Investing

Here Are the Odds Lucid Goes Bankrupt in the Next 5 Years

Chris MacDonald

Published: August 31, 2024 12:58 pm

Electric vehicle (EV) start-ups offer compelling investment opportunities as the shift from gasoline vehicles accelerates over the long-term. That’s been the thesis since many automakers, such as Lucid Group (NASDAQ:LCID) went public in mid-2021 as part of a SPAC merger. 

Unfortunately, the growth story hasn’t quite played out as expected. Companies like Lucid have faced significant challenges in vehicle development and deliveries, with market uncertainty with respect to the EV transition adding to worries that a tapped-out consumer could lead to further margin pressures. For companies like Lucid that are still spending heavily to ramp up production, losing a significant amount of money on each vehicle produced can lead to a death spiral. It appears many in the market believe that this could be the case, given that LCID stock has lost more than 90% of its value from its previous peaks.

That’s not to say this stock hasn’t performed well over near-term time frames. On a year-to-date basis, Lucid’s stock price has traded roughly flat, and nearly doubled from its April low.

So, just how likely is it that Lucid goes bankrupt over the next five years? Let’s discuss. 

Key Points About This Article:

• Lucid is among the early-stage EV makers many investors are watching closely as market dynamics continue to shift in the world of electric vehicles. 
• Let’s dive into the probability Lucid is still around in five years, and what investors may want to make of this stock moving forward. 
• If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.

Lucid’s Temporary Solutions to Its Big Problems

Lucid continues to face the challenge of ramping up vehicle production to reach profitability before its cash on hand officially is depleted. With $3.9 billion in cash, plus $1.5 billion from Saudi Arabia’s PIF, Lucid is secure for 18 months. However, long-term success hinges on halting its cash burn, despite recent positive investor sentiment.

The company’s ongoing cash burn raises concerns about long-term stock value. While the company can raise funds through debt or share dilution, both options negatively impact shareholders. If Saudi Arabia’s PIF, which has invested $7 billion in Lucid decides to stop funding the company, Lucid’s survival could be at risk. Thus, there’s the real likelihood that investor gains could be limited for investors who put fresh capital to work in this stock at current levels, even if the company eventually thrives.

Lucid is certainly among the EV stocks that carry significant risk, with ongoing dilution and the potential loss of Saudi Arabia’s support as major concerns. While the company claims superior technology (and I like the look of their vehicles, particularly the interiors), the company lags far behind industry leaders such as Tesla in terms of production. Even if Lucid survives, achieving the long-term growth needed for substantial returns remains uncertain, making it a risky investment.

In Q2, Lucid delivered 2,394 vehicles, marking a 70% increase from the previous year. This was reflected in deliveries of 2,110 vehicles, with Lucid’s management team aiming for 9,000 by year-end. Revenue rose 33% year-over-year to $200.5 million, but despite this progress, its operational losses of $1.5 billion for the first half of the year is concerning. Although this net loss was greatly improved from the $1.6 billion loss the company reported last year, net cash used in operations is at $1 billion, down from $1.5 billion.

Lucid CEO Remains Optimistic 

Lucid CEO Peter Rawlinson has certainly pushed for novelty with his car launches, with various sets of features that differ from the competition. Lucid’s Gravity SUV represents a concept that’s certainly intriguing, and is a product that many bulls remain confident will gain traction in the market. 

This EV is now in its verification phase, and follows the company’s Air Sedan to market. Known for its impressive range, the Air has won a number of awards in terms of quality, offering more than 500 miles on a single charge. No large-scale EV maker cones close to this performance.

Unfortunately, original price tags for the Air with Grand Touring trim came in at more than $110,000, but the more affordable $69,900 Air Pure could gain more traction among cost-conscious consumers. This vehicle sports 420 miles of range, and is among the most efficient in its class. So, still not bad for the price. 

I think Lucid will need to continue to market its vehicles appropriately to the right group, and see traction from word of mouth from existing owners. Much like Tesla and Rivian, who have benefited from strong grassroots support, investing in this company banks on longer-term positive trends from consumers, as well as some beneficial secular growth trends as well. 

There are certainly reasons to be optimistic about Lucid right now, but the question is just how investors will view the company aside from the product itself. 

Best Avoid LCID Stock Right Now

History is riddled with a great number of failed EV startups. Perhaps the most prominent recent example of an early-stage EV company with promise that went bankrupt is Fisker. And while Lucid has Saudi backing and significant cash which should suffice for a couple years, there really are production concerns and other issues which could come to the fore. Basically, if the Saudi PIF pulls funding from this project, most investors would consider the story over.

Trying to handicap the likelihood of bankruptcy with any company is difficult. I will say that Lucid has a premium product that’s attractive. But given the various recessionary flags we’re seeing in the market, it’s unclear to me if Lucid can survive a prolonged recession (say two or three years) which wipes out consumer demand for higher-priced EVs. I’d say there’s a 50/50 chance Lucid either goes bankrupt or thrives over the next five years, so this is a stock some investors may want to play cautiously from here.