It wasn’t too long ago that I was riding high on my recommendation of Lucid Group (NASDAQ:LCID). I initially wrote an article on LCID stock in September of last year. Soon after that, the stock zoomed upward ending up at 3x the price by late November.
Unfortunately, all good things have to come to an end. LCID stock has been on a downtrend since reaching its highs in December. Its price dropped from a high of $56 all the way to $27 when this article was written. That’s a loss of nearly 47%. And more pain is yet to come judging from the shift in sentiment in the market.
Market Sentiment Unfavorable for EVs
LCID stock isn’t alone when it comes to massive price declines. There has been a deep sell-off in electric vehicle (EV) stocks in general. This is especially true for EV companies that are in the pre-production stage. Names like Nikola (NASDAQ:NKLA) and Rivian (NASDAQ:RIVN) have suffered similar declines these past few weeks.
Throwing more fuel into the fire, Tesla (NASDAQ:TSLA) has warned that supply chain issues may remain in 2022. This is stoking fears of more inflation to come. Thus investors have become increasingly cautious.
Higher interest rates hurt Lucid in multiple ways. The first is that it increases the necessary discount rate when valuing companies. This especially hurts high-growth stocks like Lucid whose cashflows are well into the future. This poor sentiment also will lead to a higher risk premium to be assigned to LCID stock.
While Lucid has delivered its first few vehicles, there is a lot of operational risks still inherent in the company. There are many questions that remain. Can it successfully navigate through multiple necessary factory expansions? Or will it suffer some growing pains as it expands its production?
Lucid Is Prepared
This leads me to the second issue of rising rates. Electric vehicle companies will need to raise money in the future for capacity expansion. A company might have to do so at a much higher interest rate thus making expansion more costly — even worse, if a company does a share price offering while its stock is at depressed levels. This would significantly dilute existing shareholders.
Luckily Lucid is prepared for this outcome. The company has one of the strongest balance sheets among EV manufacturers. It recently completed a massive $1.75 billion convertible debt offering. The fundraising was a massive success with investors taking full advantage of the 15% “greenshoe” option. This generated an additional $262 million for the company.
According to CFO Sherry House “This funding will allow Lucid to carry out key milestones and growth plans further into the future, thereby mitigating risk in the business.” They were able to close this deal just in the nick of time in my opinion. Had they waited a few more weeks, the company would have been facing much more unfavorable market conditions.
Your Takeaway
Lucid management has raised the necessary fund needed to expand the business and “ride out” this market storm. The money raised should be more than enough to put forward its aggressive growth plans for 2022 and 2023.
The question for the average investor then becomes: “Are you willing to ride out this volatility?”
In my opinion, we could be seeing much more downside from here. It’s just the way the technicals and sentiment are playing out. LCID stock is currently on a downtrend.
However, I still like LCID stock for the long term despite the negative technical picture. Remember even Tesla had a rocky road on its way to becoming a trillion-dollar company.
On the date of publication, Joseph Nograles did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Joseph Nograles is a part-time freelance copywriter focused on the financial industry. He has worked in a wide variety of industries from tech to consulting with one of the “big four.” He has always enjoyed analyzing businesses and has been a CFA charterholder for nearly a decade now.