Lucid Motors Stock: Darwinism Is Eating EV Manufacturers (NASDAQ:LCID)

Developing, manufacturing, and retailing a new car is very capital intensive. Hence, whilst companies might be able to raise the initial startup funds, many fail because they are unable to retain access to the deep pool of capital required to support and maintain long periods of heavy capital expenditure. For clarity, Lucid Motors (NASDAQ:LCID) does not fall into this camp yet as it held cash and equivalents of $5.4 billion as of its last reported quarter. This places the company above many of its peers that also went public during the pandemic years.

But with the EV landscape fast becoming characterized by going concern risk and a looming liquidity crisis, Lucid stands to emerge strongly as Darwinism looks set to eat a number of EV manufacturers. Electric Last Mile, which like Lucid went public in 2021 via a blank check company has filed its chapter 7 with a number of other companies like Canoo (GOEV) and Faraday Future (FFIE) facing looming liquidity gaps. This will heighten an already Darwinistic backdrop for EV manufacturers, reducing long-term competition in the space to only a handful of the fittest and most competitive companies.

Lucid bulls are in great hands. The California-based company’s management has executed well so far by completing its first purpose-built EV factory in Arizona last year. The $700 million Casa Grande facility will have a future capacity to produce 350,000 units a year and will set the backdrop for an eventual expansion of total production capacity for Lucid to half a million cars a year by the middle of the decade. The remainder of this total will come from a second 155,000 production capacity factory in Saudi Arabia to serve the fledgling Middle-Eastern EV market.

Strongly Capitalized To Weather EV Winter

Lucid’s flagship Lucid Air EV sedan is the longest range and fastest charging luxury EV currently on the market. The company’s Air Dream model has an EPA range of up to 520 miles per charge with 300 miles of this deliverable within a 20 minutes charge time. While the company’s models are expensive with a starting price of $87,400, reservations have grown to reach just over 30,000 to place the sales pipeline at $2.9 billion. This number excludes a 100,000 vehicle purchase commitment from the Saudi Arabian government.

Lucid last reported earnings for its fiscal 2022 first quarter which saw revenue come in at $57.7 million as deliveries topped out at 360 against guidance for production volume of 12,000 to 14,000 vehicles for the year. Lucid expects to deliver 49,000 vehicles in 2023, rising to 90,000 in 2024. This would be for revenue of $5.5 billion and $9.9 billion respectively. However, the specter of a recession towards the latter half of 2023 has been flagged as a core risk for an embattled US economy already fighting record levels of inflation. Hence, whilst the EV market is likely going to realize a material ramp in demand over the next decade, a protracted and pronounced period of negative economic growth would derail Lucid’s delivery targets and jeopardize its ambition to turn free cash flow positive from 2025.

This is problematic because Lucid’s cash burn for its last reported quarter stood at $680 million, a figure that includes capital expenditure of $185 million. With Lucid guiding for total capital expenditure for this year of $2 billion, the company’s cash position could quickly become precarious. Assuming operational cash burn remains at $495 million per quarter, Lucid’s runway would only extend into the latter half of 2023. However, the company has been able to secure a $1 billion debt facility which would extend this runway. The backing by Saudi Arabia also somewhat de-risks Lucid’s operational roadmap. Indeed, the company was provided with $3.4 billion in financing and incentives over the next 15 years to build its AMP-2 factory in the Kingdom’s new King Abdullah Economic City.

A New EV Landscape

Lucid is one of the higher-quality EV companies that went public last year. The company is chasing a space set for immense growth over the next decade as governments rush to fulfil their net-zero obligations on the back of the Paris Climate Accords. This will see a phase-out of fossil fuel vehicles with the EU announcing a framework to stop the sale of all new ICE vehicle sales past 2035. The direction of the world is clear and Lucid is on the right path with a strong technology offering and a management team that is executing ambitious capital expenditure targets.

The collapse of sentiment towards EV companies was to be expected as the previous valuations had run far ahead of prudence. And whilst Lucid’s market cap has come down by around 65% from its all-time highs, the current market cap of $34 billion is still quite lofty. This is one to watch and could be a buy if the US avoids a recession.