Wall Street is said to be rational, but anybody that's been around long enough knows that emotions often carry the day. That said, over the long term, investors tend to get things correct, which helps explain the big ups and downs in the share price of electric vehicle (EV) maker Lucid Group (LCID -1.45%).
Given the stock trades well below its "going public" price, it seems like investors are pricing in a few big risks. And yet the market may still be too optimistic about its outlook.
Irrational numbers
Technically, Lucid didn't hold an initial public offering (IPO). It came public via a merger with a special purpose acquisition company (SPAC) -- essentially a public company created with the purpose of buying a private business to create a merged public entity and, in this case, that business was Lucid. If you bought stock when that deal was announced on Feb. 22, 2021, a $1,000 investment back then would have turned into a scant $122 today.
That valuation may not be a fair starting point because shares of SPACs were a hot commodity on Wall Street at that time and many of them traded a bit unpredictably. Sometimes they would move sharply lower after the SPAC announced that it had found a target. But even after pushing that $1,000 investment forward one day to start the clock on Feb. 23, 2021, the math only changes a bit, and the $1,000 investment declines in value to around $200.
Here's the interesting thing: Toward the end of 2021 investors started buying Lucid shares with abandon (perhaps irrationally), pushing the value of that original $1,000 to more than $1,500. If you got caught up in that mayhem, buying at the peak in mid-November, you would have turned $1,000 into $126. That's actually better than if you bought following the announcement of the deal, but no matter how you cut it, there's a lot of bad news here for investors that purchased Lucid stock early on.
The big risk today
More aggressive investors might argue that the damage has been done and that there's less risk in the shares today. To some degree that's true, but it doesn't mean that there is no risk at all. Lucid is still trying to create a sustainable business and its financial statements suggest it isn't going all that well.
For example, the company lost $0.43 per share in the first quarter of 2023, up from a loss of $0.36 in the year-ago period even as it generated a 159% increase in revenue. Then there's the balance sheet, with Lucid noting that it "ended the quarter with approximately $4.1 billion total liquidity, which is expected to fund the Company at least into the second quarter of 2024." A glass-half-empty read of that would be that a business that's losing money only has about a year to go before it runs out of cash.
Maybe it comes up with other sources of capital, but there's a small problem here. Lucid issued a convertible note that comes due at the end of 2026. While the interest rate on that convertible debt is a tiny 1.25%, the shares are well below the conversion price, so it is unlikely that they will be converted (doing so would result in massive shareholder dilution and would likely be received very badly by investors). Therefore, at the end of 2026, Lucid will need to deal with around $2 billion in debt that needs to be rolled over at likely higher rates or paid off. So there's also a countdown timer on the company's efforts to get its business up and running, and that could make it harder to raise additional capital if its business performance is weak.
Way behind
Lucid currently projects that it will produce at least 10,000 electric vehicles in 2023 (it built 2,314 in the first quarter and delivered 1,406). While that may be an achievement for the company, it would still leave it far behind other EV producers, including profitable EV giant Tesla and other large automakers. Lucid emphasizes its technology, which may be great, but sometimes the best product doesn't actually end up winning in the end (think Betamax versus VHS). With a high cash burn rate and that big convertible note looming over it, the risk/reward balance seems skewed in the wrong direction, even after the big stock-price decline at this money-losing EV maker.