Though it has been a challenging year for the stock market as a whole, high-growth companies have struggled the most. Generation-high inflation, the Fed's aggressive interest rate hikes, and the war in Ukraine have caused investors to seek shelter in value stocks, which carry much lower valuation multiples and often pay favorable dividends.
On the list of growth companies that have been hurt by the latest macroeconomic headwinds is Lucid Group (LCID -1.39%). The electric vehicle (EV) maker, which is focused on the luxury EV market, has shed 59.8% of its value since the start of the year. But with the stock now on its last legs, is it time for investors to give it a look? Let's explore the pros and cons of Lucid's stock today.
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The pros: Massive market opportunity and elevated demand
It's clear by now that EVs are the future on our roads. Just 3 million EVs were sold globally in 2020. But according to Bloomberg, that number is projected to skyrocket to 66 million by 2040, equal to roughly two-thirds of car sales by that time.
Fortune Business Insights says the global EV market is forecast to expand from $287.4 billion in 2021 up to $1.3 trillion by 2028, a compound annual growth rate (CAGR) of 24.3%. So, while the EV revolution is well underway, investors still have more than enough time to exploit the enormous secular growth trend in the years to follow.
In its second-quarter earnings release, Lucid Group noted that it currently has more than 37,000 customer reservations, equaling potential sales of up to $3.5 billion. For more context, the company delivered only 679 vehicles in the second quarter, with its total revenue $97.3 million. So the demand for Lucid Group's cars is intact, and its revenue potential is very high compared to today's levels. But like any other company, demand carries little weight without the proper execution. And in Lucid's case, the company has struggled to deliver on its promises.
The cons: Stiff competition, monstrous losses, and production woes
In its second quarter, the EV company burned $823.4 million in cash and suffered a net loss of $220.4 million. And while it ended the quarter with $4.6 billion in cash, cash equivalents, and investments, and claims that it has sufficient liquidity well into 2023, the rate at which the company is losing money is alarming. Not to mention, due to supply chain constraints, management halved its previous full-year production guidance of 12,000 to 14,000 units to a range of 6,000 to 7,000.
The company is facing a wide range of macroeconomic headwinds; all EV makers are. But cutting full-year production guidance by 50% suggests that management doesn't have a firm grasp of its current operating environment. This is especially true when other companies in the space continue to deliver on their guidance.
Rivian Automotive, for example, reaffirmed its production guidance of 25,000 units for 2022 in its earnings call on Aug. 11. Combine Lucid Group's recent underperformance with the immense amount of competition that has emerged of late, and the EV stock appears to be a dicey play at the moment.
Should investors buy Lucid stock today?
The long-term potential of Lucid Group's business is clear, but the stock comes with significant risk today. Not only is competition at all-time highs, but the company is also highly unprofitable and has failed to maintain its production guidance for the year.
I believe there are more-promising plays on the growing EV market right now, such as the industry titan, Tesla, and Rivian, which was able to reiterate its production guidance for 2022 in spite of ongoing headwinds. Investors should stay on the sidelines for now and wait until Lucid Group exhibits more progress before buying the EV stock.
