After Tesla paved the way for the electric vehicle (EV) industry, Lucid Motors (LCID 0.41%) arrived in public markets in 2021 with considerable hype. Lucid is headed by CEO Peter Rawlinson, a former head engineer at Tesla. The company's flagship model, the Lucid Air, garnered enormous praise from the industry.
Fast forward to today. The company's stock sits 95% off its former peak. Why has the stock struggled despite rave reviews for the Lucid Air? Is this a stock gone bust, or a misunderstood lottery ticket waiting to turn investors into millionaires?
Here is what you need to know.
Lucid hasn't replicated Tesla's product demand
Tesla followed a plan to become financially sustainable in a ruthlessly competitive industry. First, it burst onto the scene with fantastic premium products, like its Roadster, Model S sedan, and Model X SUV. Then, it fed broader demand with less expensive models like the Model 3 and Model Y, which sell very well. Most of the Teslas sold monthly are 3s or Ys.
Lucid is seemingly replicating this plan, launching the Lucid Air premium sedan as its first product. It succeeded in catching the attention of its industry. It scores rave reviews from media companies like Motor Trend and Car and Driver. Aside from a style and technology standpoint, the Air boasts an estimated industry-leading range of roughly 500 miles.
However, it's not seeing the same success in creating lasting demand it can build on. The company delivered 6,001 vehicles in 2023, compared to 4,369 units in 2022. That only sounds impressive when described as a percentage. Remember that management's 2023 production guidance was initially between 10,000 and 14,000 units. So, with only 6,001 deliveries, despite discounting its inventory over the summer, it's clear that demand fell short.
But this is the company's fundamental problem
Understanding why Lucid might not be selling many vehicles despite what seems like a quality product stems from two significant issues Lucid faces now and moving forward. For starters, Tesla grew without direct competition. Sure, it was competing against all the other automotive companies, but as an electric vehicle, it was unique. Legacy automotive companies didn't try to compete directly until it was clear Tesla was succeeding.
Lucid is trying to grow, but there is direct competition this time. Tesla is a company widely known as the original EV brand and has deeper pockets, a CEO whose name almost everyone knows, and several million cars on the road. You see Teslas on your streets. What percentage of people would see a Lucid Air and recognize it?
Second, Lucid may struggle to grow unit sales in a small niche. Remember, even if EVs are widely adopted years from now, they are still a small single-digit percentage of vehicles on the road today. Making a premium product restricts your short-term target market even further. That's why Tesla almost imploded trying to get enough Model 3s manufactured to turn a profit. Less than 5% of the 484,507 Teslas delivered in the fourth quarter were a Model S or X.
Tesla probably wouldn't be in business today if it hadn't gotten the Models 3 and Y up and running.
Lucid is working on rolling out the Lucid Gravity, a premium SUV, starting at roughly $80,000. Considering that Tesla's Model X also moves in limited volumes, it's hard to picture the Gravity flying off factory floors. Growing those premium models without direct competition was easier. But unlike Tesla, Lucid entered a crowded arena instead. It's a potential flaw that makes copying Tesla's go-to-market strategy a mistake.
How likely is Lucid to create life-changing investment returns?
Lucid's investment returns will depend heavily on how long Lucid goes without turning a profit and how much money it must raise, inevitably by issuing stock, to survive. The company's free cash flow is nearly negative $3.6 billion, several times its revenue. That won't change without dramatically increasing its unit sales, and the soft ending to 2023 doesn't bode well for that.
LCID Revenue (TTM) data by YCharts
Meanwhile, outstanding shares continue to rise, diluting investors along the way. The more shares there are, the less equity each share represents in Lucid. That means fewer per-share profits and a lower share price. With $4.4 billion in cash on its balance sheet, the company may need to raise billions over the next several years.
LCID Shares Outstanding data by YCharts
Lucid's stock might look appealing at first. It's down tremendously -- but one could argue what goes down must come up... right? It's also an EV stock, and electric vehicles are poised to become a big part of the future of automotive. But Tesla might be the exception, not the rule. The evidence doesn't point to a stock capable of generating life-changing wealth.
Instead, Lucid looks like an expensive investment lesson waiting to be learned.
