Lucid has a tall task in 2023.
