Lucid Group Inc. (LCID), a Newark, Calif.-based electric car manufacturer led by an ex-Tesla Inc. (TSLA) engineer, recently merged with Churchill Capital Corp IV (CCIV), a special purpose acquisition company (SPAC) for a Pro-forma equity value of $24 billion.

The stock began trading on July 26, 2021, and surged 19% in price in its Nasdaq debut.

However, closing yesterday’s trading session at $25.07, LCID’s stock is trading 61.3% below its 52-week high of $64.86, indicating bearish sentiment. In addition, a current class-action lawsuit and concerns related to the global chip shortage plaguing the EV industry could raise investors’ anxiety surrounding the stock. Moreover, given the stock’s steep valuation and weak fundamentals, it could be a risky bet.

Click here to checkout our Electric Vehicle Industry Report for 2021

Here’s what could influence LCID’s performance in the coming months:

Chip Shortage Could Mar Growth

Concerns about climate change, various government subsidies, and governmental plans to phase out fossil-fuel-powered vehicles pushed EV sales to new highs last year. However, a  global semiconductor shortage has emerged as a major impediment to the EV industry’s growth.

EV manufacturers are cutting back their operations as production costs climb dramatically owing to rising processing chip prices. Consequently,  revenue and earnings growth for numerous EV companies, including LCID, is expected to remain bleak in the coming quarters.

Ongoing Lawsuit

This month, a class-action lawsuit was filed against LCID and CCIV on behalf of the shareholders for alleged misleading statements and failure to disclose details regarding its business, operations, and prospects. The complaint alleges that the companies failed to disclose that LCID was not prepared to deliver vehicles by the spring of 2021, and that it projected production of 557 vehicles in 2021, less than the 6,000 vehicles announced in the run-up to the merger with CCIV. Because investors remain concerned about the lawsuit, LCID’s stock could take a major hit.

Inadequate Financials

LCID’s operating loss surged significantly year-over-year to $562.194 million for the second quarter, ended June 30, 2021. The company reported a $58.88 billion net loss, while its loss per share came in at 11.38 over this period. In addition, its cash balance declined 72.2% from its  year-ago value to $1 billion for the six months ended June 30, 2021.

Its trailing-12-month ROTC and ROA are negative 45.8% and 85.4%, respectively. Furthermore, LCID’s 27.4% trailing-12months gross profit margin is 23.4% lower than the 35.8% industry average. Also, the company’s cash from operations stood at a negative $815.76 million.

Stretched Valuation

In terms of forward EV/Sales, LCID is currently trading at 559.80x, which is significantly higher than the 1.47x industry average. In addition, its 511.72x forward Price/Sales compares with the 1.20x industry average. Furthermore, the stock’s 8.38x forward Price/Book ratio is 145.5% higher than the 3.41x industry average.

Unfavorable POWR Ratings

LCID has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories.S LCID has an F grade for Growth, Value, and Sentiment. Given the stock’s bleak growth prospects, negative profit margin, and higher-than-industry valuation multiples, these grades are justified.

Also, the stock has a C grade for Stability, which indicates the stock’s higher volatility than its peers.

Of the 63 stocks in the D-rated Auto & Vehicle Manufacturers industry, LCID is ranked #51.

Beyond what I’ve stated above, we have rated LCID for Momentum and Quality. Get all LCID ratings here.

Click here to check out our Automotive Industry Report for 2021

Bottom Line

LCID’s weak financials and poor profitability do not justify its stretched valuation. Also, it could take a few years for the company to generate a stable revenue stream because of the current semiconductor chip shortage and production cuts. Thus, we believe LCID is best avoided now.

How Does Luci Group Inc. (LCID) Stack Up Against its Peers?

While LCID has an overall POWR Rating of D, one might want to consider looking at its industry peers, Suzuki Motor Corporation (SZKMY), Volkswagen AG (VWAGY), and Honda Motor Company Ltd (HMC), which have an A (Strong Buy) rating.

Click here to checkout our Electric Vehicle Industry Report for 2021

LCID shares were trading at $26.21 per share on Tuesday morning, up $2.14 (+8.89%). Year-to-date, LCID has gained 161.84%, versus a 16.90% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...

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