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John Murphy, Bank of America Analyst, talks latest note on EV maker Lucid Motors.
ZACK GUZMAN: Let's chat electric vehicles, because we've been hearing a lot about the competition in that space. And of course, we've heard some interesting headlines from China talking about consolidation in the space in general. But today, we are seeing one EV maker catch quite a big boost off some positive notes in an analyst note talking about Lucid.
Shares are up more than 5% today as Bank of America put out a $30 price target on that stock, citing pretty big reasons to be optimistic. And for more on that, happy to welcome in the analyst behind the report, Bank of America's John Murphy joins us right now. And, John, it caught a lot of eyes because you compared Lucid to one-- [AUDIO OUT] Ferrari and Tesla, of course, they're on the EV. Side talk to me about what has you so excited about Lucid in a sea of competition.
JOHN MURPHY: Well, Zack, thanks for having me. You know, I think as we look at these early stage EV auto manufacturers like Lucid, you kind of have to pick some operating metrics and look at the management team to understand what's going on with the companies, because their ability to turn, you know, revenue and cash flow positive is a number of years out.
And I think when we look at Lucid, we look at Peter Rawlinson, Founder and CEO, who was the chief engineer on the Tesla Model S-- so that's a pretty good proof point that you've got somebody that's battle tested in one of the biggest EV vehicles that's out there in the market right now. But in addition to that, you've got a company that supplies battery technology, sole-sourced, to Formula E.
So that's kind of why we look at it versus Ferrari, as Ferrari provides a lot of powertrains to F1 race teams. So there's kind of a parallel there. I also think that as Lucid is starting out, they're starting out at the high end with their dream edition vehicles that are in the $175,000-plus or minus range, will grind down over time you know to some degree, but still stay at luxury price points that are probably at $70,000-plus.
So I think when you look at this, you've got the combination of some real good know-how from the chief engineer of the Model S at Tesla, great technology, and then a focus on the powertrain tech as well as the luxury market. So it's why you have this combination that's really powerful, I think-- somewhere between a combination of Tesla and Ferrari.
ZACK GUZMAN: Yeah, let's talk more about, I guess, the combination or relative comparison, I should say, to Tesla on a valuation basis, right? Because that's another thing where, you know, the company came public via SPAC-- you can have your thoughts on SPACs-- but when you talk about maybe how this company should be valued, what do you see when you stack it up against those comps?
JOHN MURPHY: Well, I think when you look at it versus the three other SPAC or startup names that we cover in the EV space right now, I think the progression of the plant and the management might be a little bit further along. Some of those companies are doing reasonably well-- certainly wouldn't count out Fisker or maybe even the other two. We're certainly not as favorable in those stocks at the moment, but it's certainly early days for those companies.
But I think as we look at Lucid and think about the race to one full plant-- so as a dumb auto analyst, you always think about 250,000 units as being one full plant. I think that Lucid is likely to get there a year, or two, or maybe three years earlier than Tesla did. So I think if we look back at the valuation of Tesla in its early days, it's somewhat appropriate and somewhat of a good guide stick.
But what we're doing right now in this free time EV to sales to get to our $30 price objective on our 2025 estimates is basically simply taking close to the average of the three other EV startup companies as well as Tesla, and that's kind of how we're arriving at that. If you look at that, Tesla right now on 2025 is trading almost 10 times EV sales. So it's an extreme discount to where Tesla is trading right now, an average of where things are right now in the EV space and, you know, something that's a little bit more aggressive than where Tesla was at this point of its maturation curve, but I think pretty appropriate given the validity of the business model at Lucid that we see so far.
ZACK GUZMAN: All right, so that's the bull case there on Lucid. But when you back up-- and I guess, you know, this would also be kind of more impressive for them to reach any kind of milestone faster than Tesla-- of course, they're kind of building on the backs of the giant there in kind of the progress being made on the EV side. But importantly, they are dealing with a few different other things market-wide that you highlighted in a new note as well, which is, of course, chips impacting supply.
A lot of people maybe might like to debate the demand side of EVs. My dad bought a Tesla not too long ago, I saw kind of the demand there, even in Texas. But on the supply side, how big of an impact is that on the whole EV market as they kind of battle with other companies out there to secure chips to keep pumping out cars?
JOHN MURPHY: So there's a lot of gradations to the semis chip shortage. I think for the majority of the industry, it's a much bigger issue. When we look at a company like Lucid at the moment, they're going to do a few hundred to maybe 1,000 units this year as they start up production in Arizona. We have them doing about 20,000 units next year.
So in the grand scheme of the demand for chips, I don't think-- or the supply of chips-- I don't think that's going to really derail the Lucid story itself. For the bigger manufacturers in the industry at large, it's a very significant issue. But it's not something that I think is going to really nick these start up EV companies at this point in the maturation curve. And hopefully, a year to 18 months out, we'll be through the bulk of this chip shortage and the EV manufacturers as well as the rest of the industry will be through the muck, and hopefully we'll get a very good auto cycle off the back of that that will help and lift them all.
ZACK GUZMAN: Yeah, lastly, that was pretty interesting in the note, kind of looking at the dips down still, not returning to pre-COVID levels until Q4 of 2022-- I mean, talk to me about why that's the timeline.
JOHN MURPHY: Well, I mean, what we're seeing right now is inventory has been worked down to almost record low levels, or lower levels than we've seen in 30-plus years-- we're about a million units of inventory in absolute terms. Just in the auto industry on dealer lots right now, traditionally, normal is around 3 to 3 and 1/2 million units. So we're very low on inventory at the moment, and it just keeps getting tougher and tougher with different kinks in the supply chain, particularly around semis, but other places as well for the industry to ramp up production.
So we don't think it's really until you get to mid next year, and even in the second half of 2022, you start catching up on production, and not even till 2023 that you start to get some level of normalization on inventory. So the industry is going to operate, in total, probably at much lower levels than anybody was expecting, and lower than most people are expecting even at the moment.
And we'll see strong pricing on the new and used side of the business for the vehicles themselves, which will help automakers offset some of this volume pressure and help profitability. It'll be a bigger problem for the suppliers because they're just getting a lower volume and pretty good for the dealers as well, as they're getting good gross margins off the vehicle. So different links in the value chain are being impacted differently, but, you know, it's the toughest for the suppliers, OK for automakers, and the best for dealers at the moment.
ZACK GUZMAN: It's a very hot space right now, a lot of questions, a lot of interest from our viewers. So I appreciate you coming on not only with two pretty good notes there in terms of detail, but also an interesting call there, in one name particularly. John Murphy, Bank of America Analyst, thanks again for the time.