When Lucid Group (LCID -1.99%) rolled onto the electric vehicle (EV) scene in 2021, investors lined up to get a piece of the company, sending its share price soaring in the following months after it went public through a special purpose acquisition company (SPAC).
But investor enthusiasm has cooled since then, and Lucid’s share price is down 61% over the past year. Some investors are asking themselves whether this price drop is a great entry point or an indication of bigger problems at the company.
While the company certainly has potential in the EV market, there are a few reasons I think it’s best for investors to avoid this EV stock right now.
A Lucid Air EV. Image source: Lucid Group.
Lucid’s vehicle production is still pretty low
Lucid produced 7,180 vehicles in 2022, which technically exceeded its guidance of building between 6,000 to 7,000 vehicles for the year. But that goal had an asterisk next to it, because Lucid lowered its production guidance twice last year, down from an initial projection of 20,000 vehicles for the year.
Lucid will have another layer of production complexity later this year after it begins making its new vehicle, the Gravity SUV, on its production line. Up until now, the company has only produced variations of its Air sedan.
New automakers often have a slow ramp up to their full production potential, but investing in an EV company while it’s still trying to find its production footing means investors would be taking on additional risk.
Lucid could make improvements to production in 2023, and potential investors should be looking for the company to do so, but it would be best to wait and see if Lucid can set higher production goals and meet them.
Lucid is losing money
More automakers than ever before are producing electric vehicles, which has caused an increase in demand for EV materials (batteries, microchips, raw materials, etc.). As a result, the cost to build an EV has gone up.
That’s especially bad news for Lucid, which is trying to make progress toward reducing its losses. Its net loss was $530 million in the third quarter — slightly worse than the loss of $524 million in the year-ago quarter — and the company has cited rising material costs as part of the problem.
On the company’s third-quarter earnings call, chief financial officer Sherry House said that “the raw material prices have been high” and that the extra expenses have “definitely hit us hard.”
And while House thinks material prices peaked in the third quarter and will start to settle down, that might not be the case for batteries. Research from BloombergNEF shows that prices for batteries, the most expensive part of any EV, won’t begin falling until next year.
All new start-up companies lose money, but it’s particularly troubling for Lucid because it is trying to get off the ground at the same time that EV material costs are rising and inflation is high.
Lucid has little control over these higher costs, and they’ll likely make it harder for the company to make a profit from its vehicle sales.
The stock is still expensive
And despite Lucid’s big share price drop over the past year, the stock is far from a bargain.
The price-to-sales (P/S) ratio of 43 is still much higher than the P/S of some of its EV peers. Tesla, for example, has a P/S of 8, and fellow EV start-up Rivian Automotive has a P/S of 16.
The combination of its expensive share price with rising EV costs and the company’s already signifiant losses makes me hesitant about Lucid right now. I think the company is creating a great product, but there are too many uncertainties for the EV maker that keep this stock from being a buy at the moment.
Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.