Introduction
Lucid Group, Inc. (NASDAQ:LCID) has been underperforming the market expectations for the past few years. The company’s stock price since its IPO has seen a stark decline. As such, in my previous article, I discussed the numerous risks surrounding Lucid, including weak production volume, high cash burn rate, and a potential lack of brand recognition in the global premium automobile market relative to other established premium competitors. Despite these risks, I had a hold rating on the company.
If Lucid was a normal company, the chances of bankruptcy could be a real possibility; however, Lucid is financially backed by Saudi Arabia’s Public Investment Fund, PIF, and the political interest of Saudi Arabia, which led me to argue that Lucid still has a chance with the support of a nation. It has been a little over half a year since the publication of my last article, and despite the overwhelming challenges Lucid faces, I continue to stand by my previous rating of hold.
On February 21st, Lucid reported Q4 2023 earnings. The results continued to reflect numerous risks. Everything from the company’s growth, cash burn rate, balance sheet, and debt pose significant risks to investors. Although the company has a plan to achieve further efficiency and scale in the coming few years, the odds of a turnaround are likely getting increasingly harder.
However, the political interests of Saudi Arabia, in my opinion, will continue supporting Lucid. Saudi Arabia and its PIF are too invested in the success of Lucid, as Lucid’s success will not only allow capital gains but also allow Saudi to take a meaningful step forward in achieving its Vision 2030, a vision for a post-petrochemical world. Therefore, for these reasons, I am continuing my hold thesis on Lucid.
Q4 2023 Results
The 2023 Q4 earnings report reflected the gargantuan headwind Lucid faces today. The company reported a revenue of $157.2 million, which was about 39% lower than Q4 2022, and the company’s quarterly net loss was $653.8 million. Further, during the quarter, Lucid had a negative free cash flow of $747.1 million, which consisted of cash used in operations of $474.5 million and cash used in capital expenditures of about $272.6 million. All in all, Lucid Motors’ ongoing financial operations are in a dire state. The company is not only reporting net loss at a significantly greater scale than its revenue, but Lucid’s yearly revenue is contracting at a rapid rate.
The risks and concerns surrounding the company continue when looking into Lucid’s balance sheet. The company has $4.32 billion in cash and short-term investments, which consist of $1.37 billion in cash and cash equivalents. In terms of liability, the company has a long-term debt of $1.997 billion and a total liability-to-asset ratio of about 43%.
Overall, Lucid, as a result of previous stock offerings, has a decent balance sheet with a strong cash position and manageable debt levels; however, the company’s revenue growth and net losses are at an extremely concerning level. If the company cannot turn the business around in the coming few months, which is likely the case, Lucid will likely have to undergo further dilution to obtain more capital.
Future Prospects
Lucid’s management team portrayed their future vision to turn around the business. During the earnings call, the management team said that the Gravity, an SUV model slated to launch in late 2024, will “expand [the] total addressable market from 2023 by more than 6x” while the “more affordable, high-volume midsized car,” scheduled to launch in late 2026 “will expand [the] market opportunity from 2023 to nearly 20x.”
The company certainly has a vision and plans to reach mass production in order to turn around the heavy losses the business is incurring today. Earlier in the article, however, I mentioned that this is likely not the case shortly, opening up a potential for further dilution.
In a single quarter ending in December 2023, Lucid reported a net loss of $653.8 million with a negative free cash flow of $747.1 million. Considering that the company has a cash pile of $1.37 billion and total cash and short-term investments of $4.32 billion on these staggering losses, I believe raising further capital is inevitable even if the company’s execution is flawless starting today. The gravity model and the mass market models are simply too far ahead in the future for these models to have a meaningful impact on Lucid’s 2024 financials. Therefore, I believe the heavy losses could potentially translate into further dilution for existing shareholders.
Saudi Arabia’s Political Interest
Lucid is enduring an extremely tough time. The company is attempting to turn the business prospects around by launching the Gravity model and a cheaper mass-market model, but these models are not expected to launch until late 2024 and 2026. As such, the risks associated with Lucid are extreme. If it was a case that Lucid was a normal company, I believe I would have started talking about bankruptcy; however, this is not the case. A dedicated government of Saudi Arabia backs Lucid.
As I have mentioned in my previous article, Saudi Arabia invested immense political and economic capital for Lucid to succeed. The company relentlessly provided funding including the $1.8 billion funding on May 31st, 2023. As such, the country has a significant interest in seeing Lucid succeed.
Beyond the financial incentive, Saudi Arabia has invested an immense political interest in the success of Lucid Motors. The country has a vision to make its economy sustainable in the world of post-petrochemicals. This vision is called Vision 2030, which includes numerous ambitious and capital-intensive initiatives such as the massive infrastructure project, the Line, along with the country’s vision to grow its manufacturing industry through electric vehicle manufacturer, Lucid Motors.
In recent months, Saudi Arabia has been borrowing billions of dollars to fund its future ambitions, which include everything from ambitious architectural projects to electric vehicle manufacturing success. Considering that Saudi Arabia’s fiscal policies have been set on a balanced budget, the country’s intent to start borrowing to fund these projects, in my opinion, sends a message. The country is dedicated to in succeeding these projects, no matter the cost. The political and economic investment is too deep for the country to easily backtrack.
Further, oftentimes, political interest overshadows economic sense. By letting Lucid fail, the political repercussions for Saudi Arabia could be detrimental, as the fall of Lucid Motors could be symbolic. Globally, the doubts about whether Saudi Arabia can succeed in its Vision 2030 is high, I believe Saudi Arabia’s government will not want its high-profile project to fail, which can create a situation where these doubters have credibility.
Therefore, for these reasons, I believe Lucid’s financial woes today are manageable. Saudi Arabia has invested too much political and economic capital to easily backtrack and stop funneling money to keep the company afloat.
Risk to Thesis
My primary argument is full of risks. Lucid, as discussed earlier, is a risky investment. The company’s losses are wide with no clear sign of profitability. More dilution may be needed in the future; thus, an investment will solely rely on Saudi Arabia’s government to continue in its effort to fund Lucid’s ambitious dream. While I believe Saudi Arabia will continue to do so, a change in the country’s tone towards Lucid Motors could quickly sour my thesis. Without dedication from the Saudis, Lucid may seriously face a bankruptcy risk in the coming few quarters.
Summary
Lucid is going through a tough time. The company’s losses are wide with no clear path to profitability shortly. Even further dilution is a possibility. However, a dedicated government of Saudi Arabia will likely continue to financially back Lucid Group, Inc., as the country has invested too much political and economic capital to accept its mistake and let Lucid Motors fail. Therefore, despite the risks, I believe Lucid Motors is a hold.
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