Lucid: Expansion Plans May Weigh On Stock Price (NASDAQ: LCID)

Stock Market


La Jolla, CA: Lucid Motors Showroom at Westfield UTC Mall

JannHuizenga / iStock Unreleased via Getty Images

Thesis

The automotive industry includes many small upstarts trying to scale up with the hopes of one day having a stock chart similar to that of Tesla, Inc. (TSLA). Lucid Group, Inc. (NASDAQ: LCID) finds itself amongst these with its Lucid Air sedan, a luxury EV car that has won multiple awards including MotorTrend’s 2022 Car of the Year, one of the industry’s most prestigious trophies.

However, what’s holding this company back is its inability to scale production. Lucid underperformed badly last year when it fell short of targeted vehicle deliveries by a substantial margin. On its most recent earnings call it also cut guidance for 2022 deliveries to barely a third of its installed production capacity. But in spite of that, the company is pouring cash into building new factories and has already begun a Phase 2 add-on to its US production facility while also revealing plans to soon break ground on an international factory. This rush of factory expansion coupled with the company’s vehicle production problems is creating a lot of execution risk that shareholders will have to bear. I would not buy this stock nor would I recommend it.

Lucid

Lucid began operations in 2007 and was originally dedicated to producing batteries and powertrains for other EV manufacturers. It shifted focus in 2016 to building its own high-end EVs but embarking on such a transformative shift was going to require a lot of capital. As a result, in 2019 it announced that the Public Investment Fund of Saudi Arabia (“PIF”), that the country’s sovereign wealth fund, had invested $ 1 billion into the company. The PIF still holds a 61.4% stake in the company today.

Lucid used the funds to design and build the aforementioned award-winning Lucid Air sedan as well as a production factory in Arizona that has a 34k vehicle / year capacity. When the $ 700 million facility was completed in December of 2020 the company set the target of producing 577 vehicles in 2021.

By Q3 of last year the company had received more than 13k reservations and had begun the production of customer vehicles, the first of which was delivered on October 30, 2021. In Q3 the company also began construction on Phase 2 of its Arizona facility that will see it add 2.85 million square feet of space and allow it to raise production capacity from 34k to 90k vehicles / year. Reservations have continued coming in at a strong pace and by February 28 of this year the company reported having booked over 25k reservations.

The Machine that Builds the Machine

In my previous article on Seeking Alpha, I wrote about Tesla. I discussed how I wished to see that company increase capex spending at a faster rate in order to meet the insatiable demand for its vehicles. Together, its 2 factories produced 930k vehicles last year easily justifying the build-out of 2 more facilities that are in the process of ramping-up.

For Lucid, I would like to see the exact opposite of that. I believe this company should adopt a more restrained approach when allocating its capex spend until it has ramped up production at its existing facility. A process that always brings with it challenges and unforeseen problems that require management’s focus, time, and energy, to resolve.

But the company’s management has charted a course for a capex-heavy capacity buildout that is being undertaken even before meaningful numbers of its vehicles hit the market. On the Q4 conference call management reported producing only 125 vehicles last year, falling short of their initial target of 577 by a substantial margin. They also cut this year’s production guidance to between 12k and 14k units, a downward revision from the previous 20K target and well below their existing factory’s 34k / year capacity. The reasons attributed to this were problems in their supply chain.

Lucid Motors Delivery and Capacity

Investor Presentation

However, on the same call they also announced the construction of a new factory in Saudi Arabia that will have a 150k vehicle / year capacity. The company’s 10-K Filings say that construction will begin in the first half of this year with a projected completion date of 2025. Sherry House, Lucid’s CFO, also mentioned that in addition to the Saudi project, they “continue to explore additional sites in China and possibilities in Europe ”.

In response to an analyst question about how they intend to fund all of this, she mentioned that the company ended the year with over $ 6 billion in cash ($ 2 billion of which came from a December convertible debt offering), which will fund the company ” really well into 2023 ”. At which point, she goes onto say about additional funding,“ It could come from governments that could come from the capital markets, whether it be debt or equity ”. Meaning that additional equity or convertible debt could be issued to fund the buildout of so much capacity, potentially diluting existing shareholders.

If instead, Lucid waited to expand production capacity until their existing factory had fully ramped-up, it could use operating cash flow thrown-off by the factory to internally fund the expansion. Saving the company from having to go to market for another cap raise.

Conclusion

Lucid is an ambitious company with a good product but the cash required for its aggressive expansion may leave it exposed to risks. This is something that could weigh on the stock price, especially if unforeseen problems materialize as it ramps-up vehicle production.



Source link

Leave a Reply

Your email address will not be published.