What a brutal six months it’s been for Lucid. The stock has dropped 28.4% and now trades at $2.50, rattling many shareholders. This might have investors contemplating their next move.
Is now the time to buy Lucid, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Even though the stock has become cheaper, we're cautious about Lucid. Here are three reasons why there are better opportunities than 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. EPS Took a Dip Over the Last Two Years
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
For Lucid, its two-year annual EPS declines of 9.6% mark a reversal from its (seemingly) healthy four-year trend. These shorter-term results weren’t ideal, but given it was successful in other measures of financial health, we’re hopeful Lucid can return to earnings growth in the future.
2. Cash Burn Ignites Concerns
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
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 579%, meaning it lit $579.38 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 $2.90 billion of cash over the last year. With $4.03 billion of cash on its balance sheet, the company has around 17 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. Following the recent decline, the stock trades at $2.50 per share (or 4.5× 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. Let us point you toward one of our top digital advertising picks.
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