Lucid Stock Needs a Sharp Correction to Become an Attractive EV Play

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© Source: Around the World Photos / Shutterstock.com The Lucid Motors (LCID) Plant in Arizona.

There is little leg room remaining in Lucid (NASDAQ:LCID) stock. Shares of the electric vehicle (EV) manufacturer have been up 86.4% in the last month. That makes it firmly overvalued. 

© Provided by InvestorPlace The Lucid Motors (LCID) Plant in Arizona.

The electric car has been the go-to for people looking to make their carbon footprint smaller.

EV technology is not new, but in 2021 there were more prototypes than ever before. There even were some breakthroughs in the industry that changed how we think about these vehicles forever. So, it is understandable why EV stocks like LCID are doing so well. However, you need to put the growth in context.

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Lucid Group went public through a reverse merger with Churchill Capital IV Corp., a special purpose acquisition company, or SPAC.

The stock did very well after the Churchill deal and ran up to $52. But then hit a wall because of its Lucid Air sedan. The launch was delayed and then they stopped updating us on what happened with production or even release dates for weeks at times. It took until September before things started moving again.

The Lucid Dream Edition Range model received an official Environmental Protection Agency (EPA) rating of 520 miles. The Tesla (NASDAQ:TSLA) rival can now boast it has the longest range vehicles on offer with at least 100+ extra miles over its closest competition.

Shares of the EV start-up are also rose substantially after executives confirmed new reservations and a ramped-up production schedule for 2022. Hence, bulls are laughing all the way to the bank.

However, investors do not seem to mind. They are already pricing in growth before it happens. Therefore, if you are an early investor, it is best to take profits and wait for a drop before purchasing more.

New Reservations Power LCID Stock to New Heights

It might seem strange LCID stock is doing so well despite reporting a third-quarter net loss of $524 million. You can chalk that up to several factors.

Vehicle reservations are up, and the company has confirmed ambitious production targets moving forward. Also, it’s worth noting that the company already has over 17,000 reservations for its Air sedan. The new model was outpacing initial projections and represented an order book worth $1.3 billion through September.

Lucid Motors confirmed that they are on track to produce 20,000 vehicles next year. However, challenges remain for achieving these plans as outlined by the company.

CEO Peter Rawlinson said they are taking steps to alleviate supply chain obstacles and the EV maker still plans on launching more affordable versions of their luxury electric car through 2022.

Revenue for the quarter of $232,000 was mainly attributable to a battery deal with Formula E electric racing league. Starting with the fourth fiscal period, the company will start to record vehicle sales, which is something that investors will look forward towards.

These announcements have done wonders for the stock price. Shares jumped 31% in a single day when Lucid revealed that their customers were starting to receive the new Air Dream Edition.

Lucid stock is following in the footsteps of Tesla, running up to the moon despite being a nascent enterprise.

Growth at a Price

Lucid’s success is evident as they’ve announced that the company will be producing 20,000 vehicles by 2022 and 50K in just two years, but that kind of growth will come at a price.

The company has announced that it plans on producing 20,000 cars by the end of 2022. This is a huge increase from 577 produced in 2021. And it will be an expensive endeavor for them.

As a result of the $4.4 billion it received from the reverse merger, Lucid will have cash through 2022. However, beyond that, the company will run into trouble.

CEO Peter Rawlinson has been constantly on the lookout for more funds, and he’s finding it hard to wait until 2022 before another round of dilution. Lucid’s Project Gravity is expected to launch in 2023, but it could face delays if they don’t secure some additional funding first. Tapping the equity markets is a matter of when not if. When that happens, the chances of a selloff are high.

In addition, the automotive industry continues to struggle due to the lack of semiconductor chips and supply chain issues. The problem is partly due to the pandemic, which has had a devastating impact on production globally. With such ambitious production schedules, the chip shortage can come back to haunt the company in forthcoming quarters.

Sit This One Out

One of the hottest investment themes to emerge last year are EV stocks. They took the financial world by storm, coming in a year where Wall Street needed a boost.

American companies are eager to invest in electric vehicles, but there’s one problem that currently prevents them from doing so–the lack of charging stations.

The Biden administration has an ambitious plan to solve this issue with $7.5 billion worth of investments towards expanding chargers across the country by 2020. Hence, the enthusiasm is justifiable. But this passion is leading to a sharp divergence between fundamentals and valuation.

LCID stock now has a market cap double that of Toyota (NYSE:TM). Somehow that does not seem right. You can thank Elon Musk for launching this latest trend.

However, we have been here countless times before. Hence, although the company is moving in the right direction, it is best to wait for LCID stock to lose some steam before buying more or initiating a position.

On the publication date, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.

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