The rise of electric vehicles has spurred a rush of new automotive start-ups to race to market, chasing Tesla's success. Lucid Group (LCID -1.76%), which went public in 2021 backed by Saudi Arabia's public investment fund, is among them.
Lucid's debut model, the Lucid Air, received critical acclaim for its design, but building enough of them has proven challenging. Does a good product mean enough to make a company worth investing in? Or does Lucid's poor execution in recent quarters warrant looking elsewhere?
Here is what's happening with Lucid, and whether investors should buy, sell, or hold shares.
Ramping up production hasn't been easy
Lucid burst onto the electric vehicle scene with its debut car, an all-electric luxury sedan called the Lucid Air. Critics gave it rave reviews; MotorTrend even made it its 2022 Car of the Year last year. After making inaugural deliveries in late 2021, Lucid produced 7,180 vehicles in 2022, which was short of its original 2022 target of 12,000 to 14,000.
Late last year, management guided for vehicle production of 10,000 to 14,000 units in 2023, but has already honed in on the bottom of that range. Management narrowed guidance to 10,000 after just the first quarter of the year. Lucid is quickly building a track record of falling short of its expectations, which doesn't instill confidence when executing your manufacturing plan is such a vital part of making a car company like Lucid profitable.
The company is already thinking about its next model, a luxury SUV called the Gravity, which Lucid will soon begin taking reservations for. One might argue that trying to launch a second product when you're already struggling to produce your first car is asking for trouble. It will probably increase operating costs at a time when Lucid could use every dollar it can find.
Is the demand there?
Of course, the automotive industry is very competitive, and newcomers like Lucid don't have the same luxuries as Tesla, which faced far less electric competition as it went through its most vulnerable years. Instead, Lucid is vulnerable as competitors bring similar products to the market. One must ask how much demand there is for a high-end luxury sedan when there are so many alternatives out there. After all, Tesla's big sellers are now its lower-priced vehicles, the Models 3 and Y.
Image source: Lucid Group.
Lucid touted its reservation count as recently as Q4 of 2022, when it disclosed more than 28,000 reservations (not including those from Saudi Arabia). But the company didn't release its reservation number as of Q1. I won't assume anything, but why would a company, especially one with a beaten-down share price, not disclose its reservations if it were good news?
The logical conclusion might be that reservations have tailed off or shrunk. Making matters look worse was a report that Lucid was putting customers jump through up to two weeks of hoops to cancel an order or reservation. Again, no fire, but there seems to be a bit of smoke around the idea that Lucid must do better winning customers' dollars.
Lucid faces financial risk
The company's growing production has burned more cash because revenue is not yet outgrowing Lucid's spending. The company's cash losses were a whopping $3.6 billion over the past year, and more than $1 billion in the past three months alone.
LCID Cash and Short Term Investments (Quarterly) data by YCharts
Management insisted it has the liquidity to last until at least Q2 of next year, but that seems optimistic if Lucid can't somehow cut costs while increasing production. At the very least, it looks like a capital raise is coming, which could come from either the public markets or Saudi Arabia's PIF, which is already a majority stakeholder.
Buy, hold, or sell?
Lucid's arrival in the electric vehicle industry was smooth until it had to begin building cars for its customers. That's not to say it can't figure things out, and Saudi Arabia's existing investments could mean additional financial support. But that doesn't mean things will work out well for the common shareholders.
With a strained balance sheet, production struggles, and no profitability in sight, investors should pass on this stock until the company puts up financials that show the worst is over. Until then, cut this stock loose and look elsewhere.
