Electric vehicle (EV) manufacturer Lucid Group (LCID -4.35%) is making headlines again... but not the kind investors like to see.
The maker of the luxury Lucid Air sedan and Lucid Gravity SUV is implementing a reverse 1-for-10 stock split, effective at 5 p.m. on Friday, Aug. 29. Reverse splits often mean a company's in trouble, and indeed, the stock price has fallen by more than 30% since the company announced the reverse split on July 17.
But with the stock now trading at its lowest levels ever, could there be an advantage to buying before the reverse split?
How the reverse split will work
Often, a reverse split is used to keep a company's share price above the $1 minimum that the Nasdaq Stock Market requires for listing, but it doesn't seem like Lucid's shares are in any immediate danger of falling that low. Rather, the company says it's trying to stay above the internal minimums set by some institutional buyers.
Lucid's 10-for-1 reverse split won't affect the total value of an investor's stake. After the split, instead of having, say, 100 shares worth about $2 each (for a total value of about $200), a shareholder would have 10 shares worth about $20 each (for a total value of about $200). In theory, the company's market capitalization -- currently about $6.3 billion -- won't change, unless of course there's a flurry of buying or selling immediately after the reverse split.
But a flurry of selling may be exactly what will happen.
A likely price drop
Research indicates that stocks that undergo a reverse split are likely to experience a drop in price, including a sharp drop when the reverse split occurs, and a further "downward drift" over the following months.
This may be a result of the liquidation of odd share lots. Because Lucid's reverse split involves trading one "new" share for 10 "old" shares, investors who hold less than 10 shares will have those odd shares automatically liquidated in exchange for cash. It's possible this liquidation sparks downward movement in the share price. Other research suggests that increased short-selling in the wake of the reverse split is to blame.
Regardless of the cause, this is exactly what happened to Lucid's fellow EV company Canoo. Canoo -- which has since filed for bankruptcy -- did a 20-for-1 reverse split of its shares on Dec. 24, 2024. Its stock price fell 7% on the day of the reverse split, and drifted more than 20% further downward over the next few weeks.
For this reason alone, investors should probably wait until after the reverse split to buy Lucid's shares. If they want to buy them at all.
Image source: Getty Images.
Plenty of time to buy
In its most recent earnings report, Lucid not only posted a larger-than-expected loss, but also lowered its production forecasts for the year from "about 20,000 vehicles" to 18,000 to 20,000 vehicles, citing the "continuously changing market environment and external factors." Meanwhile, the $7,500 federal EV tax credit is disappearing on Sept. 30, which will likely reduce EV sales further. It's expected to be a rocky second half of 2025 for the U.S. EV industry as a whole.
While there have been some recent bright spots for Lucid -- its robotaxi partnership with Uber (UBER -2.28%), for example, or its vehicles' record-setting battery life, or its 38% year-over-year increase in vehicle deliveries in Q2 -- the company is still unprofitable, burning cash, and behind on its Gravity SUV production targets.
There's certainly a case to be made for buying Lucid shares as part of a high-risk/high-reward portfolio strategy, but there's little incentive to rush to do so. Investors would be smart to keep an eye on the share price in the wake of the reverse split before buying in.
