While the stock market has recovered somewhat in 2023, the Nasdaq Composite is still down roughly 13% over the last 12 months. And Lucid Group's (LCID -3.92%) shares have woefully underperformed the index, losing a whopping 66% of their value in that time frame.
Let's discuss whether this decline is an opportunity for investors to buy the dip, or if they should run far away from this struggling electric automaker.
Electric cars are taking the world by storm
It's no secret that electric vehicles (EVs) are taking the world by storm. According to analysts at Goldman Sachs, these innovative vehicles are expected to represent 61% of all global car sales by 2040, with the figure reaching over 80% in developed regions like the United States and European Union. For automakers, the goal is to set themselves up to have a sizable market share when the industry matures.
Image source: Getty Images.
As a pure-play automaker, Lucid has some big advantages. Unlike legacy car companies, it isn't cannibalizing an internal combustion engine (ICE) business. Further, it can build its EV brand from scratch, without any baggage, as it seeks to position its cars as luxury products.
Business is booming
Despite being founded in 2007, Lucid only started producing vehicles for customers over a decade later in 2021. Now it is scaling up to catch up to bigger players in the industry. In 2022 the company made 7,180 vehicles, and it expects to increase that to between 10,000 and 14,000 in 2023. While these numbers pale in comparison to those of market leader Tesla, (which produced almost 1.4 million cars in the period), Lucid doesn't have to be the biggest car company to create value for investors.
While Tesla is targeting the mass market consumer, Lucid aims to fill the luxury niche with higher-priced sedans for the most discerning consumers. Its top-of-the-line Lucid Air Sapphire starts at $249,000 and generates a whopping 1,200 horsepower. To put that in context, Tesla's Model S starts at $84,990 and generates 670 horsepower. But while Lucid's luxury-focused strategy can ensure high margins and consumer stickiness when it matures, the company has a hard road ahead.
The losses look unsustainable
In the fourth quarter, Lucid's operating loss soared by 54% to $749.7 million. And to make matters worse, the company generated a gross loss of $357.6 billion, which means it costs Lucid more to manufacture and deliver its cars than it can recoup by selling them. While this situation is likely temporary, it highlights the immaturity of Lucid's business. The automaker is far from unlocking economies of scale, the cost savings associated with larger companies.
Management is making attempts to bring costs in line. In March, Lucid laid off a whopping 18% of its workforce as part of its restructuring plan. But while this seems like an effort to placate the market, It clearly won't solve Lucid's core problem, which is lack of scale. With high-interest rates increasing the cost of capital, investors seem unwilling to allow Lucid to utilize the same growth-at-all-costs strategy that Tesla used to rapidly build out its operations. And this is leading to poor stock performance.
Lucid is not a buy yet
With a price-to-sales (P/S) multiple of 21, Lucid stock still isn't very cheap, considering its increasingly dire economic situation. For comparison, the S&P 500 index has an average P/S multiple of just 2.4, while Tesla trades for 7.9 times sales despite being a fast-growing and profitable company.
That's not to say Lucid will always be a bad investment. The lack of economies of scale seems to be its biggest problem right now. And the stock could become a good bet when this challenge is resolved.
