Lucid Group: Negatives Outweigh Positives (NASDAQ:LCID)

Introduction

Do you know that Lucid’s (NASDAQ:LCID) CEO, Peter Rawlinson, was the highest-paid CEO in 2022, with a staggering $380 million compensation? Once I learn this information, I assumed that LCID should be one among probably the most promising shares presently traded within the U.S. inventory market. However I used to be barely disenchanted once I dived deep into the corporate’s fundamentals, which look weak. The corporate is deeply unprofitable, and its working loss is increasing regardless of income ramping up. Such patterns elevate issues concerning the effectiveness of Lucid’s enterprise mannequin. Moreover, Lucid’s precise supply numbers are a lot decrease than those promised earlier than the corporate’s IPO. Deliveries development lags behind the general U.S. electrical autos market, a regarding development for a younger and impressive enterprise. Regardless of buying and selling almost 20 instances under its all-time excessive, the present valuation fails to resonate as enticing, which makes Lucid’s inventory a “Promote.

Basic evaluation

Lucid Group is an automotive firm concentrating on the electrical autos (“EV”) luxurious phase. The corporate is younger and presents just one mannequin, the sedan known as Lucid Air, which is available in completely different variations relying on the automobile’s technical specs. The second mannequin, the Lucid Gravity SUV, is anticipated to be launched in late 2024.

Allow us to now have a look at probably the most essential metric for an automotive firm: the variety of autos produced and delivered within the final full fiscal 12 months. In line with the corporate’s web site, in 2023, Lucid produced 8,428 autos and delivered 6,001 autos. The variety of Lucid vehicles delivered in 2023 represents 0.5% of all of the EVs bought within the U.S. in 2023. Due to this fact, Lucid can’t be known as a notable participant within the American EV market. Regardless of its smaller scale, Lucid lagged behind the general U.S. EV market in 2023 relating to the expansion within the variety of vehicles bought. Complete EV gross sales within the U.S. grew by 46% in 2023, in keeping with estimates from Kelley Blue Guide. On the identical time, Lucid’s deliveries elevated solely by 37%. The notable lag behind the broad market by a younger and impressive firm like Lucid suggests a weak spot within the firm’s product choices.

It’s noteworthy to focus on that Lucid has a monitor file of falling wanting its commitments, elevating issues concerning the firm’s credibility. Reviewing the corporate’s investor deck from February 2021, simply a few months earlier than Lucid’s IPO, reveals a handful of commitments that had been left unfulfilled. For instance, it was deliberate that the Gravity SUV gross sales would have began in 2023. The brand new deadline is late 2024, which could even be postponed. Nonetheless, this may not be a dramatic drawback, contemplating the inherent complexity of designing and manufacturing new fashions. For instance, Tesla (TSLA) a number of instances delayed the launch of its Cybertruck.

However what’s certainly essential and a giant warning signal is a considerable deviation from projected deliveries and income estimates for 2022 and 2023, to place it mildly. Lucid had outlined supply targets of 20 thousand autos for 2022 and 49 thousand for 2023. Nonetheless, as indicated within the above desk, the precise deliveries fell dramatically under these projections, mirroring a comparable underdelivering in income, which likewise lagged behind the pre-IPO estimates.

Working on a modest scale, it’s comprehensible that the corporate might not be instantly worthwhile. Nonetheless, my concern arises from the truth that Lucid’s operational losses have considerably deepened regardless of income development prior to now three years. In a sound automotive enterprise mannequin, the trajectory shall be the other – as scale will increase, working earnings ought to enhance because of the decrease per-unit prices. The notable improve in working losses with expanded manufacturing volumes appears counterproductive to a logical manufacturing ramp-up.

Whereas the EV trade stays dynamic, it’s paramount to focus on the extraordinary competitors throughout the market. There’s an absolute EV chief within the U.S., Tesla, which holds 56% of the market share. The remaining 44% of the overall pie is shared between a number of giant corporations, together with iconic manufacturers like Ford (F), Toyota (OTCPK:TOYOF), Mercedes-Benz (OTCPK:MBGAF), Volkswagen (OTCPK:VWAGY), BMW (OTCPK:BMWYY), and Audi. Notable gamers within the U.S. EV market additionally embrace very South Korean manufacturers like Hyundai and Kia.

I feel it will likely be very tough for Lucid to compete with all these giants, which might produce thousands and thousands of autos per 12 months and have large experience and monetary sources. Whereas Lucid positions itself as a luxurious model, some folks would possibly say that evaluating Lucid to Toyota or Hyundai could be inappropriate. That will likely be true; nonetheless, it’s important to acknowledge the fierce competitors throughout the luxurious phase, significantly from established German manufacturers similar to Mercedes, BMW, Porsche, and Audi, which collectively command a 9.1% share of the U.S. EV market. It’s noteworthy to focus on that Mercedes and Porsche exhibit the best model loyalty within the premium phase, an element that shouldn’t be missed.

Competing with these automotive giants with just one sedan, Air is a giant problem. Furthermore, Lucid Air’s pricing ranges between $79k and $249k and is similar to its opponents from German luxurious automakers. For instance, Porsche’s Taycan is throughout the $91k to $195k vary. Mercedes’s luxurious electrical sedan, the EQS, may be purchased throughout the $106k to $137k vary. Missing the model loyalty loved by opponents and going through no pricing benefit, it turns into difficult to examine how Lucid’s Air will efficiently seize the market.

Valuation evaluation

Lucid’s inventory worth historical past since its IPO appeared like a roller-coaster earlier than it peaked in November 2021. The inventory trades at $2.8 per share, nearly 20 instances decrease than its all-time excessive of late 2021. The inventory worth declined by round 66% during the last 12 months, and it’s presently round 70% cheaper than the IPO worth.

The corporate’s current market capitalization stands at $6.6 billion, showing notably beneficiant in gentle of the long-term consensus EPS projections, foreseeing a break-even level solely post-FY 2027. It’s pivotal to focus on that these EPS forecasts are primarily based on assumptions of in depth income development, with consensus estimates anticipating a three-year consecutive doubling of income. Nonetheless, given the corporate’s historic sample of considerably falling behind expectations, the feasibility of attaining such formidable projections seems extremely uncertain.

Nonetheless, to keep away from being too pessimistic about Lucid, I’ll conduct my discounted money stream (“DCF”) valuation by implementing consensus income development estimates and utilizing a really excessive 10% fixed development charge. I anticipate zero FCF margin for the following 4 years and a 5% ranging from FY 2027. To steadiness this state of affairs, I exploit a excessive 15% low cost charge due to the intense stage of uncertainty relating to Lucid’s capacity to double income for 3 years in a row and the remoteness of the optimistic FCF timing. The variety of shares excellent is presently barely under 2.3 billion.

As proven above, the truthful valuation for the inventory stands at $2.38, a notable 14% under the present market worth, even when incorporating extraordinarily optimistic income development assumptions.

The monetary mannequin depends considerably on a income development trajectory. Ought to a extra conservative 70% income CAGR be utilized for the following three years (which remains to be difficult to finish), the inventory’s truthful worth plunges to a mere greenback. Consequently, even after its notable decline in current months, I can’t say that Lucid’s inventory is attractively valued.

Mitigating components

Whereas quite a few challenges are evident in Lucid’s outlook, there are additionally optimistic components that would mood my bearish perspective. Essentially the most obvious power of Lucid is that this firm is financially backed by the Public Funding Fund (“PIF”) of Saudi Arabia, which owns a 60% stake in Lucid. Even regardless of burning quite a lot of money each quarter, the corporate nonetheless had $4.4 billion in money as of the newest quarterly reporting date, which is defined by the intensive monetary help from PIF. Contemplating the PIF’s substantial complete property of $777 billion, it seems possible for them to maintain help for Lucid till the corporate achieves the pivotal second of disrupting the EV market with an unparalleled providing, doubtlessly serving as an inflection level for the corporate.

Regardless of having company-specific challenges, allow us to not neglect that Lucid operates in one of many hottest industries amid a considerable world shift in the direction of sustainability supported by governments in main economies. Regardless of its struggles, Lucid advantages from the numerous optimistic momentum throughout the world EV market, which is projected to develop at a 16% CAGR within the coming years. This optimistic development shouldn’t be discounted.

Conclusion

When evaluating Lucid, the negatives considerably outweigh the positives. Moreover, my goal worth estimates point out a valuation under the present market worth, emphasizing its unattractiveness. The corporate’s constant underperformance towards commitments and notable doubts about its enterprise mannequin’s viability. The numerous aggressive risk posed by German luxurious automakers shouldn’t be missed. All these unfavorable components mixed led me to assign the inventory a “Promote” score.