Stock Analysis & Ideas

Can Lucid Stock Make a Strong Comeback?

It’s been a volatile journey for Lucid Group (LCID) since the SPAC business combination was announced. A big surge above $60 in February 2021 was soon followed by a correction below the $20 level.

After some consolidation, Lucid stock surged again above $50, with the company announcing the commencement of vehicle deliveries. Investors, however, again resorted to profit booking, and the stock currently trades at around $20.

Can Lucid stock make a strong comeback?

I believe the stock is already in oversold territory. Broad market sentiments make me cautiously optimistic. Lucid stock appears to be worth accumulating in the $15 to $20 range.

Reasons for the Recent Correction

Before talking about the medium to long-term positive catalysts, let’s discuss the key reasons that triggered the sell-off this year.

The first reason is related to the industry. Near-term challenges, including chip shortages and raw material price inflation, have impacted the stock. Even Tesla stock has corrected ~14% since the start of the year. Also, it’s worth noting that with multiple rate hikes due in 2022, growth stocks have witnessed a sharp correction.

Another reason for the sharp correction is the relatively weak production guidance for 2022. For the year, the company expects Lucid Air production in the range of 12,000 to 14,000 vehicles. On a brighter note, Lucid announced that over 25,000 vehicles had been reserved by customers as of February 28, 2022. This implies a revenue backlog of $2.4 billion. However, it remains to be seen if Lucid can ramp up production in 2023.

International Production and Backlog Growth

It’s worth noting that Lucid has been aggressive in terms of expanding into international markets. The company’s first model is already available for online reservation in multiple countries.

Additionally, Lucid seems to be following the Tesla business model of having production facilities in key markets globally.

Recently, Lucid Group announced that it signed agreements with multiple agencies for its first international plant in Saudi Arabia.

This was followed by the news that the government of Saudi Arabia had signed a deal for the purchase of up to 100,000 electric vehicles. This deal is through 2030 and adds to the company’s revenue visibility.

It’s also worth mentioning here that the company’s Arizona and Saudi production capacity will exceed 500,000 vehicles. Lucid seems well-positioned to cater to incremental demand in the next few years.

From a financial perspective, Lucid reported cash and equivalents of $6.2 billion as of December 2021. The financial flexibility will allow the company to pursue an aggressive production ramp-up.

Extended Period of Cash Burn

Coming back to concerns, Lucid guided in July 2021 that the company would deliver 20,000 vehicles in 2022. However, the production forecast for the year indicates that vehicle deliveries will fall short of estimates.

Lucid had also guided that the company would report negative free cash flow of $7.6 billion between 2022 and 2024. However, it’s clear that the cash burn might sustain beyond 2024, as growth estimates fall short of initial expectations.

The key point here is that Lucid will need to dilute equity in the next few years. The dilution can be opportunistic depending on the stock price. However, that’s one risk factor that investors need to consider.

On the positive side, the markets will not react sharply to dilution if production and delivery growth is robust. Once near-term industry headwinds are navigated, Lucid might surprise, given the technological and innovation edge.

Back in February 2021, Lucid CEO Peter Rawlinson opined that the world needs a $25,000 electric car. The CEO also indicated that Lucid could achieve this in the next few years by partnering with other automakers.

The idea is to share Lucid’s technology to build a mass-market EV. This is one factor that can significantly help in driving production and deliveries. With operating leverage, Lucid can potentially follow Tesla’s path to profitability.

Of course, Lucid has plans for other models, with Project Gravity scheduled for 2024. As the number of models increases, along with a broader price range, Lucid will have a wider addressable market.

Wall Street’s Take

Turning to Wall Street, Lucid has a Moderate Buy consensus rating, based on three Buys and one Sell rating assigned in the past three months. The average Lucid price target of $40.50 implies ~107% upside potential. (See LCID stock forecast on TipRanks)

Concluding Views

In terms of risk, more than 500 electric vehicle models will be available globally in 2022. It’s clear that competition is intensifying. However, Lucid is among the names that are positioned to survive and grow. A key reason for this is the company’s investment in innovation.

Further, the EV industry has multi-year tailwinds. The near-term concerns provide an attractive entry opportunity into quality stocks. Lucid stock is among the potential value creators.

With the sharp correction, LCID stock has already discounted the disappointing guidance for 2022. The focus is likely to shift to the company’s performance in 2023 and beyond. With the recent deal with the Saudi government, the outlook seems positive.

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