The electric vehicle industry is evolving significantly as it matures and more competition enters the fray. Consequently, we’re witnessing multiple dynamics play out, including pricing wars, the introduction of new models and technology enhancements.
Only the most nimble and innovative will survive in such a hotly competitive industry. Unfortunately, for Lucid Group’s (NASDAQ: LCID) investors, the company is neither. Thus makes Lucid stock an easy sell in today’s EV landscape.
Negative macroeconomic headwinds have swept through multiple markets, including the U.S. In his acceptance speech at the Republican National Convention, President Trump called for an “end to the electric vehicle mandate on day one.” China has fared much better than other countries but remains a hotbed of fierce competition.
However, it’s tough to see Lucid and other startups compete with giants like Tesla (NASDAQ:TSLA) and other established auto companies looking to evolve. With that in mind, let’s delve deeper into Lucid’s compelling bear case.
Glimmers of Hope and Saudi PIF Lifelines
Lucid stock has languished in the red for the past couple of years but has built a healthy head of steam this month. Its stock is up over 30% this month after it announced that its second-quarter production was ahead of its first-quarter numbers. It produced 2,110 vehicles while delivering 2,394, beating Q1 deliveries of 1,728. However, this glimmer of hope does little to mask its otherwise bleak performance.
It’s important to note that Lucid’s fate is fundamentally tied to the funding it receives from Saudi Arabia’s Public Investment Fund (PIF). PIF has injected north of $6 billion into the company to keep it afloat. But its $1 trillion in assets is not an endless supply. On top of that, the Saudi Government has had a history of burning billions on various projects. Often, the goal of the PIF’s investments is more toward projection rather than earning a healthy return on investment. Hence, the scenario complicates things for Lucid as it looks to steer itself out of its current predicament.
| Quarter | Free Cash Flow (in millions $) |
|---|---|
| Dec-20 | -296.51 |
| Mar-21 | -313.51 |
| Jun-21 | -346.83 |
| Sep-21 | -384.38 |
| Dec-21 | -434.64 |
| Mar-22 | -679.73 |
| Jun-22 | -823.45 |
| Sep-22 | -859.53 |
| Dec-22 | -938.4 |
| Mar-23 | -1,043.03 |
| Jun-23 | -904.07 |
| Sep-23 | -706.1 |
| Dec-23 | -747.19 |
| Mar-24 | -714.94 |
The other thing to consider is that Lucid is burning through boatloads of cash each quarter, which raises concerns over its future. The table above shows that Lucid continues to plunge further into the red concerning its free cash flows (FCF). As per its latest update, its FCF balance is a negative $714 million, 141% higher than its December 2020 figure. Despite some progress in improving its free cash flow over the past year, it’s still substantially worse than when it went public.
| Metric | LCID | XPEV | NIO | BYDDY | TSLA |
|---|---|---|---|---|---|
| Gross Profit Margin | -197.51% | 3.95% | 6.16% | 20.65% | 17.72% |
| Return on Equity | -65.24% | -27.04% | -89.15% | 22.59% | 20.86% |
Furthermore, as the table above shows, Lucid’s profitability significantly lags behind its peers, with all key metrics deeply in the red. The firm’s gross margins are at a distressing negative 197%, which means that for every dollar of sales, it incurs nearly $2 in costs. Moreover, its return on equity is at a negative 65%, which means that for every dollar of shareholders’ equity, the company loses 65 cents.
Frequent Recalls Adds To Its Woes
It seems Lucid can’t catch a break. Its reputation took a hit again following its most recent vehicle recall. In July, the National Highway Traffic Safety Administration (NHTSA) announced it recalled 5,251 of its 2022-2023 Air luxury sedans due to a software error. Additionally, about 7,506 of its 2022-2024 Air sedans are being recalled due to a faulty coolant heater potentially posting major safety risks.
It’s important to note that this recall wasn’t a lone event. In January this year, over 2,000 Air luxury sedans were recalled for potential faults in high-voltage coolant heaters. Moreover, in August 2023, it had to recall over 6,200 vehicles in the U.S. This was due to power loss, malfunctioning windshield wipers and defective rearview cameras. Also, in March 2023, hundreds of Air sedans were recalled due to a mechanical issue that could cause motor power loss troubles.
These recurring recalls point to deep-seated issues with Lucid’s ongoing quality control troubles, eroding consumer confidence.
Bottomline on Lucid Stock
The EV space is evolving at a rapid pace, with growing competition and tech advancements. Unfortunately, Lucid Group falls short, making it a highly unattractive bet in the current investing scenario. Despite the jump in its stock price this month due to improved Q2 production, its bleak performance persists.
Lucid’s fate hinges on funding from Saudi Arabia’s PIF which, despite substantial investments, isn’t sustainable. Additionally, persistent cash burn and frequent recalls highlight Lucid’s quality control issues while eroding consumer confidence.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
