I’ve said before that Lucid has some really nice EVs (its Air model won the 2022 MotorTrend Car of the Year award) that could potentially help the company capture market share from Tesla. Has today’s share price fall created a buying opportunity for me then? Let’s take a look.

Why Lucid’s share price is down today

Looking at Lucid’s Q4 results, it’s not hard to see why the stock is down today.

For starters, guidance for 2022 was reduced significantly. Previously, Lucid was expecting to produce 20,000 vehicles this year. However, it has reduced its guidance to between 12,000 and 14,000 vehicles, due to supply chain constraints and component quality issues. This is obviously very disappointing as it means that revenues for 2022 will be far lower than investors had been expecting. 

Secondly, Lucid said that it will delay its second vehicle, an electric SUV called Gravity, to the first half of 2024. This was initially expected in 2023. CEO Peter Rawlinson said the delay is to refine the product, and provide more time to implement best practices from the launch of its first vehicle.

At the forefront of the EV revolution

There were also plenty of positives in Lucid’s results, however.

One was that customer reservations now exceed 25,000 units, reflecting potential sales of more than $2.4bn. That’s up from 17,000 units in November. This suggests that demand for the company’s EVs is high at present.

Another was that Lucid confirmed plans to build its first international assembly plant in Saudi Arabia. This is expected to begin production in 2025. The group believes this plant will help it achieve capacity of 500,000 in the years ahead. 

Additionally, management seemed very confident about the future. “We are at the precipice of a global transition toward electric vehicles, and Lucid, with our leading technology and design, is at the forefront of one of the most significant transformations in mobility in generations,” said Rawlinson. “We remain confident in our ability to capture the tremendous opportunities ahead given our technology leadership and strong demand for our cars,” he added.

This confidence from the CEO is very encouraging, in my view.

Should I buy Lucid stock now?

As for whether now is a good time to buy Lucid stock, however, I’m still not convinced that the valuation is attractive.

Even after today’s share price fall, Lucid still has a market cap of around $40bn. That strikes me as high for a company that has only produced around 400 EVs to date and is having some production issues. 

And I’m not the only one who sees the valuation as high. Morgan Stanley analyst Adam Jonas, for example, has a $16 price target on the stock. That’s much lower than the current share price.

Meanwhile, short sellers clearly believe the valuation is too high as well. At present, around 137m Lucid shares are on loan. That represents about 25% of Lucid’s free float – a very high level of short interest.

Given the high valuation, I’m going to leave Lucid stock on my watchlist for now.

All things considered, I think there are better growth stocks to buy at the moment.

Personally, I’m not surprised by the poor performance in this area of the market. One of my stock market predictions for 2022 was that small EV stocks would underperform. Has the recent weakness across the EV sector provided a buying opportunity for me though? Let’s take a look.

What’s next for Rivian and Lucid?

While EV stocks like Rivian and Lucid have all bounced a little recently, I think downside risk remains.

For starters, valuations are still quite high, even after January’s falls. At present, the market capitalisations of these companies are $63bn and $46bn respectively. Meanwhile, the forward-looking price-to-sales ratios of these companies are 18 and 21. Given that both EV companies have only produced a small number of vehicles, I see these figures as very high. If they suffer from operational challenges (like semiconductor shortages), their share prices could take a big hit.

Secondly, both of these companies are generating big losses right now and aren’t expected to turn a profit for years. In 2022, analysts expect Rivian to post a net loss of $4.7bn and Lucid to post a net loss of $1.7bn. Recently, appetite towards the stocks of unprofitable companies has really deteriorated due to the fact that the US Federal Reserve is in a tightening cycle. I think sentiment towards these kinds of stocks could get worse before it gets better.

Look out for the short sellers

Finally, both of these EV stocks have very high levels of short interest right now, which indicates that hedge funds and other sophisticated investors are betting that their share prices will fall. At present, Rivian has short interest of around 23% while Lucid has short interest of around 20%. I tend to view a short interest figure of more than 5% as a red flag because it signals that a lot of short sellers are downbeat on the stock. And that’s not a good thing as short sellers tend to do their research.

Of course, short sellers don’t always get it right. However, they’ve certainly had success with small EV stocks in the last year. Nikola, Workhorse, and XL Fleet are just some of the EV stocks that have been targeted by them. All are down more than 70% over the last year.

Better stocks to buy

I’ll point out that both Rivian and Lucid are exciting companies that have excellent products. I expect these companies to generate strong sales growth over the next few years as EVs go mainstream. Both could potentially capture market share from industry leader Tesla.

However, to my mind, neither EV stock offers a favourable risk/reward proposition right now. So, they’re not on my ‘best stocks to buy’ list at present.

Is Lucid stock now a buy for my portfolio? I still don’t think so, and here’s why.

EV boom: Lucid’s investment case  

Before I get to Lucid itself, I recognise how exciting the electric vehicle (EV) market is today. Indeed, sales have surged in 2021, and I expect this to grow further from here.

There are going to be many opportunities for investors to benefit from this sector. Lucid may well be a good way to gain exposure to the growth in EV numbers. It’s not the only way, though. I wrote about a ‘picks and shovels’ approach to the EV market here.

Lucid released its third-quarter results ending 30 September last month, and there were some positive signs. Firstly, customer reservations for its EVs rose to 13,000 in the quarter, which represents sales of approximately $1.3bn. Reservations increased further to over 17,000 by the time the results were announced, which would mean sales reaching $1.7bn.

The company also said vehicle production started in the third quarter. This is vital if Lucid is to meet customer demand for the 17,000 EVs that have already been reserved.

Why I’m still not buying Lucid stock, yet

The results release wasn’t all positive. For one, revenue was only $232,000 and missed analysts’ expectations of $1.3m. The loss was also 43 cents per share, and investing in any loss-making company is always higher-risk, in my view.

However, I’m not so concerned about the financial results as it stands. It’s well understood that Lucid’s investment case is all about the potential for its EVs in the (hopefully) near future. Therefore, it wasn’t likely to generate significant revenue in this quarter.

One reason I’m not buying Lucid stock today though is its high valuation. If it generates the expected $1.7bn of revenue next year, the share price today is valued on a price-to-sales ratio of 39. I think this is a sky-high valuation. Lucid is going to have to execute flawlessly to make those sales, and there’s no guarantee it will.

The next reason is the announcement that Lucid is being investigated by US regulators over its forecasts it made when it listed via the SPAC. At this stage, it’s difficult to know if this will amount to anything. But at the very least, it makes a potential investor like myself question the validity of forecasts in the quarterly earnings releases. Until I know if the US regulator is satisfied with Lucid’s projections, I’m staying away.

So, for now, I’m going to keep Lucid stock on my watchlist. There could be huge potential here, but I feel there are better shares to buy today.

Caught up in risk sentiment

The top EV stocks have moved lower for a different reasons. First, the Lucid Motors share price tanked recently due to news regarding an SEC investigation. In a regulatory filing, the company said that there was a request of “production of certain documents related to an investigation”. This appears to be regarding the nature of how the company went public via a SPAC (special purpose acquisition vehicle). However, this hasn’t been confirmed, so we’ll just have to wait and see.

Rivian stock doesn’t seem to have been hit due to company specific news. In fact, most of the market is still looking ahead to upcoming results in order to gauge the future direction of the company. However, the share price appears to have suffered from broader risk sentiment.

In recent weeks, the discovery and rise of the Omicron variant has spooked some investors. During periods of uncertainty, people tend to sell high-risk growth stocks. The money then usually goes towards defensive stocks as a safer place to weather a potential storm. I would definitely classify Rivian as a high-risk stock. Since the IPO only a month ago, the stock had been volatile as investors try to place an accurate value on the business.

Risks and rewards of top EV stocks

One reason why I might decide to buy the potential dip is if I believe in the long-term future of EVs. With global government initiatives around the environment and higher consumer awareness around electric vehicles, I think demand will continue to grow. These top EV stocks are likely to be leaders in the sector. Clearly, others such as Tesla have a head start. But the potential market is huge and so could easily be shared among a selection of manufacturers. 

Another reason why I could consider buying now is if I’m optimistic on the outlook for 2022. These high-risk stocks will continue to be influenced by sentiment around Covid-19 and the health of the global economy. So if I think that Omicron isn’t something to be seriously concerned about, now could be the time to buy. If we’re in a positive risk environment next year then I’d hope the share prices of these top EV stocks should be higher.

What about potential risks? I think a big one is the fact that both Rivian and Lucid are at an early stage of production. Their business models are somewhat untested when it comes to seeing how they can handle reaching scale. It could take several years to reach a mass level that enables the companies to become profitable.

But I would consider buying these top EV stocks today. However, I’d invest 50% now and then hold off on the other 50% to see how the stocks trade over the next few weeks.

It looks to me as if there are two key reasons why investors have been selling shares in the electric vehicle (EV) company this week. 

Lucid stock headwinds 

The first development is the company’s recent decision to issue $1.75bn of convertible senior notes, debt in other words. The debt carries an interest rate of 1.25% and can be converted into its shares at a predetermined rate. 

Not only will this debt issue incur additional costs for the company in terms of the interest paid, but it could also dilute existing shareholders if converted. With each new share that is issued, existing shareholders’ claim on the business declines. Investors could be selling the stock to reduce their exposure to this dilution. 

This debt issue is important to consider, but I do not think it is the primary reason why investors have been selling Lucid stock over the past week. 

The most pressing reason is the fact that the US Securities and Exchange Commission (SEC) has subpoenaed the company seeking documents related to an investigation.

Although the exact target of the investigation has not yet been revealed, Lucid is telling investors that “the investigation appears to concern the business combination between the Company (f/k/a Churchill Capital Corp. IV) and Atieva, Inc.” 

Atieva was Lucid’s former name before the corporation’s merger with the special purpose acquisition company (SPAC) Churchill Capital Corp. IV. 

The SEC has launched a range of investigations recently regarding SPAC mergers. This seems to be the latest attack on these entities. 

Many of the investigations revolve around whether or not these companies misled investors by providing overly optimistic financial statements. I should clarify that no statements related to Lucid accuse the business of this. The company says it is fully cooperating with the SEC.

Uncertainty prevails 

As of yet, it is unclear what will happen with the investigation. It is also unclear if it will have any impact on Lucid at all. Unfortunately, it does bring an element of uncertainty into the equation. The market hates uncertainty more than anything else. 

This seems to be why Lucid stock has crashed. The uncertain outlook is spooking investors. 

Still, there are some reasons to be positive. The company’s first EV started rolling off the production line earlier this year. The first deliveries went out to customers in November. As production scales up, the group’s revenues should begin to grow, and the market may reflect that in its assessment of the business. 

Despite this positive outlook, I am not a buyer of the stock today. I think Lucid’s outlook is just too uncertain, and the company has a lot of work to do to catch up to market leaders in the EV space. 

As the largest and most established EV company, Tesla has remained unrivalled for a number of years. Now, new competitors Rivian and Lucid are attempting to shake things up. Both stocks have performed particularly well recently, with Lucid up almost 400% this past year and Rivian up 72% in only a matter of days between 10th and 16th November. 

Rivian and Lucid

My main criticisms of these EV stocks is the vast disparity between share prices and company fundamentals. Rivian’s IPO a few weeks ago is a clear example of this, with shares initially floating at $78 then soaring to a peak of $172 within six days. This has given the company a market capitalisation of over $140 billion, all whilst producing zero cars and reporting losses of $1 billion in the first half of 2021.

Lucid is in the same boat as Rivian. Despite not having produced a single vehicle, its market value has surged past that of Ford Motors to reach almost $90 billion. With the first car not scheduled for release until mid 2022 and recent Q3 earnings reporting a net loss of $1.5bn, I believe its current share price is unjustifiable.

Reservations about these overpriced stocks come also from equity research analysts. For example, Morgan Stanley has recently issued a strong sell rating on Lucid, suggesting the stock price will plummet to $16, representing a 70% downside from its peak share price.

Tesla

In comparison to Rivian and Lucid, Tesla remains in the driving seat as an established and profitable industry leader.

In fact, in a tweet just last month, Elon Musk pointed out just how far behind these new EV start-ups are in comparison to Tesla, the only American car maker to have achieved both positive cash flow and high production volumes in the last 100 years.

Although I believe Tesla has an equally lofty valuation, a whopping $1 trillion, its diversification into the autonomous driving sector sets it apart from traditional EV companies, all competing for the same rapidly diluting market share.

The verdict

Whilst both Rivian and Lucid deserve applause for attempting to disrupt the EV industry with their new cars, I think both stocks are extremely overvalued and incomparable to Tesla. For me, their only achievement is that of being two of the largest US companies by market capitalisation with no revenue

New, smaller EV players face the virtually impossible challenge of rivalling Tesla, a company now producing a million cars per year and logging a profit for the fourth consecutive quarter. I believe it won’t be long before Rivian and Lucid stocks are bumped out of the fast lane and so I am steering clear of these stocks.

Having said that, I do believe bubbles have formed in some areas of the market. Electric vehicle (EV) stocks is one such area. In my view, this sector is extremely overvalued. With that in mind, here’s a look at three EV stocks I’m avoiding right now.

Rivian

Let’s start with Rivian Automotive (NASDAQ: RIVN). Its Initial Public Offering (IPO) last week represented the largest US listing since Facebook in 2012. Since the IPO, Rivian’s share price has spiked up, giving the company a market capitalisation of a whopping $127bn.

Now Rivian does appear to have some great vehicles. It also has the backing from Ford and Amazon and a load of pre-orders, so it’s clearly doing something right.

However, a $127bn valuation just makes no sense, to my mind. For starters, Rivian is not even generating any meaningful revenues yet. Secondly, the company is up against some massive players, such as Ford and GM.

I’ll point out I’m not the only one who thinks the stock’s overpriced. Last week, ARK Invest portfolio manager Cathie Wood – who is known for buying expensive growth stocks – reportedly said she wouldn’t be buying Rivian right now due to its rich valuation.

The fact that Rivian is too expensive for Wood suggests the valuation here is sky-high.

Lucid

Another EV stock I’m going to avoid due to its high valuation is Lucid (NASDAQ: LCID). Its share price has been on fire recently and, as a result, the company now has a market-cap of around $73bn.

Like Rivian, Lucid has a great product. Its flagship model, Air, is a beast of an EV that can go from 0-60mph in just 2.5 seconds and has a range of 520 miles. Given its specs, the Air could capture market share from Tesla.

However, the $73bn market-cap here looks a little ‘off’ to my mind. Right now, Lucid has only sold a handful of cars. And at the current valuation, the stock has a price-to-sales ratio of an eye-wateringly high of 42. That valuation adds a lot of risk.

Morgan Stanley analyst Adam Jonas still has a price target of $12 here. That implies downside of nearly 75%.

Tesla

Finally, Tesla (NASDAQ: TSLA) is the third EV stock I’m going to avoid due to its high valuation. At its current share price, it has a market cap of over $1trn.

While Tesla is a great company, I don’t think it’s worth $1trn+ right now. When I look at the other US mega-cap companies with similar valuations, I see companies that have very dominant market positions and highly-scalable business models. Tesla is very different from these companies. Given the number of automakers globally, it’s unlikely to be able to maintain a dominant market share. Meanwhile, as a manufacturing company, its business model isn’t as scalable.

Now, of course, the Tesla story isn’t just about EVs. This company is also a leader in the autonomous vehicle space. If Tesla can develop full self-driving technology, its revenues could skyrocket.

However, right now, I think the valuation has gotten ahead of itself.

Lucid Group has strong prospects

There is certainly a lot of promise surrounding Lucid Motors and I am most impressed about the company’s products. For example, its flagship product, the Lucid Air, claims a huge range of 520 miles, which easily beats all of Tesla’s vehicles. As of the end of June, there were also over 10,000 reservations for the Air. It is hoped that this figure will increase when the company reports to investors on 15 November. This is a factor that could see the Lucid share price soar.

Its future prospects also look strong. Indeed, total revenue is expected to be just over $2bn next year, rising to over $22bn by 2026. The group also predicts that it will be able to reach positive EBITDA by 2024. Of course, these are just estimates and there is certainly no guarantee that it will be able to reach these ambitious figures. It does demonstrate that the growth potential is extremely strong though, and some may say this gives Lucid even more upside potential than the Tesla share price.

But I’m not quite ready to buy Lucid shares. Using the company’s own estimates, it trades on a forward price-to-sales ratio of around 36, which is expensive. With a market capitalisation of nearly $70bn, it also has a similar valuation to BMW, even though BMW recorded revenues of over $100bn in 2020. Lucid Group, on the other hand, has no real trading history. This means that I cannot justify the Lucid share price, and I’m leaving it on the sidelines for now.

And the Tesla share price…

Tesla shares have soared recently, thanks to strong third-quarter earnings and a sale of 100,000 vehicles to Hertz. This has given the EV stock a valuation of $1.2trn, higher than other massive tech companies such as Meta (formerly Facebook) and Alibaba. But is this justified?

There is no doubt that the third-quarter trading update was excellent. In fact, revenues totalled nearly $14bn, a 57% rise year-on-year. Net income was also able to reach over $1.6bn, a 389% rise from last year. This demonstrates the rising profitability of the firm. The recent deal with Hertz, and continually increasing manufacturing capacity, is also likely to propel growth further.

But after the recent rise in the Tesla share price, it trades on a current price-to-sales ratio of around 24. Although slightly lower than Lucid Group, this is still comparatively high against other tech stocks. I’m also worried that competition will increase, especially as traditional automotive companies, like Ford and Daimler, are bringing EV cars to market. Therefore, even though I find Tesla stock a more appealing proposition than Lucid shares, it’s still far too expensive for me to buy right now. It will take  a major dip to get me interested.

Is Lucid a stock I should consider for my own investment portfolio? Let’s take a look at the investment case.

Lucid stock: the bull case

When I look at Lucid Motors from an investment point of view, two things stand out to me. One is that the company – which is led by former Tesla engineer Peter Rawlinson – has some very nice products.

Take its flagship EV, the Air, for example. This model, which Lucid describes as the ‘the quickest, longest-range, fastest-charging luxury electric car in the world’ can go from 0-60mph in just 2.5 seconds. Meanwhile, it has a huge range of 520 miles, which is far superior to that of Tesla EVs.

Given its specs, the Lucid Air could potentially be a genuine threat to Tesla and its Model S Plaid. It’s worth noting that in October last year, Tesla cut the price of its Model S, shortly after Lucid announced the pricing of its base model. “The gauntlet has been thrown down,” tweeted CEO Elon Musk at the time.

Source: Lucid Motors

Another thing that stands out to me about Lucid is that its cars are already in production. With some EV companies, commercial production is still years away. However, this isn’t the case here. Already, customers are receiving deliveries of their Air vehicles. And the company aims to ramp up production at its Arizona plant to 90,000 vehicles per annum within the next two years.

Analysts at research firm CFRA – who have a $50 share price target for LCID stock – point out that because Lucid is targeting the luxury market (the Air starts from $77k), it will need to sell less vehicles than other EV manufacturers to achieve profitability.

Is Lucid’s share price too high?

One concern I have here, however, is Lucid’s valuation. At the current share price of $37, the company has a market capitalisation of $59bn. That’s high. To put that in perspective, Ford, which sold about 4.2m cars last year and has recently launched some hot new EV models, has a market-cap of $72bn.

Meanwhile, the stock’s forward-looking price-to-sales ratio (using next year’s estimated sales) is about 34. By contrast, Tesla’s forward-looking price-to-sales ratio is about 17.

It’s worth noting here that Morgan Stanley analyst Adam Jonas, who covers EV stocks, has a price target of $12 for Lucid. That’s nearly 70% below the current share price. Jonas believes Lucid has a long way to go before it can be compared to Tesla.

Should I buy Lucid stock today?

Weighing everything up, I’m happy to leave Lucid Motors on my watchlist for now. I think there are better growth stocks I could buy at the moment.

The surging Lucid share price

It’s no secret that electric vehicle stocks have been stellar performers this past year. With the world transitioning away from traditional petrol and diesel-powered vehicles, investor interest in electric alternatives has been skyrocketing. But this transition is proving to be relatively slow.

One of the primary reasons behind the sluggish adoption of electric vehicles by consumers (apart from the cost) is their limited range. While recharging stations are becoming more widely available, the process still takes a long time. Even with a supercharger, it can take up to an hour before the battery is fully replenished.

So, I’m not surprised to see the Lucid share price explode following the release of the latest test results for its Lucid Air Dream Edition Range. This electric vehicle achieved a distance of 520 miles on a single charge! That’s about 140 miles further than Tesla, which until recently held the crown for the longest distance. It’s also worth noting that its other models outperformed the competition. Its Edition Performance model reached 471 miles, and the Grand Touring model went as far as 516 miles. Bear in mind, these vehicles have upwards of 800 horsepower.

Needless to say, this is an impressive feat of engineering. And for individuals who tend to travel long distances, these vehicles may be the most attractive option. In turn, this could allow Lucid to steal some sizable market share from its competitors. But as with every investment, there are risks to consider.

The challenges that lie ahead

As someone with an engineering background, this efficiency achievement is quite astonishing, in my mind. However, as an investor, I’m a little sceptical about the Lucid share price. It’s clear the company has nailed its technology. But on the production side, there’s quite a bit of uncertainty.

Lucid has yet to deliver any finished vehicles to customers. And consequently, that makes it a pre-revenue business. Management has released a forecast of it producing 20,000 cars in 2022. However, with the semiconductor chip shortage continuing to wreak havoc on the automotive industry, there’s growing concern that this target won’t be met.

Given the absence of revenue and subsequent lack of profits, it seems to me that the Lucid share price is entirely being held up by expectations rather than existing fundamentals. That’s fine if the company can deliver on its promises. However, suppose it were to miss a deadline? In that case, I think it’s likely that the Lucid share price would experience a large amount of volatility.

The bottom line

Personally, I’m not tempted to add this business to my portfolio. While I can’t deny, the technology is impressive, it’s ultimately meaningless if it can’t get cars flowing out of its factories. Once production is underway, and revenue starts to flow, I may have to reconsider my position. For now, it’s staying on my watchlist.