tiprankstipranks
Lucid’s Lofty Valuation Adds to Its Bear Case
Stock Analysis & Ideas

Lucid’s Lofty Valuation Adds to Its Bear Case

Story Highlights

LCID is down more than 50% but still trades at a high valuation. In addition, the company is struggling to keep up its production target due to supply chain issues. Moreover, the highly saturated EV market and the massive competition in the space limits Lucid’s upside

High-growth stocks have had a rough outing in the stock market this year. Most electric vehicle (EV) stocks that were trading at mind-boggling valuations last year have been cut to size. Lucid Group (LCID), in particular, has shed over 50% of its value year-to-date, which implies that investors have lost faith in this stock. Despite the sell-off, LCID stock trades at over 26 times forward sales estimates.

Additionally, the firm targets a relatively niche market within the EV space, so it will take time to turn profits. Moreover, the company faces ongoing chip shortages and related supply chain headwinds impacting the automotive sector.

Hence, its premium valuation is divorced from its fundamentals at this time. Though it has the potential to become a successful business in the future, it isn’t attractive, at least in the near term. As a result, we are bearish on the stock.

Supply Chain Issues Could be a Handful for Lucid

LCID stock dipped when the company announced a reduction in its production target for the year. Lucid Group reduced the production target from 20,000 to 12,000 due to logistics and supply chain challenges. This doesn’t bode well for the company considering it has only delivered 125 vehicles in 2021 and 360 in the first quarter of 2022.

To further complicate things, the luxury electric car maker also came short on its delivery goal last year. Lucid Group delivered a mere 125 air sedans in the last quarter of 2021, compared to its plan of shipping more than 500 vehicles, according to its earnings statement.

In addition, the company delayed the launch of its new vehicle, the Gravity SUV, from 2023 to 2024. This could mean that Lucid is moving at a slower pace, and it needs time to settle in the fast-paced market.

According to Peter Rawlinson, Lucid’s CEO, the company is facing issues acquiring raw materials mainly due to the global supply chain and logistic shortages. The CEO also mentioned that the Covid-related factory shutdowns in China added more fuel to the fire.

Not just this, but Lucid struggles to acquire cheaper components because of its small scale. Moreover, it hasn’t reprogrammed its software for multiple chips, as Tesla has done. This means Lucid is vulnerable to chip shortages, and it might have to go for a production halt if these issues worsen.

Ali Faghri, an analyst at Guggenheim Securities, said that the delay in deliveries could make it hard for Lucid to win market share in an already competitive market. Moreover, Lucid Group doesn’t have the first mover advantage as Tesla does, and an uncertain supply of integral components can cost the company a lot.

Lucid’s Premium Valuation Doesn’t Seem Convincing

Lucid’s unique selling point sounds exciting, and the pull-back in its price has investors licking their lips. But Lucid is valued at more than 26 times forward sales estimates. This makes LCID a highly speculative investment at its current price.

In 2021, Lucid Group yielded revenue of just $27 million and incurred an operating loss of $1.5 billion.

2022 was the year of progress for the business, but the ever-increasing supply chain issues suggest that the company wouldn’t be able to deliver on its planned number of cars. However, even if it does, its stock would remain expensive compared to other stocks in the EV sector.

The company believes it can deliver 500,000 vehicles annually by 2030, but investors must not forget that the electric car industry is more saturated than ever. Moreover, macroeconomic headwinds and competitive challenges will continue to pose significant issues for Lucid. Therefore, it will take time before we can fully believe in this company.

Lastly, Lucid ended its first quarter with a debt-to-equity ratio of 0.59, which is quite impressive. However, it’s likely to increase once the company expands, which will cost Lucid a lot since interest rates are aiming for the sky.

Wall Street’s Take on Lucid

Turning to Wall Street, LCID stock has a Hold consensus rating based on one Buy and one Sell rating assigned in the past three months. The average LCID price target is $24.00, implying a 22% upside potential. Analyst price targets range from a low of $12 per share to a high of $36 per share.

Bottom Line: Lucid’s Current Valuation is Too High

Lucid is growing and working on its foundations, but its growth is questionable, its stock trades at a premium, and it is facing many supply chain issues. These weaknesses make LCID a problematic stock to buy, especially when inflation and high-interest rates have shaken the tech sector’s valuations. Thus, LCID might make sense in the future, but the stock is too expensive to handle at its current valuation.

Disclosure

Trending

Name
Price
Price Change
S&P 500
Dow Jones
Nasdaq 100
Bitcoin

Popular Articles