VWAGY - Lucid: Volatility Remains Its Middle Name

2023-05-30 09:30:00 ET

Summary

• LCID continues to boast an eye-watering short interest of 24.01%, worsened by the sustained cash burn, lumpy production/ delivery numbers, and lowered 2023 guidance.
• While the management appears to be passionate enough, it remains to be seen how the automaker may execute in the near term, due to the deteriorating balance sheet.
• A retracement to $6s is quite likely since another dilutive capital raise may come sooner than expected, with the macroeconomic outlook still pessimistic and capital funding tight.

The LCID Investment Thesis Remains Highly Speculative And Volatile

Interestingly, Lucid Group ( LCID ) maintains its aggressive ambition in the SUV market, with the management still determined to launch Gravity by 2024, likely to further inflate its expenses and drain its balance sheet. This is naturally on top of the Lucid Air Sapphire's production by September 2023.

By FQ1'23, the automaker's gross margins remain underwhelmingly negative at -235% (-96.2 points QoQ/ +91.5 YoY), with operating expenses also elevated at $398.57M (+1.6% QoQ/ -2.6% YoY). The latter is attributed to the sustained R&D efforts towards newer models, as mentioned above. While headcounts are already on the chopping block, it remains to be seen if there may be any improvements in the operational expenses ahead.

In addition, LCID's Phase 2 build-out in Arizona has similarly expanded its capital expenditure to $241.77M (-16.5% QoQ/ +30.6% YoY) by the latest quarter, with FY2023 to bring forth a midpoint capex of $1.5B (+40.1% YoY). As a result of its lack of profitability, the cash burn has accelerated to approximately $1B quarterly, with the cash/ short-term investments also dwindling to $2.97B (-24% QoQ/ -44.8% YoY) at the same time.

As a result of the potential cash flow issues by the end of 2023, it is unsurprising that Mr. Market is increasingly uncertain about the automaker's intermediate prospects. The intense EV competition has been worsened by the elevated interest rate environment as well, notably impacting Tesla's ( TSLA ) profit margins due to the reduced Average Selling Prices .

Furthermore, LCID sealed the pessimistic sentiments with its lowered FY2023 production guidance of 10K ( +39.2% YoY ), notably lower than the FQ4'22 guidance of up to 14K (+94.9% YoY) and pre-IPO guidance of up to 49K.

This is worsened by the automaker's lower-than-expected FQ1'23 production of 2.31K vehicles ( -33.8% QoQ / +230% YoY ) with only 1.4K delivered (-27.4% QoQ/ +288% YoY), attributed to the reduced production days from the transition to other buildable configurations, as guided in the previous FQ4'22 earnings call .

Furthermore, investors must note that LCID's production and delivery numbers may remain lumpy through 2023, with FQ3'23 likely experiencing another transitional downtime from the ramp-up of Phase 2.

This cadence may point to its "brand awareness" issues as well, despite the relatively robust 28K retail reservations and 100K under the agreement with the government of Saudi Arabia by the end of 2022. The management has suggested that the deceleration is no longer attributed to the logistical and global supply chain issues, which have notably leveled off thus far.

While the LCID management has commented that the inventory build-up of $1.01B by the latest quarter (+21.9% QoQ/ +205.4% YoY) is mostly attributed to test fleet/ loaner vehicles, we are not particularly convinced, since the uncertain macroeconomic outlook may have increasingly contributed to the impacted demand for premium EVs.

The same cadence is also observed in Mercedes-Benz's ( MBGAF , MBGYY ) inventory levels, which have been consistently growing to $30.21B by the latest quarter (+13.3% QoQ/ +16.4% YoY), as with BMW ( BAMXF ) at $24.67B (+18.3% QoQ/ +13.4% YoY) and Audi ( VWAGY ) at $57.48B (+10% QoQ/ +20.9% YoY).

LCID 1Y Stock Price

As a result of the cash flow headwind, it is unsurprising that LCID has been trading sideways at these levels for the past two months, with the intermediate support likely breached in the near term. Assuming so, we may see the stock retrace to the previous December 2022 and January 2023 bottom of $6.

Then again, we must also highlight the pessimism embedded in its stock prices is similarly shared with many other automakers, with their stocks similarly depressed for the past year and YTD.

Nonetheless, even at $6s, LCID does not look attractive enough, due to the potential volatility from the elevated short interest of 24.16% at the time of writing. Combined with the pessimistic factors discussed above, we remain uncertain about its eventual prospects, with the funding market still tight from the recent banking meltdown.

While the automaker may continue to rely on the PIF for more capital, or even more speculatively a buyout, shareholders' equity has been continually diluted as well. It now boasts an eye-watering share outstanding at 1.83B (+7% QoQ/ +8.9% YoY), drastically expanding from the previous IPO levels of 1.21B since July 2021.

While the management seems rather experienced and committed to driving brand awareness/ early adoption, we prefer to maintain our Hold (Neutral) rating on the LCID stock, with things potentially being highly volatile in the intermediate term. While traders may embrace the stock for a quick gain, the stock remains exceedingly speculative, only suitable for experienced traders with higher risk tolerance.

For further details see: