Can Lucid Stock make a comeback?

It was an unstable journey for Lucid Group (LCID) since the announcement of the SPAC business combination. A strong push above $60 in February 2021 was quickly followed by a correction below the $20 level.

After some consolidation, Lucid stock jumped above $50 again as the company signaled the start of vehicle deliveries. Investors, however, have again resorted to profit booking, and the stock is currently trading around $20.

Can Lucid stock make a comeback?

I believe the stock is already in oversold territory. General market sentiments make me cautiously optimistic. Lucid stocks seem to be worth hoarding in the $15-$20 range.

Reasons for the recent correction

Before we talk about the medium to long-term positive catalysts, let’s discuss the main reasons that triggered the sell-off this year.

The first reason is related to the industry. Short-term challenges, including chip shortages and commodity price inflation, impacted the stock. Even Tesla stock has corrected about 14% since the start of the year. Additionally, it should be noted that with the multiple rate hikes expected in 2022, growth stocks have seen a sharp correction.

Another reason for the sharp correction is the relatively weak production forecast for 2022. For the year, the company expects Lucid Air production to be in the range of 12,000 to 14,000 vehicles. On a more positive note, Lucid reported that over 25,000 vehicles had been reserved by customers as of February 28, 2022. This implies a revenue backlog of $2.4 billion. However, it remains to be seen if Lucid can ramp up production in 2023.

International production and order book growth

It should be noted that Lucid has been aggressive in terms of expanding into international markets. The company’s first model is already available for online booking in several countries.

Additionally, Lucid appears to follow Tesla’s business model of having production facilities in key markets globally.

Recently, Lucid Group announced that it has signed agreements with several agencies for its first international factory in Saudi Arabia.

This was followed by news that the Saudi government had signed an agreement to purchase up to 100,000 electric vehicles. This agreement is valid until 2030 and adds to the visibility of the company’s revenues.

It is also worth mentioning here that the company’s production capacity in Arizona and Arabia will exceed 500,000 vehicles. Lucid looks well positioned to meet the additional demand for the next few years.

From a financial perspective, Lucid reported cash and cash equivalents of $6.2 billion as of December 2021. The financial flexibility will allow the company to continue an aggressive production ramp-up.

Prolonged period of cash burn

Returning to concerns, Lucid reported in July 2021 that the company would deliver 20,000 vehicles in 2022. However, production forecasts for the year indicate that vehicle deliveries will be lower than estimated.

Lucid had also indicated that the company would report negative free cash flow of $7.6 billion between 2022 and 2024. However, it is clear that cash burn could continue beyond 2024 as growth estimates are below initial expectations.

The key point here is that Lucid will need to dilute equity over the next few years. Dilution can be opportunistic depending on the stock price. However, it is a risk factor that investors should consider.

On the positive side, markets will not react abruptly to dilution if production and shipment growth is robust. Once the near-term industry headwinds are navigated, Lucid could surprise, given the technological advantage and innovation.

In February 2021, Lucid CEO Peter Rawlinson opined that the world needed a $25,000 electric car. The CEO also indicated that Lucid could achieve this in the next few years by partnering with other automakers.

The idea is to share Lucid’s technology to build a consumer EV. This is a factor that can significantly help boost production and deliveries. With operational leverage, Lucid can potentially follow Tesla’s path to profitability.

Of course, Lucid has plans for more models, with Project Gravity slated for 2024. As the number of models grows, along with a wider price range, Lucid will have a wider addressable market.

The Taking of Wall Street

As far as Wall Street is concerned, Lucid has a moderate buy consensus rating, based on three buy and one sell rating over the past three months. The average Lucid price target of $40.50 implies approximately 107% upside potential. (See LCID stock forecast on TipRanks)

Final views

In terms of risk, more than 500 models of electric vehicles will be available worldwide in 2022. It is clear that competition is intensifying. However, Lucid is among the names that are positioned to survive and grow. One of the main reasons for this is the company’s investment in innovation.

In addition, the electric vehicle industry has been experiencing tailwinds over several years. Short-term concerns provide an attractive entry opportunity into quality stocks. Clear-headed actions are among the potential value creators.

With the sharp correction, LCID stock has already updated the disappointing forecast for 2022. The focus should be on the company’s performance in 2023 and beyond. With the recent agreement with the Saudi government, the outlook looks positive.

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