To be clear, Lucid makes great EVs. As luxury electric sedans go, the Lucid Air is a home run. It delivers a posh overall experience with an unbeatable driving range compared to high-priced peers such as Tesla's (TSLA, Financial) Model S. Lucid's batteries are top-notch, and the company's superior technology patents will still play a significant role in the future development of the industry.
However, despite these advantages, Lucid is far from achieving sustainability and has become a cash-burning machine funded by Saudi Arabia. It targets a niche luxury EV market, but struggles with profitability, losing over $100,000 per vehicle, reporting a $680.90 million net loss in the first quarter, and showing underwhelming production and sales growth despite modest increases.
Due to this and other negative factors—including a reality check in the EV world with abundant suppliers and demand far below what was predicted a few years ago—Lucid's shares have plummeted by more than 95% since their all-time high in 2021. In 2023 alone, the company has already experienced a devaluation exceeding 30%. Short sellers have seen Lucid as an excellent opportunity to place their bets against the company, resulting in 39% of its total outstanding shares being shorted.
In early May, Lucid announced a significant bet on its new Gravity SUV to turn around its business. However, the company also reported it continues to burn cash at a rapid pace, leading to yet another restructuring announcement.
Although Lucid's valuation has plummeted nearly 95% from its peak three years ago, its multiples still stand unjustifiably higher than those of its competitors in the EV industry. While the company maintains a controlled liquidity situation, I am skeptical about its prospects for achieving sustainability and profitability in the near future.
High hopes on Gravity SUV
One of Lucid's main highlights in the most recent quarter was the management team reiterated its plan to launch the Gravity SUV later this year.
The SUV will be priced at less than $80,000, placing it within the luxury segment. One of the leading EV makers, Rivian (RIVN, Financial), for example, is a success story in this category, which undoubtedly makes this a promising market for Lucid. SUVs have generally shown a more resilient consumer demand than sedans, which could be a good point for Lucid to explore beyond its Air model.
In addition to the Gravity SUV program, Lucid has also announced it plans to introduce mid-sized vehicles that should begin production at the end of 2026, which also represents a significant step for the company to expand its addressable market.
There is also a trend in the EV industry that is shifting toward offering lower-priced models. Rivian and Tesla, for example, among other peers, are also planning to launch lower-priced models in the coming years.
In my view, the industry has realized it needs to offer more affordable and attractive options to attract a wider customer base. Lucid's decision to launch the Gravity SUV certainly aligns with this trend, finally positioning it in a broader segment and not as niche as luxury. All in all, this is excellent news for the company's future product positioning.
Lucid's financial stability is strong, but its sustainability is weak
One of the main reasons for optimism is Lucid has no risk of bankruptcy, evidenced by its strong liquidity. With a quick ratio of almost 4, this indicates the company has $4 in liquid assets (excluding inventory) for every $1 in current liabilities. In short, a very comfortable position.
It is very important to mention this robust liquidity position comes from the support of the PIF, Saudi Arabia's sovereign investment fund, which is willing to provide stability in the company's finances in order to develop Lucid's electric vehicles. In March of this year, the PIF invested $1 billion in the company, bringing its total investment over the last six years to $6.40 billion, giving it a 60% stake.
However, even though the company has this financial stability, Lucid's business model has proven to be completely unsustainable.
For the first quarter, Lucid reported a total of $3.99 billion in total cash and short-term investments, as well as a cash burn of $2.2 billion. If the company continues to burn cash at these same levels, it will run out of cash by the second quarter of 2025.
Also, looking at the top and bottom lines, Lucid recently reported revenue of $172.70 million, but incurred a cost of revenue totaling $404.80 million, leading to a negative gross profit of approximately $230 million, which essentially shows the company has been losing more money per vehicle sold than its average selling price.
Even if potential cost reductions are achieved through a substantial increase in production volume, this could result in excess inventory without sufficient demand. In other words, it is not an easy scenario for the company. But with Lucid swiftly developing new EV models that are more cost-effective to produce and better aligned with market demand, it is a good move to ensure the company's efficiency improves in the long term.
Under restructuring again
On May 24, Lucid's management team announced it will undergo a new business restructuring plan, which will result in the reduction of 400 employees, or 6% of the total staff.
According to Lucid, this move is justified by the need to address the business' developing needs, which translates into demand for EVs that might be lower than the company had anticipated a few months ago.
It is important to note these challenges are not unique to Lucid. The EV industry has faced significant difficulties, especially since last year. During 2020 and 2021, there was an over-demand for EVs that collided with a global supply chain shortage, causing a major shortage and overvaluing EV makers. Lucid, for instance, was worth $90.90 billion in November 2021.
With the resolution of those shortages, consumers now opt for internal combustion engine vehicles due to their lower cost and convenience, leading to Lucid's market value being closer to this new reality as it dropped to around $6.40 billion at last check.
The restructuring plan will incur charges of approximately $21 million to $25 million, primarily related to employee benefits, transitions and stock-based compensation payments. This represents a costly setback for Lucid, which is already experiencing financial losses.
Moreover, there are a few other reasons for concern about this plan as Lucid disclosed its decision to focus on future growth by outlining three main priorities: increasing sales of Lucid Air sedans, staying on track for the Gravity SUV program to commence production by the end of 2024 and launching its midsize program by late 2026.
The significant layoffs cast doubt on Lucid's ability to meet its launch expectations, as fewer employees could indicate potential delays in meeting deadlines.
Valuations are still astronomically high
The burning question surrounding Lucid's valuation is whether, despite the staggering 95% drop from its peak, the current trading price reflects a fair assessment of its fundamentals and future growth potential. However, delving into key metrics like the price-sales ratio reveals a clear answer: it is a resounding no.
Lucid currently trades at a price-sales ratio of 9.80, nearly 1,000% higher than the automotive industry average and surpassing all its direct EV peers. There is no compelling reason for the stock to be valued at such a stretched multiple compared to its peers, especially considering the business is not yet sustainable or even close to it.
The bottom line
It is very difficult for me to sustain any bullish sentiment on Lucid. The company faces significant production and sales challenges, operates in a fiercely competitive sector and caters to a selective luxury niche. Furthermore, the EV maker has been plagued by pricing problems and substantial financial losses. To make matters worse, its valuation is nowhere near to being considered attractive.
While the PIF is willing to bankroll Lucid's cash burn and the company does have impressive vehicle technology with high hopes for its upcoming SUV, I find the margin of safety for betting on a turnaround to be very slim. Therefore, I remain bearish on the stock.
