Down a whopping 60% over the last 12 months, investors in Lucid Motors (LCID -1.39%) haven't had much to smile about recently. The electric automaker is reeling from a combination of epic cash burn and rising competition in the EV industry. Should investors bet on the company despite these challenges, or stay far away? Let's dig deeper. 

The Saudi Arabian Connection 

In late January, Lucid's stock rose substantially amid speculation that Saudi Arabia's sovereign wealth fund could be moving to take the company private. The oil-rich state already owns 65% of Lucid's shares. Taking full control would involve buying the remainder -- likely at a considerable premium. But so far, the Saudi investment fund has decided to only increase its Lucid stake by 9.2% to 1.11 billion shares, suggesting the rumors may be overblown. 

Man driving a futuristic car.

Image source: Getty Images.

That said, investors shouldn't write off Lucid's Saudi connection.

As the majority owner of Lucid, Saudi Arabia is incentivized to use its considerable clout to help the company succeed. The Saudis already agreed to purchase 100,000 Lucid EVs over the next decade, and Lucid plans to open its first international factory in the country, providing more opportunities for Saudi Arabia to provide support by creating a favorable business environment (including things like tax incentives, rebates, or grants).

Cash burn is relentless

Lucid will need all the help it can get. Although it is growing at a respectable clip, operations are far from self-sustainable. Fourth-quarter revenue jumped almost tenfold year over year to $257.7 million as the company scaled up its vehicle manufacturing and distribution. But with a cost of revenue of $613.3 million, Lucid spends more to make and deliver its cars than it can recoup from selling them. Cash and equivalents fell from $6.3 billion to $1.7 billion year over year in the fourth quarter. 

This problem should eventually resolve as Lucid gets bigger and unlocks economies of scale. But it highlights how incredibly immature the business is -- which makes it uncomfortably dependent on outside financing and vulnerable to competition from large profitable rivals. 

For example, Tesla generated an operating profit of $13.7 billion in 2022. And it took advantage of its high margins to lower global prices by 20% that year. A sustained price war could keep Lucid's losses higher for longer, and possibly squeeze it out of the industry by taking margin share. There doesn't seem to be any clear solution to this challenge. 

What about the valuation?

With a price-to-sales (P/S) multiple of 24, Lucid's shares are valued significantly higher than the S&P 500's average of 2.4. But while stock price premiums are normal for fast-growing companies, investors should think twice before betting on this company. Lucid is burning through hundreds of millions of dollars every quarter, and the situation doesn't look likely to improve soon. The risks seem to outweigh the reward right now.