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Should You Buy Lucid Group While It's Below $4?
Upstart electric vehicle company Lucid Group (NASDAQ: LCID) recently announced Q4 vehicle production and deliveries that surpassed expectations. Additionally, the company just started deliveries for its second model, a premium SUV, and intends to launch a mainstream (cheaper) product in late 2026.
Investors hope these developments can fuel a rebound for a stock that peaked at nearly $60 per share a few years ago, but has slid to just above $3 today. Needless to say, Lucid has been a tremendous disappointment from an investment standpoint.
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But that's ancient history. Whether you bought the stock higher and hope for a rebound, or you're a prospective shareholder looking to get in on the ground floor, it's all about Lucid's ability to grow its brand, sales, and production volumes moving forward.
Is the stock poised to rebound, and should you buy while it trades below $4 per share?
Why investors should forget about Lucid's past share price
There is a temptation to look at Lucid stock and think, "The stock once traded at $58, so it must be a bargain at $3."
Price anchoring, when investors associate a stock's value with its past price, is a common mistake. Judging Lucid stock based on its 2021 (or any previous) share price is problematic for two reasons.
First, the broader market was in a bubble fueled by zero-percent interest rates. The market can sometimes be irrational, and investors were broadly paying unsustainable valuations for some stocks, including Lucid's.
Second, the company keeps issuing new shares. You can see how much Lucid's share count has grown over the past few years. Management has issued stock as employee compensation and to raise new funds from investors. Lucid's business currently operates at heavy cash losses, so it must do these things to stay afloat when its cash reserves run low.
LCID Stock Based Compensation (TTM) data by YCharts
Lucid's share dilution is a hidden penalty on shareholders. As the share count increases, existing shares' value decreases. It's like cutting a pie into increasingly smaller pieces; more people get some, but you're getting less of the pie.
Lucid needs to stop the financial bleeding
For the stock to have a long-term upside, Lucid must slow its financial losses enough to rein in its share count expansion. Unfortunately, it could be a ways off from accomplishing that. While Lucid's Q4 deliveries (3,099 units) grew an impressive 78% year over year and topped analyst expectations, we're still talking about a small number. Lucid's 2024 deliveries totaled only 10,241 vehicles, and the company resorted to price cuts to help get there.
Meanwhile, trailing-12-month cash losses are still almost 4 times the company's sales:
LCID Revenue (TTM) data by YCharts
Automotive factories need to operate near full capacity to produce vehicles profitably. Investors must hope the company's recently launched premium SUV, the Gravity, as well as upcoming midsize products, will raise production levels so that Lucid can financially sustain its business without external funding. At the moment, it appears unlikely that Lucid's volumes will see meaningful short-term growth.
Should you invest in Lucid at under $4 per share?
A look at Lucid's current valuation highlights how ridiculous it was for the stock to trade so high in 2021. While trading at those prices, the company didn't generate meaningful revenue. Even after falling almost 95% from its peak, Lucid trades nearly 10 times its revenue, far higher than legacy automotive companies, and over 3 times Rivian's valuation.
Is such a high valuation justified? Lucid's delivery growth in Q4 is less impressive once you factor in the tiny base numbers and price cuts. The business is hemorrhaging cash and diluting investors, which might continue for a while. In other words, there's little to zero fundamental justification for the stock's current valuation, making it even less likely to continue rallying to $4 per share and beyond.
No, Lucid is not a buy at just over $3 today. On the contrary, it could be wiser to sell. If anything, investors should avoid putting money into the stock until Lucid shows serious progress in ramping up its production volumes and slowing its cash losses.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
