Lucid Group(NASDAQ: LCID) probably isn't the first name you think of when you are asked about electric vehicles (EVs). The top-of-mind name is most likely Tesla(NASDAQ: TSLA), the company that pretty much forced the major automakers to start building EVs. Being late to the game is one of the problems that Lucid faces. Another big one is money. It's part of why investors have mixed opinions about the stock potential of this automaker.
To help in determining the path forward for Lucid, here's a quick look at the buy, sell, or hold decisions around its stock.
The arguments for selling Lucid stock
With a market cap of $7.5 billion, Lucid is not a small company. However, it pales in comparison to the roughly $707 billion market cap of Tesla. In some ways, it probably isn't fair to compare these two companies, which are clearly at different points in their corporate lives. but there are reasons a comparison makes complete sense. After all, Lucid, like it or not, has to compete with Tesla for customers.
Image source: Getty Images.
Of course, it isn't just Tesla that Lucid has to fight against as it looks to sell its electric vehicles. It also has to compete against virtually all of the major automakers and other EV start-ups, such as Rivian(NASDAQ: RIVN). This is not a small problem; Lucid is hoping to make around 9,000 vehicles in 2024. That's a rounding error for most large automakers.
Even Rivian is expecting to make multiples of that 9,000 estimate despite having problems with its supply chain. Rivian built more of its EVs in the third quarter than Lucid will build in all of 2024. The comparison to Tesla is even more sobering, as the EV giant made 410,000 of its vehicles in the third quarter.
Then there's the financial aspect of Lucid's story. It lost $0.34 per share in the second quarter. Then it highlighted that it had $4.2 billion in liquidity and, subsequent to the end of the quarter, the automaker raised an additional $1.5 billion in funding. That sounds like there's no need to worry about the red ink, but there is. According to the company, the additional funding "is expected to provide sufficient liquidity into at least the fourth quarter of 2025."
A glass-half-empty reading is that in roughly a year, Lucid could run out of cash if it doesn't convince investors to keep funding its money-losing operations. This is a company that only an aggressive investor should even be looking at today. And even then, the risk seems pretty material, based on management's own prognosis of its cash runway. Simply put, most investors should sell it or avoid buying it in the first place.
LCID Chart
The arguments for holding Lucid stock
As the chart above highlights, Lucid stock rose sharply after it went public via a merger with a special purpose acquisition company (SPAC) in mid-2021. At that time, Wall Street was enamored of anything related to electric vehicles. Then investors moved on to other stories and EV stocks fell, with Lucid losing around 90% of its peak value. If you bought at the top, you are likely sitting on material losses. In fact, you could be sitting on material losses even if you bought while it was still falling toward its current share price.
At this point, your losses might be so large (and your position in the company so small) that sticking it out in the hope that Lucid manages to build its business and (someday) turn a profit might seem like the path of least resistance. But management is clearly telling investors that the balance sheet is a problem, since liquidity issues could be front and center in a year or so. You should only stick around if you actually believe that Lucid can survive. Stock prices do, quite frequently, fall to zero, wiping out the stakes of shareholders that linger behind.
The arguments for buying Lucid stock
A contrarian view here would be that after such a massive stock price decline, the risk of Lucid failing is priced into the stock. And if Lucid does manage to build out its EV business it could, possibly, be the next Tesla. That's a very long way off, but Lucid has a host of industry awards that suggest it has a desirable product to sell. In fact, the company is quite proud of the fact that its battery efficiency is materially greater than those of its peers, particularly when you take cost into consideration.
If Lucid can parlay its technology into auto sales and/or partnerships with other automakers, there might be material upside here. That is a big bet, however, so you either need to be a fairly aggressive investor or have a fairly deep knowledge of EV technology (and believe that Lucid is at the cutting edge of it).
This is an aggressive investment that requires a glass-half-full view of the situation, so simply going on gut instinct probably isn't a good idea. In other words, only buy Lucid if you really believe the company has a bright future and, preferably, you can honestly back that belief up with facts.
Lucid is a tough stock to love
Lucid is not going to be a good stock selection for the vast majority of investors. It is losing money, doesn't have a huge cash runway, and is taking on a host of very large and established competitors. Could it survive and thrive? Sure. But it could also flame out, just like what has happened to many other small EV companies at this point. Buying Lucid requires a huge amount of optimism about the company's highly uncertain future.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.
