2022 was a brutal year for electric vehicle (EV) companies, and Lucid Group (LCID 5.88%) hasn't escaped the carnage. With its share price down 80% over the last 12 months, the upstart automaker has lost a massive amount of value. Let's explore whether it's time to buy the dip or avoid the stock because of the risk of continued downside.
What is Lucid Group?
Founded in 2007 and hitting public markets in 2021, Lucid Group is an electric automaker focused on the high-end side of the market. The company's luxury focus gives it a solid niche in this competitive industry, positioning its products as a higher-status alternative to lower-priced electric sedans produced by companies like Tesla.
Image source: Getty Images.
According to its mission statement, Lucid plans to "create sustainable mobility without compromise." And so far, consumers seem to be buying into its vision. As of the third quarter, the company reports 34,000 reservations for its cars -- representing over $3.2 billion in potential sales. Lucid also enjoys support from the government of Saudi Arabia, which owns 62% of the company through its Public Investment Fund.
In August, Lucid inked an agreement for the government of Saudi Arabia to purchase up to 100,000 of its EVs over 10 years. Luxury cars are popular in the oil-rich countries of the Middle East. And Lucid plans to target the region as part of its international expansion. Investors can sleep easier knowing the company has backers with such deep pockets.
Business is booming
In the near term, demand isn't a problem for Lucid. With substantial pre-orders and backing from a major world government, supply will be the main thing holding the company back.
And while operations are still small, the business is growing exceptionally fast. Third-quarter revenue soared from $232,000 to $195.5 million as Lucid achieved record quarterly production of 2,282 vehicles and 1,398 deliveries.
That said, the picture isn't all rosy. Lucid is burning through cash at a massive rate. In the third quarter, it spent $290 million on property plant and equipment (to expand its production capacity) and used $569.5 million on operating activities.
With just $1.26 billion in cash and equivalents on its balance sheet, the company will likely need to raise capital through equity dilution (which involves selling new stock and diluting existing shareholders) or debt issuance. With interest rates high and a possible recession on the horizon, raising cash will not be cheap.
And so it isn't hard to see why the company's shares have performed so poorly over the last 12 months.
Is Lucid Group a Buy?
Over the long term, Lucid looks like a winner. The electric vehicle opportunity is expanding at a nice clip. And the company's niche focus on the luxury market could eventually give it good margins and product differentiation from mass-market rivals.
That being said, investors who buy the stock now face the risk of being too early. Lucid's cash burn is simply massive. And with economic conditions tightening, the risks of betting on a small, unprofitable company can't be overstated. Investors may want to wait until Lucid scales up more before taking a position.
