Lucid Group (LCID -0.79%), the luxury electric vehicle maker led by Tesla's (NASDAQ: TSLA) former chief vehicle engineer Peter Rawlinson, went public on July 26, 2021 by merging with the special purpose acquisition company (SPAC) Churchill Capital Corp IV. The combined company's stock started trading at $25.24 per share and skyrocketed to a post-merger high of $55.52 on Nov. 16, but is now only worth about $9.

In other words, a $3,000 investment in Lucid on its first trading day would have briefly blossomed to nearly $6,600 before shrinking to about $1,000 today. Let's see why Lucid initially attracted so much attention, why it lost its momentum, and where its stock might be headed in the future.

Lucid's Air sedan.

Image source: Lucid.

Why did Lucid initially impress the bulls?

Throughout 2020 and 2021, many growth stocks rallied to all-time highs as retail investors banded together on social networks like Reddit, flocked to commission-free trading platforms like Robinhood, and poured their stimulus checks from the pandemic into riskier investments.

Those factors created a fertile market for SPACs, which billed themselves as retail-friendly alternatives to traditional IPOs. Instead of going through underwriting banks, SPACs were publicly traded "blank check" companies that looked for private companies to merge with. When a merger closed, that SPAC's investors gained shares of the new company.

Many SPACs capitalized on the public's growing interest in EVs, which resulted in a flood of SPAC-backed EV companies hitting the market. Lucid attracted more attention than many of its peers, since it was led by a man who had previously worked on Tesla's Model S. The top-tier Dream edition of its Lucid Air sedan, which starts at about $150,000, could also reach 520 miles on a single charge -- which beats Tesla's longest-range vehicle, the Model S Long Range, by more than 100 miles.

But unlike IPOs, SPACs were allowed to provide multi-year sales forecasts in their pre-merger presentations. That key difference enabled EV makers that hadn't produced a single vehicle to claim they could deliver hundreds of thousands of vehicles within the next few years. And that's precisely what Lucid did: During its initial presentation, it claimed it could produce 20,000 vehicles in 2022 and 500,000 vehicles annually by 2030. Those dazzling estimates impressed the bulls -- who temporarily ignored the company's red ink -- and its stock soared during its first four months.

Why did Lucid disappoint?

Three challenges eventually crushed Lucid's stock. First, it repeatedly trimmed its production targets over the past year. In February, it reduced its production target for 2022 to a range from 12,000 to 14,000 vehicles. In August it halved that target to just 6,000 to 7,000 vehicles. It still needs to deliver a lot of vehicles in the fourth quarter to hit that reduced goal -- it's only delivered 2,562 vehicles since it kicked off its mass production last September. 

Lucid blamed its slowdown on component shortages and other supply chain bottlenecks, but noted that it still had a backlog of more than 34,000 reservations at the end of the third quarter -- which could still generate over $3.2 billion in revenue once delivered. It also signed a new production deal in Saudi Arabia, which it claims will enable it to deliver 500,000 vehicles by 2025 instead of 2030, but its broken promises over the past year have cast doubts on that ambitious goal.

Second, Lucid is swimming in red ink and shouldering a lot of debt. Its net loss widened from $719 million in 2020 to $2.58 billion in 2021. In the first nine months of 2022, it generated $350 million in revenue but posted a net loss of $1.83 billion. It ended the third quarter with $3.66 billion in total liabilities, which gives it an elevated debt-to-equity ratio of 1.1. That leverage, along with its steep losses, could make it tough to secure fresh funds at reasonable rates.

On the bright side, Lucid won't go bankrupt any time soon. It was still sitting on $1.26 billion in cash and equivalents, along with $2.08 billion in marketable securities, at the end of the third quarter.

Lastly, rising interest rates and other macro headwinds are driving investors away from speculative growth stocks. Lucid's reduced production targets and ugly balance sheet make it an unappealing stock to own in this bear market, and it still isn't cheap at six times next year's sales. Tesla, which has already ramped up its production, trades at five times next year's sales.

Will Lucid's stock bounce back?

Lucid is in better shape than other struggling SPAC-backed EV makers like Canoo and Nikola, but it will be stuck in neutral until it ramps up its production, stabilizes its losses, and proves its business model is sustainable. For now, it makes more sense to simply invest in Tesla instead of Lucid or its SPAC-backed peers to gain some exposure to the growing EV market.