After Saudi Arabia agreed to buy “up to” 100,000 electric vehicles (EVs) from Lucid (NASDAQ:LCID) over ten years, I believe that the deal gives the automaker two very important advantages. Nonetheless, partly due to the high valuation of LCID stock and the tremendous competition that Lucid is facing, I remain cautious on the name. Consequently, I still recommend that investors sell the shares.
The Saudi Deal Is Very Positive for LCID Stock
The largest owner of LCID stock, Saudi Arabia, via the country’s Public Investment Fund, has agreed to buy at least 50,000 EVs and as many as 100,000 EVs from Lucid.
As a result of the deal, I think there’s very little chance of Lucid going bankrupt in the next five years. The Saudis’ money should enable Lucid to keep paying its bills for at least that amount of time.
Additionally, the Saudis’ funds should help Lucid cope with supply chain, inflation, and production issues. After all, automakers with large amounts of money can afford to build many factories, hire more workers, and pay higher prices for auto components.
And given the Saudis’ many political and business connections around the world, along with their apparent willingness to aid Lucid, they should be able to help the automaker obtain the raw materials that it needs to build hundreds of thousands of EVs.
Valuation and Competition
Valuation and competition remain stumbling blocks for Lucid and LCID stock. The shares currently have a market capitalization of $30 billion. If the Saudis buy 60,000 of the automaker’s EVs over the next five years for an average price of $60,000, Lucid’s revenue from the deal during that time will come in at $3.6 billion. That’s a great deal of money, but it’s not that much revenue over a five-year period for a company with a market cap of $30 billion. So Lucid is still going to have to sell at least a few hundred thousand EVs to other customers over the next several years to boost its shares meaningfully.
And, given the intense competition in the consumer EV sector, that may not be an easy task. In addition to Tesla (NASDAQ:TSLA), EVs introduced by Ford (NYSE:F), General Motors (NYSE:GM), Volkswagen (OTCMKTS:VWAGY), BMW (OTCMKTS:BMWYY), and Rivian (NASDAQ:RIVN) all seem to have generated significant amounts of interest in the U.S.
Additionally, multiple Chinese automakers, including Nio (NYSE:NIO), Xpeng (NYSE:XPEV), and BYD (OTCMKTS:BYDDF) have entered Europe and may launch major operations in the U.S. within a year or two.
Meanwhile, as I’ve pointed out in past columns on LCID stock, the automaker’s order totals have not been impressive, and there is evidence that it’s not generating very much buzz among American consumers.
Given all of these points, I continue to view the shares as a sell.
On the date of publication, Larry Ramer owned long positions in XPEV and RIVN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.