Valuation Remains A Concern For Lucid Motors
After an euphoric rally to $64.9 earlier this year, Churchill Capital Corp IV (NYSE:CCIV) stock has seen a sharp correction. While the stock seems to be consolidating around $20 levels, CCIV stock has struggled to break-out on the upside.
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There are two likely reasons for the correction and the stock sustaining at lower levels. First and foremost, all electric vehicle stocks have corrected in the recent past. After touching highs of $900 earlier this year, Tesla (NASDAQ:TSLA) stock currently trades at $600. I believe this is a healthy correction and the long-term bull-market remains intact.
Further, there is little doubt that the valuation for Lucid Motors seems stretched. Even after the correction, it might make sense to stay away from CCIV stock.
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While I start my discussion on a bearish tone, the following point is important to note – Over the next decade, the electric vehicle industry is expected to grow at a CAGR of 29%. From a business perspective, I am bullish on electric vehicle companies. However, it might a good idea to wait for further correction before going overweight on electric vehicle stocks.
Let’s talk about the valuation concerns related to Lucid Motors.
High Valuation and Optimistic Projections
Churchill Capital announced a special purpose business combination with Lucid Motors in February 2021. The company also had a PIPE transaction that was priced at $15 per share. It implied a pro forma equity value of $24 billion.
Currently, CCIV stock trades near $23. Therefore, it seems likely that Lucid Motors will list at a valuation that’s above $35 billion. There are several reasons to believe that valuations are stretched.
Lucid Motors expects to commence production in the second half of the year. Further, the company has guided for sale of 20,000 electric vehicles and revenue of $2.2 billion in 2022.
However, on the guidance for 2022, Peter believes that the company is “on track for over 577 vehicles this year and a significant increase throughout next year.”
The company’s CEO didn’t commit the vehicle delivery number of 20,000. It’s very likely that projections will change. And this will disappoint the markets.
It’s also worth noting that Lucid motors expects to ramp-up vehicle deliveries to 49,000 units in 2023. Furthermore, by 2026, vehicle deliveries are expected at 251,000 units. The revenue guidance for 2026 is $22.7 billion.
Another important point to note is that the EV sales are expected to grow at a CAGR of 29% over the next decade. However, between 2022 and 2026, the company’s vehicle deliveries are expected to grow at a CAGR of 88.2%.
Given the intense competition in the electric vehicle industry, the growth rate seems unrealistic. With these optimistic projections, Lucid Motors expects to be free cash flow positive in 2025. A relatively conservative outlook would imply that the company is unlikely to be FCF positive even in 2026 or 2027.
Once actual numbers flow in terms of deliveries, the markets will re-set valuations to a conservative growth outlook.
Concluding Views
By 2030, Lucid Motors plans to have at least six products. This includes premium SUVs and sedans. With launch of new models, it’s likely that vehicle deliveries will gradually increase.
Lucid Motors also plans an affordable model to rival Tesla’s model 3 in 2024 or 2025. However, experts believe that “it may be too late for Lucid to launch the affordable model as legacy makers are already introducing affordable models to challenge Tesla.” Further, affordable models might not have an EBITDA margin as attractive as luxury models. The revenue and cash flow projections are likely to change if the affordable model does gain growth traction.
Clearly, there are several challenges and intense competition will impact growth. It remains to be seen if Lucid Motors has a brand-pull like Tesla.
Overall, it’s unlikely that CCIV stock will deliver strong returns in the foreseeable future. At best, the stock is likely to remain sideways. If I had to buy an EV stock, TSLA stock looks attractive after a meaningful correction.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
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