2023 has been a gangbusters year for Lucid Group (LCID 0.83%). Shares in the luxury-focused electric automaker have soared 95% this year amid improving industry sentiment and speculation that Saudi Arabia's Public Investment Fund (PIF) could take it private. Let's discuss whether now is the time for investors to bet on the company or sit on the sidelines.
What is Lucid Group?
Founded in 2007, Lucid hit public markets through a reverse merger with a special-purpose acquisition company (SPAC) in 2021. Like its biggest rival, Tesla, the company focuses on electric vehicle manufacturing and energy storage. But it differentiates itself by focusing on the luxury side of the market with flagship sedans such as the Lucid Air Touring and Air Grand Touring, which start at $107,400 and $138,000, respectively.
To put those price tags in perspective, Tesla's Model Y starts at $53,490, while its higher-end Model S starts at $94,990, according to its website.
Lucid's luxury focus could help boost its economic moat by making its cars a status symbol. The higher price tags could also leave room for better margins and unit profitability depending on how well the company can scale up its operations and unlock cost efficiencies in its supply chain. Lucid's relationship with Saudi Arabia is another potential edge for the company.
The Saudi connection
In late January, Lucid's stock surged significantly after a report suggested Saudi Arabia's Public Investment Fund may be preparing to acquire the automaker to take it private and possibly relist it on the Saudi Arabian stock exchange in several years. Neither the PIF nor Lucid have made any comment on the rumors, and it is unclear if such a deal is actually in the works. Nevertheless, investors shouldn't overlook the importance of Lucid's Saudi connection.
Right now, Saudi Arabia's PIF owns a 62% stake in Lucid, which means the oil-rich Kingdom is heavily invested in the automaker's success, buyout or not. Lucid needs this support because of its massive cash burn.
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In the third quarter, the company's operating loss hit $687.5 million. And with just $1.26 billion in cash and equivalents, these losses don't look sustainable without an external source of capital.
Saudi Arabia could help finance Lucid by buying more shares. On the operational side, the oil-rich country serves as a ready buyer for its products with an agreement to purchase 100,000 Lucid EVs over the next decade. As part of its planned international expansion, Lucid plans to open its first factory outside the U.S. in Saudi Arabia. This move could create more opportunities for the Saudi government to expand its partnership with Lucid and create a favorable business environment for the company.
Is Lucid stock a buy?
It is unclear if Saudi Arabia's Public Investment Fund will actually acquire Lucid, so investors shouldn't bet on the company solely because of that possibility. Lucid's long-term thesis rests on its ability to create a moat for itself by selling well-differentiated Luxury EVs, and it seems to be on track to accomplish this, with or without a Saudi buyout.
That being said, Lucid is still burning through an eyewatering amount of cash, and profitability looks nowhere in sight. Investors may want to wait for the company to scale up more before taking a position.
