Lucid has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 6.6% to $2.74 per share while the index has gained 10.3%.
Is now the time to buy Lucid, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.We don't have much confidence in Lucid. Here are three reasons why we avoid LCID and a stock we'd rather own.
Why Is Lucid Not Exciting?
Founded by a former Tesla Vice President, Lucid Group (NASDAQ: LCID) designs, manufactures, and sells luxury electric vehicles with long-range capabilities.
1. Low Gross Margin Reveals Weak Structural Profitability
All else equal, we prefer higher gross margins because they make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.
Lucid has bad unit economics for an industrials business, signaling it operates in a competitive market. This is also because it’s an automobile manufacturer.
Automobile manufacturers have structurally lower profitability as they often break even on the initial sale of vehicles and instead make money on parts and servicing, which come many years later - this explains why new entrants whose fleets are too young to generate substantial aftermarket revenues have negative gross margins. As you can see below, these dynamics culminated in an average negative 178% gross margin for Lucid over the last four years.
2. Cash Burn Ignites Concerns
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Lucid’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 609%, meaning it lit $609.01 of cash on fire for every $100 in revenue.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Lucid burned through $2.83 billion of cash over the last year. With $3.47 billion of cash on its balance sheet, the company has around 15 months of runway left (assuming its $2.01 billion of debt isn’t due right away).
Unless the Lucid’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Lucid until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Lucid isn’t a terrible business, but it isn’t one of our picks. That said, the stock currently trades at $2.74 per share (or 4.7× forward price-to-sales). The market typically values companies like Lucid based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. We’d recommend looking at Costco, one of Charlie Munger’s all-time favorite businesses.
Stocks We Would Buy Instead of Lucid
With rates dropping, inflation stabilizing, and the elections in the rearview mirror, all signs point to the start of a new bull run - and we’re laser-focused on finding the best stocks for this upcoming cycle.
Put yourself in the driver’s seat by checking out our Top 5 Growth Stocks for this month. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.
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