What a brutal six months it’s been for Lucid. The stock has dropped 35.3% and now trades at $16.96, rattling many shareholders. This was partly driven by its softer quarterly results and might have investors contemplating their next move.

Is there a buying opportunity in Lucid, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.

Why Is Lucid Not Exciting?

Despite the more favorable entry price, we don't have much confidence in Lucid. Here are three reasons we avoid LCID and a stock we'd rather own.

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 148% gross margin for Lucid over the last five 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 485%, meaning it lit $485.16 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 $3.38 billion of cash over the last year. With $2.34 billion of cash on its balance sheet, the company has around 8 months of runway left (assuming its $2.12 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’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at $16.96 per share (or a forward price-to-sales ratio of 2.5×). 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 suggest looking at an all-weather company that owns household favorite Taco Bell.

Stocks We Would Buy Instead of Lucid

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