There are no guarantees in the investment world. If you bet on the wrong company at the wrong time, be prepared to lose a boatload of money. Lucid Group‘s (NASDAQ: LCID) early supporters learned this lesson well. Shares in electric vehicle launch they have plummeted 99% from their all-time highs in early 2021.
The biggest loser is the government of Saudi Arabia, which controls more than 60% of the company’s equity through its Public Investment Fund (PIF). But many ordinary investors have also been burned. Let’s dig deeper and see if the situation can change in the next few years.
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A war in Iran could be a bad thing for the electric car industry. The conflict almost choked the Strait of Hormuz, which 20% of the world’s oil shipments are transited. Many of the Middle East’s top energy producers have been caught off guard, sending oil futures down 53% year to date.
Electric vehicles allow people to bypass oil prices by getting electricity from the grid, which is often less flexible. There are signs that consumers are already changing their behavior. Data from New Automotive shows that EV registrations have fallen by 51% year-on-year in 15 European Union countries. In the US, online marketplace Autotrader reports a 28% jump in inquiries about EVs.
This situation also has positive political consequences as governments around the world see the importance of reducing their dependence on imported oil. This practice may encourage them to support the industry.
Favorable macroeconomic conditions matter little if the company cannot turn them into profit. Lucid’s fourth-quarter earnings were a mixed bag. The good news is that the top line figures were impressive. Revenue rose 123% year-over-year to $522.7 million amid a sharp increase in deliveries driven by the company’s new midsize SUV, the Gravity.
In general, SUVs are a more popular type of vehicle than luxury transportation in the U.S. The launch of the Gravity last year quickly expanded Lucid’s market reach. That said, with a starting MSRP of $79,900, the car is a bit pricey. In the next few years, management could boost growth by turning to lower-cost investments like Lucid Earth, which is expected to start at $50,000 when it becomes available next year.
But while Lucid’s top line is doing well, the company’s bottom line continues to struggle. Q4 loss of performance gained 45% to $1.06 billion, which is an alarming amount for the company’s quarterly cash burn market cap for 2.6 billion dollars. Lucid will struggle to stay in business without a big commitment from its backers.
Lucid’s situation will look bleak without continued support from the Saudi Arabian government, which sees the company as a useful tool to transition away from an over-reliance on fossil fuels. The war in Iran also presents risks to the traditional energy industry. This uncertainty may strengthen the Saudi government’s commitment to funding Lucid, even if it doesn’t make strong financial sense right now.
Another way of life can emerge Uber Technologies. This week, it was reported that the ridesharing giant plans to invest an additional $200 million in Lucid (bringing its value to $500 million) as part of a partnership between the two robotics companies. The deal will involve using Lucid’s new Gravity SUVs as the basis for autonomous vehicles. It would also help Lucid increase production capacity and improve margins by spreading fixed production costs over a larger number of vehicles.
But while I have high hopes for Lucid, it’s always dangerous to catch a falling knife. Investors should not overcommit to a stock until there are signs that its levels have exceeded burning money are controlled.
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Will Ebiefung holds positions in Lucid Group. The Motley Fool has a position on and recommends Uber Technologies. The Motley Fool has a policy of disclosure.
Is Lucid Stock a buy at $7.25? was first published by The Motley Fool
