LCID - Lucid: Why Q2 Is A Game-Changer

• Lucid cuts its production outlook a second time.
• The company now expects an annual production volume of only 6-7 thousand electric vehicles, despite surging reservations.
• Because of logistics and supply challenges, the delay in production will push revenues into the future, which is set to weigh on Lucid’s valuation.

Lucid Group, Inc. ( LCID )'s shares tumbled 10% on Thursday after the electric vehicle maker announced a second cut to its FY 2022 production target due to logistic and supply challenges. Reservations for the Lucid Air base model and special configurations models were better than I expected, and Lucid beat EPS predictions for the second quarter. However, the trimmed forecast for its factory output is a game-changer since it creates significant uncertainty for Lucid, and it is likely to limit the stock's upside potential in the short term!

New production outlook is a game-changer for Lucid

Inflation and supply constraints are exacting a heavy a toll on the auto industry. Many electric vehicle manufacturers experienced a sharp deceleration in their delivery growth prospects this year due to soaring inflation and problems sourcing important car parts. Lucid also continues to have problems with the supply chain and for that reason lowered its production target for FY 2022 a second time this year.

The company already down-graded its production outlook from 20 thousand electric vehicles to 12-14 thousand Lucid Air models in February, which at the time represented a decline in factory output of up to 40%.

In its Q2'22 earnings report , Lucid said that it now expects a production of only 6-7 thousand electric vehicles this year, which reflects another 50% down-grade relative to the already lowered FY 2022 outlook from February. The down-grade created significant negative sentiment overhang for Lucid yesterday, with shares trading down 10%.

While Lucid beat EPS predictions, the outlook weighed heavily on the electric vehicle ("EV") maker. Revenues for Q2'22 also fell short of predictions, indicating that Lucid's production ramp is taken a lot longer than initially expected.

Lucid's revenues increased from $57.7M in Q1'22 to $97.3M in Q2'22, showing growth of 69%, and the EV company delivered 679 vehicles in the second quarter, showing an increase of 89% compared to Q1'22. So far this year, Lucid has produced 1,405 electric vehicles… which is a very low number considering that Lucid's forecast at the beginning of the year assumed a production volume of up to 20 thousand units. It seems that Lucid is not executing against its growth targets as solidly as I expected, and it raises questions as to how quickly Lucid can really scale its production going forward.

Reservation update

Lucid still has momentum with customer reservations, meaning the market generally has a positive view of the Lucid Air's value prop. I expected Lucid to grow its reservations to between 34-35 thousand before the company submitted its earnings sheet. With a reservation total of 37 thousand, the EV start-up exceeded my high-case expectations by 2 thousand units.

Between May and August, the electric vehicle company added 2.3 thousand new orders to its reservation list each month and the total estimated order value has risen by approximately $600M since May 5 when the last reservation update was given. The total estimated order value is now $3.5B, which calculates to an average price of $95 thousand per electric vehicle reserved.

Strong balance sheet ensures delivery ramp

Financing Lucid's production ramp is not an issue from a resource point of view, but it may take longer than investors would like. The EV maker had plenty of cash on its balance sheet at the end of Q2 - a total of $4.57B - which gives the company a long liquidity run-way and all but ensures that it can expand its manufacturing facilities to scale Lucid Air production.

Risks with Lucid

The risk with Lucid is the same as with every other start-up: they go through a lengthy period of elevated cash burn as they bring a new product to market, but they also have prospects for parabolic delivery and revenue growth if their products catch on with consumers. Lucid's reservation status shows that customers like the firm's EV product and its variations a lot, and the estimated reservation value indicates Lucid can capture billions of dollars in potential revenues going forward. However, in the short term, Lucid has significant timeline and production risks and I feel like I have been led down by the much slower than expected pace of production growth.

Final thoughts

Lucid's second down-grade regarding FY 2022 production volumes is a game-changer for me and, for that reason, my adventure investing in the electric vehicle manufacturer is coming to an end here. I still like Lucid for its long-term prospects in the luxury sedan segment (which is why I now give Lucid a hold rating), but I also believe that the ramp will take a lot longer than I initially expected.

I am willing to take big risks on companies that have strong potential for above-average top-line growth, but the down-graded production outlook fundamentally changes the equation here: about 50% of Lucid's estimated FY 2022 production volume is now getting pushed into the future. I expect the firm's steep reduction in production guidance to continue to weigh on the company's shares for the foreseeable future!

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