With its shares down 52% since the start of the year, Lucid Group (LCID -3.03%) seems to be a falling knife. Even though shares look cheap right now, they could fall even more due to the company's deteriorating fundamentals. Let's explore what the next 12 months could have in store as the embattled electric-vehicle (EV) maker fights for survival.
The Trump effect?
Unlike EV-industry leader Tesla, which is up 28% since President-elect Donald Trump's victory, Lucid hasn't reacted positively to the news, with its stock down by roughly 10% since Nov. 5. It's impossible to pinpoint the exact cause of a stock-price move, but there are some reasons why investors may see the new administration as a threat.
Unlike the outgoing Biden administration, Trump seems less willing to force the adoption of electric vehicles through government intervention. Reuters reports that his transition team plans to end the $7,500 consumer tax credit for EV purchases -- a move that would take Lucid's already-expensive cars even further out of reach for most consumers.
More broadly, Trump pledged to end what he calls Biden's "EV mandates," which could refer to the recent tightening of Environmental Protection Agency (EPA) emission standards that help push a transition to EVs by making gasoline-powered cars more costly for automakers to produce.
The situation isn't as bad as it looks
While these developments may look like a death knell for Lucid's business, that isn't necessarily the case. The regulatory pressure may have actually hurt some EV industry participants by introducing too much competition in the face of limited organic demand.
Legacy automakers like Ford Motor Company, which lost $1.2 billion with its EV segment in the third quarter, are squeezing out smaller pure-play companies like Lucid, which aren't capitalized enough to sustain such losses. An easing of government pressure to transition to EVs could make the industry less competitive, giving smaller companies more room to establish their brands and bring their business models to maturity.
But even in the best-case scenario, Lucid faces an uphill battle. Third-quarter operational losses jumped 2.3% to $771 million. On an annualized basis, that comes out to over $3 billion, which is substantial for a company with only around $3.5 billion in liquidity on its balance sheet.
What could the next year have in store?
Over the next 12 months, Lucid's most pressing concern will probably be getting the cash it needs to stay in business. And to do this, management will likely rely on capital raises, which involve issuing and selling more units of stock.
While this avoids the future cash-flow challenges of debt financing, it reduces current investors' claims on future earnings. In Lucid's case, dilution has historically triggered sell-offs.
Image source: Getty Images.
The good news is that Lucid has a strong relationship with the government of Saudi Arabia, which owns around 60% of its shares through its public investment fund (PIF). The Saudi government has historically been a key participant in Lucid's prior stock sales.
Lucid's management also plans to drive growth through new model releases, such as its Gravity SUV, which is expected to begin production late this year. The new model will give Lucid exposure to the SUV market, which is the most popular vehicle type in North America. Overall, the company faces a very uncertain future but has everything it needs to stay in business and try to execute its long-term strategy.
Is Lucid stock a buy or a sell?
Lucid's stock is a hold in my book. While fear of the Trump administration may be overblown, the EV maker still faces a highly uncertain future because of its cash burn and need for constant equity dilution. Investors may want to wait until they see the sales performance of the new Gravity SUVs before they get a clearer picture of the company's prospects.
