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On Friday, Lucid Motors (LCID) shares fell to an intraday low of $3.62, marking a new record low for the startup electric vehicle (EV) company. While LCID eventually closed at $3.80, and is modestly higher to start the week, that's not much comfort for investors - the stock currently trades at less than half of the 2021 special purpose acquisition company (SPAC) IPO price of $10.
The most recent trigger for the downside in Lucid Motors shares was its guidance cut to full-year production. The company now expects to produce between 8,000-8,500 cars in 2023, down from its previous guidance of over 10,000 vehicles. Incidentally, Lucid Motors slashed its production guidance multiple times in 2022, as well.
Lucid Motors Is a Penny Stock Now
Lucid Motors is now a penny stock, and many doubt whether the company will survive as its stock price continues to fall to new lows. Tesla’s (TSLA) CEO Elon Musk predicted the demise of both Lucid Motors and Rivian (RIVN) in 2022 during an interview with the Tesla Silicon Valley Owners Club.
In 2021, when Rivian shares surged following its IPO – which was the biggest since Facebook’s, now Meta (META), in 2012 – Musk also expressed concerns over its valuation. To be sure, the valuations of startup EV companies in 2021 showed all the signs of a bubble. For instance, Rivian’s market cap topped $150 billion and surpassed that of Volkswagen (VWAGY). The market caps of NIO (NIO) and Lucid Motors also looked to go past the $100 billion mark, and NIO's valuation surpassed that of Ford (F) and General Motors (GM), both of which happened to sell many more cars – and, more importantly, sell them profitably.
Musk’s prediction about the valuations of startup EV companies has come true, and even Tesla’s market cap is now way below what it was at the peak in November 2021. So, will his prediction about Lucid going bankrupt also come true?
Lucid Motors' Listing Was the Epitome of the EV Bubble
The existence of an EV bubble was quite apparent in 2020, when Nikola (NKLA) - which is also a “bankruptcy candidate” now - commanded a market cap greater than Ford's. However, to me, the EV bubble reached its apex when the shares of Churchill Capital IV (CCIV), which eventually merged with Lucid, surged to almost $65 on mere rumors that the SPAC was going to merge with Lucid Motors.
A 550% spike in the SPACs' stock price was way too much, even by the standards of the SPAC mania of that time. The only way the stock could have sustained those levels was if the sponsors of CCIV managed to get a real bargain deal on valuations from Lucid Motors. That wasn’t going to happen, given the EV euphoria - and as things turned out, it didn't happen. As a result, CCIV stock went downhill sharply when the merger was finally announced.
Lucid Motors, as well as other EV names, rallied in late 2021 after Rivian’s IPO. There was a broad-based rally in EV names, and Tesla’s market cap went past $1.2 trillion – a milestone no other automaker has even come remotely close to. However, since then, the sector has been massively out of favor with investors, and practically all of these names trade at a fraction of their all-time highs - with LCID being no exception.
EV, Clean Energy Companies Stare at Bankruptcies
Fears over some green energy names going bankrupt are not unfounded. Earlier this year, Lordstown Motors filed for bankruptcy, and more recently, fuel cell company Plug Power (PLUG) issued a “going concern” warning – which is often a precursor to a bankruptcy filing.
Here, it's important to understand why companies go bankrupt, because there are a few different reasons:
- Falling demand for its products and services, or not being able to keep up with shifting trends: Kodak is the perfect example here, as the company lost out to the rise of digital photo technologies. Other companies may see a major product failure or are not able to deliver on a key product, which eventually leads to bankruptcy.
- Legal and regulatory issues: Companies can also go bankrupt due to legal issues, with the recent bankruptcy filings of Rite Aid, Endo International, and Mallinckrodt offering up good examples, since their alleged role in the U.S. opioid crisis was among the reasons they filed for bankruptcy.
- Worsening economic conditions: At times, worsening macro conditions can amplify financial woes. For instance, the COVID-19 pandemic - and more recently, the steep rise in interest rates - have pushed several companies into bankruptcy.
- Inability to pay debts: A lot of companies file for bankruptcies due to their huge debt pile, which they are not able to serve. The most recent example is that of WeWork (WEWKQ) which had a massive debt load of nearly $19 billion. Coupled with continued losses, that pushed the company into bankruptcy.
- Running out of cash: At times, companies that are consistently loss-making do run out of cash - and if investors or creditors don’t bail out the company, they seek bankruptcy protection. Lordstown Motors (RIDEQ) fits into this category, as the company ran out of cash after Foxconn pulled out from the funding deal.
Will Lucid Motors Go Bankrupt?
While many EV and green energy companies might go bankrupt over the next couple of years, Lucid Motors might not - for the simple reason that it had a total liquidity of $5.45 billion at the end of September 2023, which it believes will fund the launch of its Gravity vehicles and also last into 2025.
Another factor worth considering would be Lucid's backing from Saudi Arabia’s sovereign wealth fund, which has poured billions into the EV company already – including the private investment in public equity (PIPE) transaction during the 2021 merger, and two rounds of capital raise in 2022 and 2023, respectively.
The country sees electric cars as a key long-term growth driver, and earlier this year, Lucid opened its factory in Saudi Arabia. Lucid has started shipping cars to Saudi Arabia, which has an option to order up to 100,000 cars from the company.
Saudi Arabia Might Consider Taking Lucid Motors Private
With the backing from one of the richest sovereign wealth funds globally, it seems quite improbable that Lucid will go bankrupt, at least in the near future. That said, Saudi Arabia might consider taking the company private - something which markets have been speculating on for the last few months. However, if Lucid Motors sales fail to pick up, at some point even the “Saudi backstop” might come under pressure, especially as the kingdom has also formed a separate joint venture with Foxconn to produce electric cars in the country.
On the date of publication, Mohit Oberoi did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
