Down more than 35% on a year-to-date basis, Lucid Group (NASDAQ:LCID) stock has been an under-performer, to say the least. Now, the overall EV sector has been hit hard by a number of headwinds. Some of these are macro and sector-specific.
However, like many of the harder-hit EV names, Lucid has production and deliveries problems. And while the company’s management team has done a good job of securing outside investment (we’ll get to that), there are still substantial losses and additional cash burn that will need to be funded moving forward. Uncertainty around this aspect of the company’s business in the context of slowing demand is what has many investors concerned.
Lucid CEO Rawlinson himself has warned against banking solely on continued Saudi investments, noting the risk of assuming infinite wealth. Initial excitement over the Saudi funding spike in shares quickly subsided, with prices reverting to pre-announcement levels.
Here’s more on why I think LCID stock may be too risky to buy at current levels, despite appearing cheap at first glance.
Competition Remains Tough In This Sector
Lucid’s high-end EV sedans have certainly caught on among certain buyers. I’ve seen a number of these vehicles on the road myself. And looking at these cars’ specs, I can see why EV buyers would opt for a Lucid over, say, a Tesla (NASDAQ:TSLA). Based on almost every metric, they’re better quality vehicles.
The thing is, at this price point, there are simply a number of competitive options at better price points car buyers may gravitate toward. I’m all for quality, but price matters. And given where interest rates are, this goes double for those with squeezed credit or who carry higher uncertainty about the future.
I think many of the same problems Tesla is running into are the same problems Lucid will continue to face moving forward. Demand remains depressed, and will likely continue to be, until rates drop significantly. If that doesn’t happen, the company’s cash burn based on its current run rate (and even some production growth) may not suffice. Additional capital infusions could kill the investment thesis around this stock, as existing investors get diluted or the company’s balance sheet is swamped with debt.
Saudi Investment May Not Be Enough
Ayar Third Investment Company, an affiliate of Saudi Arabia’s Public Investment Fund, recently purchased $1 billion of Lucid Group preferred stock shares. PIF holds a significant 60% stake in Lucid, raising concerns about the potential impact on LCID stock if it divests shares. This isn’t the first time PIF has invested heavily in Lucid. Previously, it acquired over $1.8 billion worth of shares, coinciding with a decline in LCID stock from mid-2023.
Despite the PIF’s substantial share acquisition in Lucid Group, historical trends suggest no guarantee of stock price growth. Lucid faced ongoing challenges: producing fewer vehicles than anticipated, high pricing, and limited profitability with widening losses.
Although there was a recent $1 billion share purchase, Lucid’s substantial cash burn of $1 billion per quarter remains a pressing concern. Rising interest rates are putting a squeeze on potential Lucid buyers, and with cheaper options in this space, there’s likely to be more demand-side pressures down the road.
LCID Stock Likely to Continue to Decline
Lucid’s high-quality EVs are certainly in a class of their own. If given the option and a blank check to buy a particular EV right now, I’d probably pick a Lucid.
But the problem is, I don’t have unlimited money, and there are so many options out there at lower price points to consider. I’m not the only one who feels this way – the company is burning through its order backlog, with little future demand on the horizon (at least according to analysts).
Combined with production-related issues, this is a stock I can see lagging for some time. Maybe there’s a value argument that can be made here. But for now, I’m not going to be the one to make that argument, as I think this stock could have much further to decline before it’s all said and done.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.