Lucid Group's (LCID 0.41%) stock fell 6% during after hours trading on April 13 following a disappointing production update. For the first quarter of 2023, the electric-vehicle maker produced 2,314 vehicles and delivered 1,406 vehicles -- which declined sequentially from its 3,493 vehicles produced and 1,932 vehicles delivered in the fourth quarter.
Before Lucid went public by merging with a special-purpose acquisition company (SPAC) in 2021, it claimed it could produce 20,000 vehicles in 2022 and 49,000 vehicles in 2023. But it produced only 7,180 vehicles in 2022, and it expects to manufacture 10,000-14,000 vehicles in 2023. Its underwhelming first-quarter production update suggests it will need to significantly accelerate its production throughout the rest of the year to reach that goal.
Image source: Lucid.
Lucid currently produces only one vehicle, the luxury Air sedan, in four tiers that have starting prices between $89,000 and $170,000. It originally planned to roll out its Gravity SUV this year, but that launch has been delayed to 2024.
Lucid, like many other smaller makers, blames its persistent delays on supply chain issues. Those setbacks are disappointing, but could Lucid's stock be worth buying as a turnaround play after tumbling more than 60% over the past 12 months?
Expectations vs. reality
The brightest red flag for Lucid is its history of broken promises. Its failure to meet its own production targets already triggered a class action lawsuit, which was ultimately dismissed this February, and a Securities and Exchange Commission (SEC) probe that started last December. In its latest 10-K filing, Lucid said it was "cooperating fully" with the SEC but that there was "no assurance as to the scope or outcome of this matter."
Furthermore, Lucid's total reservations dropped from its peak of about 37,000 vehicles in the second quarter of 2022 to roughly 28,000 vehicles at the end of the year. That decline, which was probably exacerbated by its production delays and recalls throughout the year, suggests its potential customers are losing their patience.
Yet Lucid continues to make extremely bullish projections. Last May, it moved up its target for producing 500,000 vehicles per year from 2030 to 2025, claiming it could achieve that ambitious goal with the backing of its Saudi investors.
Lucid's main plant in Arizona currently has an annual production capacity of 34,000 vehicles, and it plans to expand its capacity to 90,000 vehicles in 2024. It believes it can make the leap to half a million vehicles by opening a massive new plant in Saudi Arabia with the backing of the country's Public Investment Fund (PIF), which already owns about 62% of Lucid's shares. The Saudi government has also pledged to buy 100,000 vehicles from Lucid over the next 10 years.
The bulls vs. the bears
The bulls believe Lucid can overcome its growing pains and ramp up its production, but the bears think its liquidity will run dry before that ever happens.
In 2022, its first full year of producing and delivering vehicles, Lucid generated $608 million in revenue but posted a staggering operating loss of $2.59 billion. It ended the year with $4.9 billion in total liquidity, partly because of a $1.5 billion capital raise in December, which it expects to last through "at least" the first quarter of 2024.
And even after its latest capital raise, Lucid has a manageable debt-to-equity ratio of 0.8, which suggests it still has room to raise fresh funds in the future. Saudi Arabia's PIF, which bought up most of Lucid's newly issued shares in December, will probably be willing to pour more cash into the company to help it ramp up its production.
For 2023, analysts expect Lucid's revenue to more than double to $1.3 billion as it narrows its operating loss to $2.25 billion. In 2024, they expect its revenue to rise another 147% to $3.3 billion, with an operating loss of $1.69 billion. But given Lucid's spotty track record of missing its own expectations, we should take those estimates with a grain of salt.
Should investors buy Lucid right now?
If you believe Lucid can ramp up its production, attract more reservations, and narrow its losses, then its enterprise value might seem reasonable at five times its 2024 sales. Tesla (TSLA -1.92%), which is much larger and growing at a slower rate, trades at four times its 2024 sales. Yet Rivian (RIVN -2.27%), which is experiencing the same growing pains as Lucid, trades level with its estimated sales for 2024.
However, those valuations could be irrelevant if Lucid runs into more production issues this year. If its Saudi backers lose faith in its plans, they could simply let the company fizzle out and cut their losses. They could also let the stock crash and buy out the rest of the company at a steep discount.
Simply put, there are too many uncertainties regarding Lucid's future to consider it to be a turnaround play. Investors should wait for it to post its full first-quarter report on May 8 and carefully weigh the pros and cons before pulling the trigger.
