Wall Street is often regarded as a logical beast, yet it frequently sways to the rhythm of emotions. Nonetheless, in the long run, investors usually align with reality, which explains fluctuations in the share price of electric vehicle manufacturer Lucid Group (NYSE: LCID).
Investors are factoring in substantial risks considering the stock's significant dip below its initial public offering price. However, the market might still be overestimating its prospects.
How has LCID stock performed since its IPO?
Strictly speaking, Lucid didn't go through a conventional initial public offering (IPO). Instead, it became a public entity through a merger with a special purpose acquisition company (SPAC) — a public firm explicitly designed to purchase a private business and transform it into a combined public enterprise.
In this case, that business was Lucid. If you had invested $1,000 when the deal was announced on Feb. 22, 2021, your investment would have shrunk to a meager $226.4 today. LCID stock went public at $25 per share and currently trades at $5.66.
Investors with a high-risk appetite may argue that the worst is over and less risk is associated with investing in Lucid. While this holds some truth, it doesn't imply that the risks have vanished entirely. Lucid is still navigating the arduous road to establishing a viable business, and its financial reports suggest it's having a challenging time.
For instance, the company reported a loss of $0.43 per share in the first quarter of 2023, a more profound loss than $0.36 during the same period in the previous year, despite a substantial 159% increase in revenue. Further, Lucid reported that it concluded the quarter with approximately $4.1 billion in total liquidity, projected to support the company until at least the second quarter of 2024. A pessimistic interpretation is that a company incurring losses has roughly a year left before it depletes its funds.
Is more shareholder dilution on the cards?
Perhaps Lucid could find other means to raise capital, but there's a catch. The company issued a convertible note that matures at the end of 2026. The interest rate on this convertible debt is a mere 1.25%. Still, the shares are significantly below the conversion price, making a conversion improbable (as it would lead to a massive dilution of shares, which would likely upset investors).
Therefore, by the end of 2026, Lucid will be faced with addressing roughly $2 billion in debt that must be settled or refinanced at likely higher rates. This places a ticking clock on the company's efforts to establish its business, which could complicate attempts to secure additional capital if its business performance could be better.
What next for Lucid stock price and investors?
Lucid anticipates manufacturing at least 10,000 electric vehicles in 2023 (with 2,314 produced in the first quarter and 1,406 delivered). Though this could be seen as a triumph for Lucid, it's still trailing behind other EV manufacturers, including the profitable Tesla (NASDAQ: TSLA) and other legacy automakers.
Lucid often highlights its superior technology, but having the best product doesn't necessarily guarantee success. With a high cash burn rate and a significant convertible note hanging over its head, the balance between risk and reward tilts unfavorably, even considering the substantial drop in this unprofitable EV maker's stock price.
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