According to analysts at Goldman Sachs, electric vehicles (EVs) will grow to represent a whopping 50% of all vehicle sales by 2035. And Lucid Motors (LCID 0.18%) aims to stake its claim on this rapidly expanding opportunity.
But while the automaker has started production, it still struggles with spotty growth and unsustainable cash burn. Let's discuss what the next 10 years could hold for the company and its investors.
What went wrong for Lucid Motors?
Founded by former Tesla executives in 2007, Lucid Motors is an electric automaker that focuses on the luxury side of the market, with high-end vehicles emphasizing design, power, and amenities. But despite having a well-defined niche, it has struggled to create shareholder value -- with the stock falling by over half since its initial public offering (IPO) in mid-2021.
At the core, Lucid's problems stem from disappointing production growth and demand. These challenges were highlighted in the company's third-quarter earnings report, where revenue declined by around 30% because of a drop in the number of cars produced and sold. To be fair, this comes at a time of significant macroeconomic pressure on the EV industry because of high interest rates, which hurt consumer purchasing power because cars are often purchased with credit.
Lucid's luxury orientation may have also become a liability as the tight economic conditions pressure consumers to opt for lower-priced alternatives. But investors should consider this a transitory challenge, not necessarily a permanent flaw in Lucid's business model.
There are some reasons to be optimistic
Despite the poor near-term performance, Lucid does have several potential tailwinds that could play out over the next decade. The company started its life as an original equipment manufacturer (OEM) under the name Atieva, selling EV batteries and powertrains to other manufacturers. This is a more 'picks and shovels' way of betting on the EV opportunity, and in the third quarter, management finalized a deal with sportscar maker Aston Martin to help build its electric powertrains going forward.
Image source: Getty Images.
The partnership is a big vote of confidence in Lucid's technological capabilities and could represent a significant revenue driver. According to Lucid, the deal involves contracts worth over $450 million. And if similar deals occur in the future, OEM manufacturing could become a core part of Lucid's long-term strategy.
Can the company survive another decade?
Lucid burned through $752.9 million in the third quarter. And this number will likely worsen before it improves because the automaker is in an early stage of scaling its operations. It costs Lucid more to manufacture and sell its cars than it earns from selling them -- before accounting for operating costs like office salaries, research, or advertising.
With $1.16 billion in cash on its balance sheet along with $3.26 billion in short-term investments, Lucid can maintain the current cash burn for several more years. But over the long term, it will probably need to rely on outside financing to stay afloat.
Most likely, this will come from Saudi Arabia's public wealth fund, one of Lucid's major backers, which bought $3 billion worth of shares in May to bring its total ownership stake to 60%.
Lucid's Saudi connection is good protection against bankruptcy. However, investors should remember that equity dilution isn't free money because it reduces current shareholders' claims on future earnings. All in all, Lucid's wealthy backer, strong niche, and OEM potential make it a stock to watch. However, investors may want to wait to buy because of its ongoing cash-flow challenges.
