Lucid Stock Q1 2022 Preview: Prepare For A Weak Showing

Summary

• The automotive industry faces a tough earnings season ahead of worse-than-expected production challenges and market volatility.
• First quarter global auto production volumes are currently about 3% lower than previous consensus estimates, adding risks to 2022 guidance initially provided by OEMs earlier in the year.
• Lucid will not be spared either, with production volumes expected to come in at a weak pace for the first half of the year.
• But the company is well-prepared for ramping up production in the second half when some of the supply chain challenges are expected to ease.
• Paired with continued progress on its longer-term growth roadmap, which includes continued expansion of its product line-up and availability overseas, the stock remains a favourable investment pick at current levels for those with patience.

JannHuizenga/iStock Unreleased via Getty Images

The first quarter has largely remained a struggle across the broader automotive industry, as OEMs continue to take the brunt of the blow from protracted supply chain snarls ranging from component shortages to logistics headwinds. The pandemic-era disruptions to supply chains have yet to even recover, and the war in Ukraine and renewed COVID lockdowns in China have already unleashed fresh pressure on the already-fragile imbalance between input supply and demand.

And electric vehicle ("EV") upstarts like Lucid (NASDAQ:LCID) will most likely be registering the largest impact. Challenges that come with early production ramp up and a shortage of components amid other supply chain constraints are a recipe for the perfect storm. And to not sugar coat things, Lucid's production and delivery numbers for the first three months of the year will likely remain mediocre. It would already be counted a plus if it reaffirms or shows a production run-rate supportive of its already-lowered guidance of pushing out 12,000 to 14,000 vehicles by the end of the year.

But these challenges remain transitory, with continued deliveries of Lucid vehicles providing proof that improvements to production ramp up will regain momentum once supply chain constraints show further easing. And for now, the expectation threshold from market participants remains low. More than 80% of constituents within the S&P 500 that have reported actual 1Q22 financial results to date have beat earnings expectations, surpassing the five-year average of 77%. Only a handful of those that have fallen short of consensus estimates have been severely punished by the market (insert NFLX, AMZN, and INTC, to name a few), while the rest have largely performed in line with industry and key benchmark index trends. This means any signs of positive progress on production ramp up for Lucid at this point would be a point added to rebuilding investors' confidence in the stock.

Near-term production and supply chain headwinds aside, the EV demand environment remains strong. Lucid's technological leadership remains a key differentiator for its brand and product portfolio within the increasingly crowded industry. And continued improvements of its product and technology roadmap, paired with ongoing expansion of its presence and availability overseas will continue to bolster prospects for greater market share gains over the longer-term.

Delivery progress will for sure be an area of focus and key determinant for near-term price performance later this week. But the anticipated positive progress pertaining to international expansion, demand growth, and product and technology roadmap enhancement efforts should not be overlooked either. These will also place a heavy weighting on the stock's performance while investors mull on whether the company can grow into the premium priced into its valuations. Considering Lucid's recent start of productions ("SOP") on the Air Grand Touring, alongside a recent announcement of the new Air Grand Touring Performance trim that boasts industry-leading range and performance capabilities, paired with another Saudi Arabia milestone underwritten by a 100,000-vehicle order, the expectation for favourable prospects over the longer-term remain intact.

Brace for Impact with Mediocre Volumes Expected in 1H22

Execution remains a key focus for investors amongst tech upstarts with lofty market valuations, and Lucid's upcoming delivery results and guidance will be a case in point for close scrutiny. The company has already fallen short of production and delivery volume expectations twice: once in 2021 by failing to meet its production projections of 577 vehicles as outlined in its investor presentation, which the market has largely spared the company from punishment for, and again earlier this year when 2022 production guidance was slashed from 20,000 vehicles to a range between 12,000 and 14,000 vehicles.

Citing "extraordinary supply chain and supply quality challenges", management's decision to adjust guidance earlier this year dealt a huge blow to the stock's performance, driving an immediate decline of 14% in extended trading the day of the announcement. While supply chain woes are nothing new to the automotive industry, the situation was ironic for Lucid. The EV pure-play had actually been prudent in navigating through the ongoing chip supply crisis that has upended the automotive industry, but instead has been caught in a rut with a shortage on commodity items like window glass and interior carpeting.

The stock has yet to show any meaningful signs of recovery since, as it continues to succumb to broad-based market and industry-wide declines. Even recent rallies in response the start of customer deliveries of the Air Grand Touring, launch of a new Air Grand Touring Performance trim, and a blockbuster purchase order from the Kingdom of Saudi Arabia have showed little momentum, underscoring investors' relentless demand for tangible proof of progress. This means market participants will be on the lookout for results supportive of the current year guidance at the minimum. Anything short of such an expectation would mean investors are ready for the exit.

Now, unlike peers Tesla (TSLA) and Rivian (RIVN), Lucid does not provide monthly or quarter delivery and production results ahead of its earnings release. And based on progress reported during its first quarter earnings call (February 28), Lucid indicated it had produced more than 400 vehicles since SOP in late September with over 300 delivered to customers (125 of which were delivered in 2021). This indicates a weekly production run rate of about 30 vehicles in the first two months of the year, which is nothing impressive to write home about considering its Casa Grande AMP-1 facility's annual production capacity of 34,000 vehicles at full ramp. The early-year results were also a farcry from the monthly production run-rate of 1,000 vehicles required to hit the lower-range of Lucid's guidance. This indicates that the EV maker has likely produced and sold less than 1,000 vehicles in the first quarter, leaving a requirement to produce more than 11,000 vehicles in the remaining three quarters of the year.

To better understand the implications of Lucid's first quarter delivery results on its stock's performance, we have taken a look at comparable upstart Rivian's first quarter production and delivery results. Rivian produced 2,553 vehicles during the first quarter, and delivered 1,227 to customers over the same period. Based on its target to build 25,000 EVs this year, Rivian's first quarter results represent about 10% of that goal. The results were already a disappointment to Rivian's investors, seeing the stock has continued its downtrend following the announcement. If Lucid's first quarter productions do not hit at least 10% of the lower range of its guidance, the stock could also see further declines in the near-term.

And compounding added supply chain uncertainties emanating from the Russia-Ukraine war and COVID lockdowns across key component manufacturing hubs in China, the production bottleneck could remain in constraint for the rest of the second quarter. Paired with ongoing macroeconomic headwinds like further tightening of monetary policy and an extended inflationary environment, Lucid's stock could see further turbulence in the first half of the year.

But the tell-tale will largely rely on performance in the second half, which we expect to be much stronger. While recent satellite imaging shows that monthly vehicle productions in April have likely remained at under 100 units as expected due to unresolved supply chain snarls, Lucid's recent hiring spree for manufacturing technicians could mean the company is preparing for further ramp up later in the year. The EV maker is also seemingly amping up customer deliveries and reducing wait times, a positive sign that logistics are being sorted out to ensure efficient operations in the latter half when production picks up to meet its target for the year.

Robust Demand within an Inflationary Environment

The only common factor that automakers have ironically dodged under the current macroeconomic environment is that demand has largely remained strong despite speculations of dampening consumer prospect ahead of a potential economic downturn. Because of reduced supply in the market, more than 80% of new vehicle purchases recorded year-to-date were above the manufacturer's suggested retail price ("MSRP") compared to a mere 3% in the same period last year.

Monthly % of cars sold over/under MSRP (Edmunds)

Vehicle sticker prices that have historically "set the ceiling" now "sets the floor", underscoring how the tables have turned with pricing power shifting from consumers to auto makers within the supply-constrained environment. And the upper hand that auto makers hold on pricing have helped to cushion some of the blow from inflationary pressures that continue to drive up input costs. This is further corroborated by the jump in February's U.S. consumer price index - soaring vehicle prices "single-handedly accounted for one-fifth" of the month's 7.9% inflation print.

The change in pricing dynamic within the automotive industry has caused a shift in consumer demand towards "luxury and used". Surging new vehicle prices have encouraged more buyers from average income households to consider used cars, while those from higher income households are becoming more receptive of spending a little more for the luxury option.

The trend bodes well for Lucid. Although its vehicles start at a hefty premium of $77,400 for the Air Pure, the current demand environment is drawing greater interest to luxury from buyers within a cohort of Americans that earn over $75,000 a year and represent close to half of the country's population. This is further corroborated by the continued acceleration in Lucid's order book.

From Lucid's latest update, the company grew reservations by 47% over a short span of three months, from 17,000 in November (+31% from September) to 25,000 in February. Although the number is merely a drop in the ocean compared to orders and sales of industry titan Tesla and other legacy premium auto makers, the accelerating growth in demand is a positive gauge of the company's future uptake rate and sales. Paired with Lucid's continued expansion of its vehicle line-up and global availability, the company remains well-poised for greater market penetration and share gains - especially as production ramps up and industry-wide supply chain constraints subside.

Positive Progress on Long-Term Growth Initiatives

Near-term production and market challenges aside, Lucid continues to make significant strides in its globalization efforts and advancements to its product and technology roadmap. Following recent confirmation on the construction of its first overseas manufacturing facility in the Kingdom of Saudi Arabia, which underpins $3.4 billion of added value realizable over a 15-year horizon, Lucid has inked another deal to sell as many as 100,000 vehicles to Saudi Arabia's Ministry of Finance.

The purchase order calls for 50,000 EVs to be delivered over the next decade beginning 2Q23, with an option for another 50,000 EVs over the same period. Under the arrangement, Lucid is expected to deliver 1,000 to 2,000 vehicles on an annual basis over the next two years, with further ramp up to between 4,000 and 7,000 vehicles annually beginning 2025. Although the quantified size of the deal has not been disclosed, the arrangement could generate at least $4 billion to $8 billion in sales for Lucid over the next ten years based on the brand's current lowest selling price of $77,400 on the Air Pure. Based on the consensus price-to-2023-sales ratio of about 8.9x, and an average annual sales contribution of $400 million to $800 million attributable to the deal, Lucid is substantiating at least $3.6 billion to $7.1 billion in added value to its current market cap of about $32 billion. This represents a potentially generous 11% to 22% valuation bump upon materialization of the deal starting in 2023 from just fundamental growth, without consideration for any valuation multiple expansion.

The latest milestone achieved in Lucid's overseas expansion efforts also underscores its continued importance to Saudi Arabia's vision of diversifying its economy with added focus on becoming carbon-neutral over the longer-term. Pioneering EV adoption in Saudi Arabia will also mark a critical development for Lucid in scaling its business and "[addressing] worldwide and untapped market demand", which strengthens its fundamental outlook and bolsters favourable long-term valuation upsides ahead. The expansion of Lucid's sales and production footprint to Saudi Arabia will also enable better capitalization on rising demand across the nearby European market, which continues to lead rapid EV adoption.

Lucid's continued expansion to Canada with the opening of its latest studio in Toronto's Yorkdale Shopping Centre is also expected to help the brand gain further traction and drive momentum for the company's fundamental and valuation performance. The U.S. and Canada are together expected to account for more than a quarter of estimated EV sales totalling more than 12 million units by mid-decade. With deliveries in Canada beginning anytime now, Lucid is well-positioned to benefit from robust EV uptake rates across North America in coming years.

The company has also recently announced the SOP and customer deliveries on its Air Grand Touring, the second most expensive tier of its flagship Air sedan after selling out of the limited production, top trip Dream Edition. Starting at $139,000, the Air Grand Touring is capable of delivering 516 miles of range on a single charge, and boasts 819 horsepower with acceleration speeds from 0 to 60 miles per hour in 3.0 seconds. The company has also announced a new sub-trim, Air Grand Touring Performance, which is expected to begin deliveries coming June in the U.S. and August for Canada. Although the Grand Touring Performance has a lower driving range of 446 miles compared to the standard Grand Touring, its sticker price includes a $40,000 premium with an MSRP of $179,000 (C$242,000 in Canada). The newest addition to the Air sedan line-up runs on a dual-motor, enabling 1,050 horsepower and acceleration from 0 to 60 mph in 2.6 seconds, which are some unmatched specs within the nascent EV industry.

Both trims are equipped with an "ultra-fast 900V+ charging system", allowing for fast charging that can juice up the vehicle with 300 miles of range in 21 minutes. Lucid's technological leadership continues to answer to concerns over range anxiety, which remains one of the top roadblocks to faster global EV adoption. The new standards set will not only ensure Lucid's appeal within the luxury EV segment, but also advance technological development within the field to drive greater uptake rates and better economics for the broader industry, and enable accelerated adoption of sustainable transportation at the same time.

Valuation Considerations

Although we are effectively preparing for weak delivery results from Lucid for the first half of the year, our near-term price target remains consistent with our previous analysis at about $30 for the stock. This represents upside potential of more than 60% based on the stock's last-traded share price of $19 at the time of writing (May 3rd).

Lucid Valuation Analysis (Author)

Lucid Valuation Analysis (Author)

Based on the foregoing analysis, we believe Lucid remains capable of producing at least 12,000 vehicles by the end of the year. The mediocre outlook expected in the first half of the year is expected to represent a shift in productions, rather than permanently lost units. Not only does Lucid's manufacturing line have capacity to churn out 12,000 vehicles, the company's growing talent base and the expectation for further easing of current supply chain bottlenecks will also accommodate production ramp up in the latter half to meet its set target. The anticipated improvement to domestic production of key components as a result of rapid Omicron recovery and ensuing expansion of the labour force, paired with the expected post-pandemic reopening of China's economy in the second half also bolsters the prospects of supply chain improvements, which further complements the company's production ramp efforts.

Is Lucid a Buy Ahead of Upcoming Earnings?

While our price target indicates further upsides in the near-term, we expect the stock to see continued volatility in the sub-$20 range through the second quarter. Coupling expectations for front-loaded rate hikes in increments of 50bps to 75bps in May and June to quell inflation, with a COVID and geopolitical situation that remains fluid, equities are expected to remain in a risk-off environment in coming months. And compounding the macro headwinds with expectations for a weak showing from Lucid for its first quarter results and second quarter outlook, the stock is in for a few more months of turbulence, which creates potential for better entry opportunities ahead.

But nonetheless, we believe Lucid's stock remains an attractive long-term investment, with very favourable risk-reward pay-out potential at current price levels for patient investors. And as production continues to ramp and demand gets materialized into recognized revenues, which could take a few quarters of consistent positive progress, we expect a return in investors' confidence for the stock.

Author's Note: Thank you for reading my analysis. Please note that we will be launching a Livy Investment Research Marketplace service on June 1. The service will allow you to follow my coverage portfolio, interact with me directly, and participate in chat rooms with other subscribers. I will be offering a legacy discount for subscriptions in the first two weeks of launch. Stay tuned for more details as we ramp up to launch in the coming weeks.

Analyst’s 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.