Lucid Group: Risky, But Has Saudi Arabia's Backing

Lucid Group (NASDAQ:LCID) is full of risks. In times of uncertain macroeconomic conditions and a high-interest rate environment, the company is immensely unprofitable. In fact, Lucid's road to profitability is still very opaque. Not only are the company's production numbers extremely weak, the delivery numbers relative to the production numbers are even weaker. The cars Lucid is making are not selling. In normal circumstances for a normal company, this is likely enough for the company to receive a sell rating, especially as the company will likely require additional financing in the future. However, Lucid is not a normal company existing in normal circumstances. The company is tied to a geopolitical interest, which often ignores near-term economic factors. Saudi Arabia's investment fund is heavily invested in Lucid Motors, and I believe they will pump Lucid Motors until the company is able to mass-produce its vehicles. Saudi Arabia is pouring over a trillion dollars to prepare the country for a post-oil world, and Lucid is one of many keys to opening the door to the future Saudi Arabia is planning. Therefore, I am neutral on Lucid's future.

Near-term Risks

As I have mentioned earlier, the risks involved in the company are massive. First, the company's production and deliveries are weak. Lucid produced 2173 vehicles in Q2; however, the company only managed to deliver 1404 vehicles. To put this number into perspective, the company only delivered 65% of the total vehicle produced. This likely shows that market demand for Lucid vehicles is persistently very weak. The claim is further supported by the fact that Lucid only delivered 1406 vehicles during the first quarter after producing 2314 vehicles. To date in 2023, the data support that consumer appetite for Lucid's products is weak, and it is highly questionable if this could change in the near future as Lucid's new vehicle is only expected to hit the market in 2024.

The demand and production levels are not the only risks surrounding Lucid. The cash burn rate and liquidity are other points of concern.

On May 31st, Lucid raised $3 billion through a stock offering diluting existing shareholders. The capital raise comes after the company reported about $780 million loss in 2023Q1 bringing the company's cash and short-term investment to about $3.4 billion. During the earnings call, the management team said that this is enough for the company to last until 2024Q2; thus, the additional $3 billion raised will likely allow the company to stay afloat until 2025-2026 before needing to seek additional funding.

Overall, Lucid Motor is not in an optimal position. The company's low deliveries relative to production shows poor demand for the company's product reflecting a fundamental risk, and the likelihood of a continual cash burn creates a potential liquidity risk in the future. Thus, if Lucid did not have strong backing from Saudi Arabia, I would have a sell rating on the company.

Saudi Arabia

Despite an arguably existential threat to Lucid, it may be in Saudi Arabia's best interest to continually support the company until a potential future success.

Government actions should not be taken lightly as it often ignores many short-term economic factors. Saudi Arabia has something called Vision 2030. This is a program or a vision for the country to stay prosperous and competitive in a post-oil world, and in this vision, the Kingdom of Saudi Arabia will be investing $3.3 trillion until 2030.

Today, about 80% of Saudi Arabia's export income comes from petrochemicals making up about 40% of the country's GDP. As such, it is highly likely for the country to do whatever in its power to grow other sources of income and economic growth. With many developed nations such as the US and Europe attempting to achieve carbon neutrality by 2050, growing other industries through Vision 2030 is likely the only way out of the current, arguably, existential crisis. Thus, considering the importance of Vision 2030, an opportunity to incur short-term losses for potential future prosperity will likely keep the country interested.

Lucid Motor's Importance

Why is Lucid Motor important to Saudi Arabia? Why should the nation incur billions in losses for the uncertain success of Lucid Motor?

Manufacturing creates massive amounts of quality jobs. Taking Tesla (TSLA) for example, Elon Musk, in 2022, said that the company has created 110,000 direct jobs and about 500,000 indirect jobs. Someone needs to make batteries, seats, consoles, and every single part that goes into making a car creating a tremendous economic impact.

Lucid Motors is expected to provide Saudi Arabia with this future by building a manufacturing plant in the country. Not only is Saudi Arabia hoping to create jobs, the country likely hopes to grow its manufacturing industry through Lucid creating synergies with other investments that the company has made through Vision 2030.

Saudi Arabia hopes to lead numerous manufacturing industries that could create synergies with a successful automobile industry. These include composite aerostructures to manufacture "all parts of the aircraft made of composite materials." Further, the production of wind turbines, pipes for petrochemicals, and components for automobiles and ships are also on the agenda.

The economic impact of Lucid's success could reach far beyond the economic losses the country may incur in the near term. Not only could successful Lucid create thousands of new jobs, but it could also boost the country's ongoing effort to diversify its economy from petrochemicals. Therefore, I believe Saudi Arabia will ignore the short-term risks associated with Lucid keeping the company afloat until an eventual success or a point of failure. The stakes are simply too high for the country to just give up on Lucid Motors allowing Lucid to find success in the coming few years.

Summary

Lucid Motor is certainly an extremely risky investment. The company is having trouble finding demand for its high-end cars even before their mass production phase. In fact, less than 70% of the cars produced in 2023 have been delivered to customers. The fundamental problem with demand is also combined with a potential future liquidity problem as the company's profitability roadmap is non-existent today. However, it may be in Saudi Arabia's best interest to keep supporting Lucid to give the company a chance to find its light at the end of the tunnel as Lucid's success will aid in the country's quest to diversify its economy away from petrochemicals. Therefore, as political interests often overshadow short-term risks, I have a neutral rating on Lucid stock.