The automotive business is a tough game, but Lucid Group(NASDAQ: LCID) apparently makes a good product. Its flagship model, the Lucid Air, has garnered great reviews, and the company has a new SUV model coming soon. However, Lucid has struggled with sharp losses while it tries to grow production levels high enough to sustain the business financially.
Investors recently received great news when Lucid announced it had secured a new $750 million investment in preferred stock and $750 million in loans from Saudi Arabia's Public Investment Fund (PIF), which has long backed the company. Management says the additional funds will fund operations through the end of 2025, giving investors some stability.
Does this position Lucid stock as a long-term winner, capable of generating life-changing investment returns?
Here is what you need to know.
Additional funds are a helpful Band-Aid but not a solution
Lucid Group is a young automotive company facing a simple problem that all new competitors in this industry face: It needs to increase its vehicle production fast enough to make money before it runs out of money.
Manufacturing vehicles requires expensive factories, which must build many vehicles to run profitably. This hurdle and the automotive industry's competitiveness make it tough to stick around. Tesla once faced the same problem and nearly went bankrupt before it reached that magic threshold where it built enough cars to tip the business toward profitability.
Lucid, which produced 2,110 units in Q2 and delivered 2,394 (a 70.5% year-over-year increase), is progressing. You can see below that gross losses and free cash flow have seemingly bottomed and begun improving:
LCID Gross Profit (TTM) data by YCharts
The company ended June with approximately $3.9 billion in cash and couldn't go much more than another year at this pace without running out of money. Management believes the additional $1.5 billion in total liquidity from Saudi Arabia's PIF will fund the business through Q4 next year, another 18 months from now.
Lucid's short-term stability is easily a win for investors, which helps explain the stock's positive reaction to the news. However, it's more like a Band-Aid on a wound than a solution; the stock's long-term returns will depend on how quickly Lucid can stop its cash burn.
Lucid's investment potential drops over time.
Only time will tell when (or if) Lucid stops losing money, but it's an important question because the stock has less potential upside the longer it burns cash.
Lucid can raise money from debt, and it has. But you can only do that so much when you're losing money, because servicing that debt only depletes your cash faster. The other option is to sell more shares to raise the money. You can see that Lucid's share count has dramatically increased since the company went public in 2021:
LCID Total Long Term Debt (Quarterly) data by YCharts
The more shares there are, the less of the company each share represents. In other words, this concept (called dilution) is terrible for shareholders because it decreases the stock's per-share value. There is a scenario in which Lucid ultimately survives and thrives, but investors don't make as much money because Lucid had to dilute its shareholders to oblivion to keep the company afloat.
While Saudi Arabia came to the rescue once again, it's worth considering the risk that it eventually decides that Lucid is no longer worth investing in and stops before Lucid can survive on its own. Saudi Arabia has tied up roughly $7 billion in Lucid thus far, so cutting its losses would sting. However, Saudi Arabia's PIF is worth nearly $1 trillion, so it can easily move on without feeling too much pain.
Is Lucid stock a millionaire-maker?
Few stocks generate life-changing returns without taking some risks, but not every opportunity is created equal. Lucid is undoubtedly a risky stock, but the ongoing dilution and risk of Saudi Arabia pulling its support are serious red flags. Even if Lucid survives, it still must cement itself as a leading electric vehicle brand capable of enough long-term growth to generate such lofty returns. Tesla delivers hundreds of thousands of vehicles every three months; Lucid hopes to hit 9,000 for the year.
Lucid argues that its technology makes its product superior to the competition, but that doesn't matter if the vehicles don't sell well.
Yes, Lucid stock can be a home run if everything goes right. That's a colossal if in Lucid's case. The evidence says it's a low-percentage pitch that investors shouldn't swing too hard at.
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Justin Pope 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.
