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Despite a brief uplift in Lucid Group, Inc. (NASDAQ:LCID) stock in October due to meaningful production volume improvement observed in Q3 2022 and a reaffirmed full-year guidance on output levels, the premium electric vehicle (“EV”) maker’s shares remain victim to broader market volatility amid mounting macroeconomic uncertainties. More than 60% of Lucid’s market value has vanished this year, as investors continue to shun non-profitable companies and long-duration names with cash flow realization timelines being the furthest out.
A prominent trend in the current Q3 earnings season is that a decent quarter in line with expectations has been sufficient to satisfy investors when sentiment is weak. But Lucid’s third quarter results did not suffice. The company posted third quarter revenue of $195.5 million, missing consensus estimates of $200 million, while earnings per share came in at -$0.32, missing consensus estimates for -$0.30. The double miss continues to underscore execution risks ahead for this EV pure-play as it reels from ongoing early-stage production ramp-up costs, rising input cost pressures, as well as the lag in rolling off of sales priced under the legacy pricing model prior to MSRP hikes implemented in June.
Looking ahead, we remain focused on Lucid’s forward execution on ramping up production levels at its Casa Grande facility, as well as global expansion efforts. These remain key driving factors in Lucid’s ultimate ability to capture the industry-wide benefits from modestly easing supply chain bottlenecks and q/q cost pressures into its margin expansion trajectory. Meanwhile, we still view Lucid’s premium pricing model as a near-term competitive advantage amid the looming (in our view) macroeconomic downturn, which is corroborated by its order book of 34,000+ vehicles valued at $3.2 billion.
While Lucid stock is currently one of the most expensively priced compared to its EV start-up peers, trading at more than 12x forward EV/sales compared to the peer group average of ~8x, we believe the premium partially reflects a slight competitive advantage. Lucid benefits from being seen as a luxury EV maker catering to a less sensitive consumer cohort ahead of the looming economic downturn. Yet, said premium also makes Lucid’s shares more susceptible to further downside potential in the near term, which is consistent with the post-earnings decline in late-trading Tuesday.
Specifically, we view Lucid’s valuation premium to peers as a margin for further declines over coming months given its profit-lacking nature under today’s risk-off environment in equity investing. The combination of tightening monetary policies and rising recession risks stands to inject additional volatility to Lucid stock from a valuation perspective.
Understanding Lucid’s Premium Luxury Advantage
Consumer sentiment is expected to show prominent weakening over coming months as persistent inflationary pressures continue to weigh on household budgets and discretionary spending habits. This is further corroborated by the recent decline in the average personal savings rate in the U.S. from 3.5% as of June 30th to 3.1% as of September 30th, which is a far-cry from the “five-year pre-COVID average of [approximately] 7.7%.” Meanwhile, consumer credit card debt is also on a steady rise, approaching the “pre-pandemic peak of $916 billion in September.”
Global payment processing giant Visa (V) has also cited recently that while aggregate spending levels have remained resilient and consistent throughout the year, consumer behavior has inevitably changed as a result of worsening economic conditions and surging inflation, with data showing a decline in purchasing power. And further deterioration likely lies ahead, as the Federal Reserve remains fixed on taming demand with aggressive monetary policy tightening to rein in runaway inflation.
Yet, luxury segments have continued to demonstrate resilience relative to mass market OEMs, which makes strong tailwinds for Lucid. Automakers like Mercedes (OTCPK:MBGAF, OTCPK:MBGYY), Ferrari (RACE) and Porsche (OTCPK:POAHY) have collectively demonstrated benefits “from strong pricing power,” sustaining profitability with production preference of higher-priced “top-end” vehicle models, including “electric models priced 15% to 20% above their ICE cohorts.” From a demand perspective, the resilient sentiment from premium OEMs also underscores their recession-resistant nature relative to mass market counterparts, which cater to a consumer end-market cohort that is more sensitive to price changes. Specifically, mass market automakers have seen more price resilience demonstrated in cheaper compact vehicles in September (used car prices down 6% y/y) relative to full-size vehicles (used car prices down 25% y/y), which again demonstrate consumers’ price sensitivity within the persistent inflationary environment.
The luxury segment’s relative resilience amid the rocky macro backdrop is further corroborated by Lucid’s order book of 34,000+ vehicles valued at $3.2+ billion as of the end of the third quarter. This compares to 37,000+ reservations outstanding during the end of the second quarter, valued at more than $3.5 billion. Considering Lucid delivered 2,282 vehicles in the third quarter, the company likely lost some of its reservations ahead of changing consumer behavior under the currently dire macro climate. Yet, the relatively slight decline in order book value underscores Lucid’s ability to maintain its top-line function in achieving profitability, especially as costs continue to scale with production now close to doubling the estimated rate in 1H22 at more than 300 vehicles per week.
Lucid’s pricing power as a luxury premium EV maker also makes a competitive advantage by absorbing some of the near-term cost pressures and safeguarding auto gross margins from macro-driven erosion in addition to higher ramp-up costs at early-stage production. As mentioned in the earlier section, the company is expected to see more evident auto margin improvement in the fourth quarter and through 2023, when it plans to ramp-up production to capacity and roll off of legacy orders placed prior to the June MSRP increase. The upcoming start of productions of the higher-priced Lucid Air Sapphire trim is also expected to contribute positively towards the company’s forward auto margins, offset by related ramp-up costs in early-stage production of said vehicle variant. Another upcoming cost alleviation factor that is slightly farther out includes the planned completion of AMP-1 Phase 2 expansion next year, alongside start of productions of the higher-priced Gravity SUV in 1H24. This shares the same platform as the Air sedan to enable improved economies of scale and hopefully drive costs lower over time.
And, while the recently enacted Inflation Reduction Act (“IRA”) in the U.S. – Lucid’s core operating market – effectively eliminates prospective buyers of luxury vehicles from EV purchase subsidies, we view the premium sector to be more resilient than its non-American mass market counterparts as well. The IRA will inevitably make EVs manufactured outside of North America and/or made with battery materials sourced from a region outside of “the U.S. or a free trade agreement country” less competitive over the longer-term, as they will not be eligible for the EV purchase tax credits nor the battery production and assembly credits.
But the luxury segment has always been “carved out” in a sense from said competitive disadvantage under the IRA, given that the more affluent consumer end-market is relatively less sensitive to price changes. And in Lucid’s case, not only does its premium positioning within the increasingly saturated EV market effectively offset some of the competitive demand headwinds stemming from the IRA, but the company also stands to benefit from a battery pack assembly credit of $10/kWh under the same law thanks to its U.S.-based Lucid Powertrain Manufacturing (“LMP-1”) facility in Casa Grande, Arizona.
Addressing Downside Risks
- Profitability Risks: As mentioned in the earlier section, the Lucid stock remains vulnerable to further volatility as investors continue to shun companies operating at a loss. With the company still in early stages of ramping up productions to full capacity, related costs will continue to weigh on its margins, which is a harbinger for further turbulence to its shares’ performance amid mounting market uncertainties over coming months. While the inflationary environment today is also compounding pains on Lucid’s margins, we view the easing cost environment as a result of improving supply chains in the third quarter as a plus. Specifically, global container shipping costs have decreased 68% y/y as of September, although it remains close to double of pre-pandemic levels. Meanwhile, costs of road transport have also eased, declining by 6% since peaking in March 2022, although they remain 22% higher y/y. This is bound to alleviate some of the near-term input cost pressures and logistics inefficiencies previously experienced by Lucid, leaving margins more reflective of its higher opex related to planned production ramp-up and expansion spending only. And from a long-view perspective, we remain optimistic that Lucid’s vertically-integrated business model and continued production ramp-up will enable competitive profit margins at scale. However, this will take time, which is a luxury that not many can afford under the current market climate, and potentially subjects the stock to further turbulence over coming months.
- Production Risks: Lucid produced 2,282 vehicles in the third quarter, which is more than threefold the output volume in the second quarter. Based on our previous coverage on the stock, the company has likely produced at a quarterly run-rate of about 700 to 800 vehicles in 1H22, which puts it at about 2,318 vehicles out from the lower-range of its full-year production target. While the some-2,300 vehicles Lucid needs to produce in the fourth quarter match closely with its output volumes in the third quarter, it is important to remember that the 2,282 vehicles produced in the third quarter includes a handful (estimated at 500 to 600 units) of near-completion inventory classified as work-in-progress during the second quarter due to logistics challenges and quality issues. As such, Lucid’s production run-rate would need to improve by another ~30% in the fourth quarter in order to meet its full-year production guidance of at least 6,000 vehicles. But considering Lucid’s ability to ramp production volumes up by more than three-fold in the third quarter (or more than double, excluding near-completion units rolled over from the second quarter), we view its reaffirmed full-year production guidance as reasonably achievable. As observed in the latest 3Q22 earnings season, companies that have previously “guided conservatively and been upfront about macro sensitivity” have tended to fare better under the current macro climate, as it “leaves room to surprise to the upside.” We view this as a potential booster for Lucid, especially compared to peers like Rivian (RIVN), which reaffirmed its aggressive full-year production goal and effectively dialed up execution risks due to persistent industry-wide production challenges (e.g., supply chain constraints, logistic bottlenecks, etc.).
- Liquidity Risks: Auto production remains a capital-intensive business, which is further elevated in Lucid’s case given its internalized, vertically integrated business model. The company ended the third quarter with cash of $3.86 billion, which should be sufficient to cover capital requirements through the fourth quarter of 2023. And as Lucid works towards its overseas expansion aspirations, alongside the roll-out of new vehicle models over the longer-term (e.g., new Air sedan variants; Gravity SUV), the company will likely command new capital requirement in the near-term. However, we view the company’s exposure to liquidity risks as remote, especially when compared against EV start-ups with similar growth profiles. As discussed in one of our previous coverages on the stock, we view Lucid’s $1.75 billion convertible debt offering last year as a prudent move to bolster its balance sheet alongside $4.4 billion received in July 2021 following completion of its reverse merger with CCIV. And the multitude of credit revolvers under Lucid’s belt (totaling $1.25+ billion), coupled with the recent $8 billion universal shelf filing further reinforces its financial flexibility to support long-term growth initiatives. The company’s long-term partnership with the Kingdom of Saudi Arabia (“KSA”), reinforced by the Public Investment Fund’s controlling stake in the company, also provides further liquidity backing to the company’s growth aspirations. This is further corroborated by the support Lucid has received to date for its expansion efforts in the KSA. These include the extension of a $1.4 billion Saudi Industrial Development Fund loan agreement to support the build-out of Lucid’s new manufacturing facility in the King Abdullah Economic City (“KAEC”), as well as financial support from local public agencies to subsidize the EV maker’s day-to-day operations in the region.
Final Thoughts
From a long-view perspective, we remain bullish on the Lucid stock given a robust secular demand environment ahead. Although the EV maker’s double miss in the third quarter does not bode favorably for the stock under the current market climate, there are multiple factors over the next 12 to 24 months that are expected to visibly drive costs lower and enable greater margin expansion, making positive contributions to Lucid’s longer-term valuation prospects. These include its premium pricing advantage in enabling macro resilience in the near-term as well as competitive profit margins over the longer term when scale is reached.
But for now, given Lucid stock’s valuation premium to its peers and the underlying business’ ongoing losses, we expect Lucid shares to see further price volatility as market continues to adjust for looming macro headwinds, spanning weakening financial conditions, tightening monetary policies, and rising recession risks.
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