Against the backdrop of high inflation and rising interest rates, electric vehicle (EV) stocks have seen dramatic pullbacks from previous valuation highs. Even after a run of rip-roaring gains to start 2023, industry leader Tesla's (TSLA 0.37%) stock trades down roughly 52% from its peak. Meanwhile, luxury-focused upstart Lucid Group's (LCID 13.03%) share price is down roughly 85% from its high.
Which of these EV stocks is the better buy at current prices? Read on to see why two fool.com contributors come down on different sides of the debate of whether Tesla or Lucid stock will deliver better returns for investors.
Image source: Tesla.
Tesla stock has explosive potential
Parkev Tatevosian: Admittedly, Tesla's stock has already had an incredible start to the year. Shares are up 55% while its rivals struggle for traction. That said, its stock could have more room to run if the company can sustain its excellent pace of growth.
Indeed, Tesla's revenue has exploded from $21.5 billion in 2018 to $81.5 billion in 2022. More impressively, it has demonstrated skill in achieving economies of scale. Between the aforementioned years, Tesla's operating income rose from negative $253 million to $13.8 billion. Investors might be skeptical of the company's ability to continue at this rate. However, Tesla expects to grow vehicle deliveries by 50% annually in the long run.
TSLA PE Ratio (Forward) data by YCharts
At that pace of expansion, combined with the improvement in profitability that has come through scale and mastering the learning curve, Tesla's earnings could rise exponentially over the next decade. The key word there is could. There is a risk that competition, diminishing consumer demand, and self-inflicted wounds will stop Tesla in its tracks. It's up to individual investors to decide if they are willing to ride this volatile stock for the long run. Judging by the valuation of Tesla shares, investors have eagerly strapped on their seat belts; the stock has a forward price-to-earnings ratio of 49.6.
Lucid is growing rapidly and could get bought out
Keith Noonan: While Lucid likely remains years away from shifting into profitability and also trades at a significantly higher forward price-to-sales multiple than Tesla, there are other factors that should be taken into consideration. Tesla's profitability is obviously a key point in its favor, but Lucid should be growing sales much quicker than the EV giant, and it has even greater explosive potential despite also being riskier.
TSLA PS Ratio (Forward) data by YCharts
With a market cap of roughly $16.3 billion, Lucid is less than one-fortieth the size of Tesla, so there's potentially a lot more room to run here. Looking a bit further out, Lucid is valued at roughly 4.9 times expected sales for 2024, while Tesla is valued at approximately 4.6 times expected sales for the year.
It bears repeating that Lucid looks like a much riskier stock than Tesla, but its rapid revenue expansion and smaller market cap also suggests more potential for explosive growth if the company can execute at a high level and carves out a lasting position in the EV market. There's little chance that the smaller EV upstart will ever surpass Tesla or pose a big threat to the larger company's dominant position in the industry, but that unlikely scenario wouldn't need to play out in order for Lucid's stock to deliver better performance.
Lucid ended 2022 with revenue of roughly $608.2 million, up from sales of just $27.1 million in 2021. The company already has already had considerable success targeting the high end of the EV market, and demand continues to look strong.
Not counting its agreement to deliver as many as 100,000 vehicles to the Saudi Arabian government, Lucid had reservations for over 28,000 vehicles as of Feb. 21 -- good for sales of more than $2.7 billion. With Lucid focusing even further up the luxury vehicle market than Tesla, the smaller EV company could eventually wind up seeing strong margins on vehicle sales. And while losses are mounting as the business ramps up production, it also remains well capitalized, with roughly $4.9 billion in total liquidity at the end of last quarter.
Additionally, some reports suggest that Saudi Arabia's Public Investment Fund (PIF) could purchase Lucid outright. After increasing its position in the EV company last quarter, the Saudia Arabian fund already holds more than 60% of Lucid's outstanding shares, which suggests a very high degree of confidence in the business's long-term growth prospects. Depending on the acquisition price, it's possible that a buyout could be a catalyst that pushes the company's share price significantly above current levels.
With the company scaling rapidly and potentially being eyed for a full buyout by the Saudi Arabian PIF, Lucid stock offers investors multiple ways to win right now.
So which EV stock is the better buy?
For most investors, backing Tesla is probably the more sensible play. Tesla stands as the clear industry leader in the EV space, and the fact that it's growing sales at an impressive pace while already being significantly profitable suggests that it has a much lower risk profile compared to most smaller upstarts in the EV industry.
But for investors looking for potential home runs with high-risk, high-reward stocks in the EV arena, Lucid could be a better fit. Tesla is already squarely in megacap territory, and Lucid's comparatively small market capitalization suggests that the company has more room for explosive valuation growth if its business continues to scale and move closer to profitability or if it winds up being acquired.
