Down roughly 91% percent from its all-time high of $58 (reached in early 2021), Lucid Motors (LCID 0.41%) has been a punishing bet for early shareholders. While the luxury electric vehicle (EV) maker has found a potentially lucrative niche, near-term macroeconomic pressures have left it in a fight for survival. Will the next five years lead to a brighter future for Lucid's investors? Let's dig deeper to find out.
What can Lucid's past tell us about its future?
Founded in 2007 by former Tesla executives, the automaker now known as Lucid Motors spent much of the last decade and a half as an original equipment manufacturer (OEM) for electric vehicle batteries and powertrains. In 2016, the company shifted focus toward building its own vehicles and went public through a reverse merger with a special purpose acquisition company (SPAC) in 2021.
While Lucid's shares initially performed well, investors have become less optimistic. The company faces near-term macroeconomic challenges like rising interest rates, which reduce consumer-spending power and demand for new cars, which are often bought using credit. Furthermore, competition is rising in the EV industry, leading to growth and margin pressure as rivals like Tesla slash prices to maintain their market shares. These issues came to a head in the company's most recent results.
Price wars and weak margins
Second-quarter revenue increased by 55% to $151 million year over year as Lucid more than doubled customer deliveries from 679 vehicles to 1,404. That said, the company's operational loss rose by around 50% to $838 million, and it generates negative gross margins, which means it costs more for Lucid to manufacture and deliver its cars than it earns from selling them -- before even including research and development (R&D) or administrative expenses.
Lucid has no clear pathway out of this mess, partially because the EV price war is forcing it to lower prices instead of increasing them. In August, the company cut the manufacturer's suggested retail price (MSRP) of its Touring and Grand Touring by a whopping $12,550. These moves put more pressure on its already tight margins.
Image source: Getty Images.
The good news is that Lucid doesn't seem doomed to bankruptcy. As of Q2, the company claims to have $6.25 billion in total liquidity. And it enjoys partners with deep pockets -- namely Saudi Arabia's Public Investment Fund (PIF), which helped inject $3 billion into the company through a stock offering in May.
Lucid is critical to Saudi Arabia's plans to diversify its economy away from fossil fuels. The company plans to open its first overseas plant in the country's King Abdullah Economic City this month. Over the coming years, investors should expect Saudi Arabia to take an increasingly important role in Lucid, both as a financier and a customer. Motives like national pride and geopolitical positioning could incentivize the desert kingdom to keep Lucid operational, even if it burns a hole in their pocket.
What does this mean for shareholders?
Like many companies that went public through a SPAC, Lucid seems to be at a far too early stage in its operations to make sense for public market investors. While Saudi Arabia's support could help the automaker overcome its near-term challenges and stay afloat, it is unclear if Lucid will generate sustainable shareholder value within that time frame.
With its massive cash burn and unclear pathway to profitability, the automaker will likely continue to rely on equity dilution to fund operations. While this can help avert bankruptcy, it erodes current shareholders' claims on future earnings. Investors who want to bet on Lucid should probably wait for more quarters (or years) of data before taking a position.
