What happened
Shares of Lucid Group (LCID -2.86%) rose 71.2% in January, according to data from S&P Global Market Intelligence. The luxury electric vehicle (EV) brand posted strong production growth in the fourth quarter, which has gotten investors bullish about the stock's prospects. It was undoubtedly helped by the recent resurgence in growth stocks to start out in 2023. For example, as of this writing, competitor Tesla (TSLA -3.40%) is up 76% year to date.
So what
On Jan. 12, Lucid Group updated investors on its production numbers for the fourth quarter of 2022. The EV manufacturer hit 3,493 vehicles produced in the fourth quarter, up from less than 500 last year and up 53% from Q3 of 2022. That performance puts the company ahead of its previous guidance for producing 6,000-7,000 vehicles last year.
Global automotive giants such as Ford and Toyota have to produce millions of vehicles a year to maintain profitability. But that's not the case for Lucid Group because it sells luxury vehicles at an initial selling price of $138k or more. With high price points, each car Lucid Group sells will generate more profits, which in turn means it needs to sell fewer overall vehicles to achieve positive net income and cash flow. Investors in Lucid Group probably took this production beat as a sign the company is making good progress in achieving this positive cash flow.
However, investors should also be aware that Lucid Group still fell far short of its production goals at the start of 2022. In its Q4 2021 earnings release, Lucid management guided for unit production of 12,000 to 14,000 in 2022, which the company ended up falling well short of. That's not a huge deal in the long run, as the company still has 34,000 car reservations it can fill throughout 2023 and 2024, but it does extend the time period Lucid will be burning cash off its balance sheet.
Now what
Lucid Group is quickly growing its vehicle production. Let's do some math to see what that could turn into financially. If the company starts selling 10,000 vehicles a quarter sometime within the next few years, that equates to 40,000 car deliveries annually. With an average selling price of $150,000 and a 20% profit margin -- which is higher than a traditional automaker but makes sense for a company selling only luxury EVs -- 40,000 units sold a year equates to $1.2 billion in annual profit. For a stock with a market cap below $20 billion, that doesn't seem too expensive.
The problem is, Lucid Group doesnt have much cash on its balance sheet to help it get to the end of this rainbow. Last quarter, it had just over $3 billion in cash and equivalents, which is barely above the amount of cash it burns in a single calendar year. Either the company needs to get to profitability very quickly, or it will have to raise funds from the capital markets. If the latter occurs, that will hurt shareholder returns.
