Lucid (NASDAQ:LCID) showcased the first "customer quality" Air sedans rolling off the assembly line at its Casa Grande manufacturing facility two weeks ago during the "Production Preview Week" event. The gesture marked the beginning of commercial production for the EV maker, and started the official countdown to its first customer delivery, which management confirmed would happen later this month. Guests who were able to experience the vehicle first-hand at the event had also validated MotorTrend's flawless review on the vehicle in August. The latest updates had bolstered investors' confidence on the stock's upside potential as expected, with its price reaching $28.39 on September 29th, the highest since the completion of Lucid's reverse merger with SPAC Churchill Capital Corp. IV ("CCIV") in July.
But mounting headwinds that have accompanied the broader market into the fourth and final quarter of the calendar year had snapped Lucid's three-day rally. The stock has since calmed from its recent peak, remaining rangebound at the mid-$20 level in the last two weeks. Meanwhile, the broader market continues to be plagued by volatility resulting from mounting concerns of a slowing economic recovery due to the lingering coronavirus delta variant, supply chain disruptions, an energy crisis, and contagion risk from China's rising debt woes.
The stock will likely remain rangebound over the next two weeks as investors mull on the upcoming delivery of the first Air sedan. The Air sedan's entry into the mass market will be a key inflection point for Lucid as it completes its transition from an EV startup to an EV maker, marking better valuation prospects ahead. Another near-term catalyst to keep an eye out for would include Lucid's first earnings release, which is expected to happen in early- or mid-November. With commercial production, the last and hardest hurdle, now in progress and the first Air sedan delivery on its way, Lucid is expected to close off the year on a strong note. On this basis, we maintain our bullish outlook and 12-month price target of $29.79 on the stock, making its recent pullback an attractive buy opportunity.
Lucid kicked off its Production Preview Week on September 27th, and opened the doors of its Arizona manufacturing facility to guests for the first time. As anticipated in our most recent coverage on the stock, Lucid provided several major updates on its car manufacturing progress, delivery timeline, and near-term business outlook at the week-long event:
Attending guests were able to test-drive all four trims of the Lucid Air as well. Those who are active in the automotive community have also testified to MotorTrend's flawless review of the premium electric sedan in August, validating the stunningly positive driving experience delivered by the vehicle. Paired with Bank of America's recent follow-up affirmation of their initial buy rating on the stock after attending Lucid's Production Preview Week, investors have largely responded with confidence, boosting Lucid's stock price to a post-SPAC-merger peak of more than $28.
Last month, Lucid announced a cashless redemption of all outstanding warrants as of October 8th. Public warrant holders will receive 0.4458 of a Lucid share for each public warrant outstanding on the redemption date. The decision effectively reduced share price dilution risks from the conversion of warrants, while also enabling warrant holders to partake in Lucid's long-term growth by holding stake in the company. Although the cashless redemption meant Lucid had to lose out on cash proceeds of more than $467 million had the warrants been exercised, the decision was also a testament to Lucid's capability in financing its near-term growth initiatives. The EV maker received net cash proceeds of $4.4 billion upon completion of its reverse merger with CCIV in July, in which CEO Peter Rawlinson had recently said would be sufficient to fund production of the Air sedans and other operational costs until the end of 2022.
Meanwhile, the company would consider alternative financing options to fund production of the Gravity SUV slated for 2023. Considering Lucid's strong balance sheet, boasting a net-cash position with minimal related party debt, the company has the flexibility to consider debt financing down the road, which would be less costly than equity financing and reduce risks of additional share price dilution. The lower cost of debt would ultimately reduce the weighted average cost of capital applied to discount Lucid's future gains, which makes it more attractive from a valuation standpoint in the long-run.
Earlier this week, Lucid provided additional detail regarding the functions of its "DreamDrive" advanced driver-assistance system ("ADAS"). DreamDrive was introduced last July, and features 32 cameras, radar, lidar, and ultrasonic sensors to enable a broad range of more than 30 advanced driver-assistance features, including self-parking and highway driving assistance. DreamDrive is also compatible with in-vehicle connectivity features to support seamless deployment of future deployment of automated driven technology through over-the-air updates.
The top tier package, "DreamDrive Pro", would make Lucid the first passenger automaker in the U.S. to employ automotive lidar as a standard feature in the Lucid Air Dream Edition and Lucid Air Grand Touring models. DreamDrive Pro also includes an in-vehicle monitoring system featuring infrared driver cameras and pressure sensors on the steering wheel to ensure driver engagement while the ADAS feature is activated. The technology will even take the liberty to stop the vehicle and unlock the doors to allow emergency responders access in the event that the driver is disengaged and not responding to prompts when DreamDrive Pro is activated. The safety feature directly addresses one of the most critical controversies regarding safety and clarity of use on level 2 autonomous driving features after multiple crashes featuring Tesla vehicles where Autopilot was activated with the driver disengaged, which is currently illegal. It also addresses some safety concerns over automated door handles employed in some modern EV models, which tend to lockup during emergencies, preventing first responders from accessing the vehicle to free passengers. The forward-looking design of DreamDrive effectively minimizes unnecessary headaches related to the eventual implementation of level 4 full self-driving features down the road.
Meanwhile, DreamDrive Pro will be an optional add-on feature in lower trim Lucid Air models. Although pricing information on the add-on feature has not yet been released, increasing ADAS adoption in recent years based on safety considerations underscores a strong additional revenue stream ahead for Lucid. Global demand for ADAS is expected to advance at a compounded annual growth rate of 27% through to 2025, reaching towards a projected value of close to $60 billion. And because software-as-a-service deployments are typically easier to scale, DreamDrive Pro will likely yield better margins and further bolster Lucid's long-term valuation prospects.
One of the most looked-forward-to near-term catalysts for the stock is the fast-approaching commencement of car deliveries to customers later this month. Lucid will prioritize debuting the $169,000, limited edition Lucid Air Dream Edition on roadways, before moving forward with production and delivery on the lower trim models.
The upcoming delivery of the Air sedans to customers is expected to drive increased brand awareness and recognition for Lucid. Paired with its direct sales go-to-market strategy, with the opening of more than 20 studios before the end of the year and at least six more in 2022 across North America, with additional expansion into Europe and the Middle East sometime next year, Lucid's brand will likely reach a greater audience to underpin additional sales in the near-term as global EV adoption continues to accelerate. Customers who have received their Air sedans are also expected to provide additional validation on the impressive reviews previously provided by exclusive car reviewers and selected guests at the Arizona manufacturing facility's open-house event. Lucid's brand reception over the next few months will be a critical determinant for the Lucid Air's order trends following initial deliveries, as well as the ramp potential on other models in the long-run, and an indicator of how viable management's guide on 2022 and 2023 deliveries is.
Lucid's first public earnings release, which is expected to occur in early- or mid-November for the quarter just passed, will also shed light on the company's progress related to its financial performance and business outlook, and further investors' confidence in the stock. Based on our initial deep dive on Lucid's operational trajectory, with consideration of details disclosed in its February and July Investor Presentation, the EV maker is expected to generate annual revenues of up to $14.0 billion over the next five years from EV sales and start realizing profits by 2025. Details to be released regarding the actual and estimated number of deliveries before the end of 2021 will be critical for evaluating whether the EV maker is progressing as planned. The upcoming earnings release is also expected to include remarks on Lucid's growth strategy, and provide details on its outlook regarding the addition of new revenue streams in the long-run. This includes information regarding the potential cross application of its proprietary battery technology in other commercial vehicles and energy storage, as well as its production and technology roadmap over the next five to ten years.
It has been an exciting year for Lucid, with significant achievements including the completion of its reverse merger IPO in July and the most recent EPA validation received on the Lucid Air's range rating of 520 miles on a single charge. While the stock will likely remain rangebound at the sub-$25 level for at least another week or two, additional milestones in the near-term are expected to be key catalysts in boosting the stock's performance. Lucid's promising growth prospects (please see our detailed analyses on the stock here) underscore significant upside potential for the stock in both the short- and long-run, which makes its current price level a reasonable buy opportunity.
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Disclosure: I/we have a beneficial long position in the shares of LCID either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.