Lucid, A Luxury EV Maker Is Facing A Demand Issue

Lucid, a luxury electric vehicle manufacturer, appears to be having a problem with demand at the moment.

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In its fourth-quarter earnings report on Wednesday, the company said it had "over 28,000" reservations for its Air sedan as of Feb. 21, the deadline for submitting reservations for the car. Considering that the company had claimed to have over 34,000 reservations in November and delivered fewer than 2,000 vehicles in the fourth quarter, this came as a bit of a surprise.

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Lucid said it plans to build just 10,000 to 14,000 vehicles in 2023, much fewer than the roughly 27,000 Wall Street analysts had expected - and even less than Lucid's factory is set up to build, which is able to produce roughly 34,000 vehicles per year.

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Almost 17% of the company's shares have been sold off since the company announced its earnings report on Wednesday.

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The road to getting the Air into production was a rough one for Lucid. In the first half of 2022, the company spent much time scrambling to secure key components and unravel logistics snags that had arisen during the development process. The company seems to be facing a second problem now that production is running more or less smoothly: not enough of those reservations seem to be converting into orders.

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The CEO of the company, Peter Rawlinson, acknowledged this on the earnings call when he reminded the listeners that reservations are not binding on the company.

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“The production issue has been resolved. There is no gating issue here right now," Rawlinson explained. “Currently, I am focused on sales. Here's the thing. We have what I consider to be the world's best product... Too few people are aware of not just the car, but even the company.”

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As Rawlinson pointed out, in 2023 he plans to focus on "amplifying customer awareness" and reducing customer churn, which he believes is an "entirely solvable problem".

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Marketing might be able to help in this situation. In spite of that, it is clear that Lucid's vehicles aren't generating the demand it expected, leading to some tough questions for investors about the company's future.

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First of all, what is the size of the potential market for Lucid? There is no doubt that Lucid will be able to grow in the future, but any estimate needs to be based on an estimate of the "total addressable market," and it appears that Lucid made a rather optimistic assessment on that front, given that its factory is equipped to build many more vehicles than it currently does.

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CFO Sherry House acknowledged during Lucid's earnings call that running an auto plant well below capacity isn't exactly a route to profitability.

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“Since we are producing cars at low volumes on production lines that were designed for higher volumes, we will continue to experience negative gross profit as a result of labor and overhead costs associated with the production of cars at low volumes,” said House.

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This leads us to a second, related question: for how long will Lucid be forced to run its factory at a loss? To put it another way, when will Lucid be able to reach the point where it can become profitable - and how much money will it have to raise between now and then to reach that point?

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It has long been noted that Bank of America analyst John Murphy is bullish on Lucid, but in a note to investors following Lucid's earnings report, he cut his rating on the stock from a buy to a hold. Murphy wrote in his letter that he now believes that Lucid is unlikely to break even before 2027 and that it will need to raise more capital earlier than he had previously anticipated in order to do so.

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The good news is that Lucid has a deep-pocketed investor at its disposal: Saudi Arabia's Public Investment Fund owns about 62% of the company, and it has shown recently - most recently in December when it invested a further $915 million - that it is still willing to invest in Lucid's growth. It is likely that Lucid will be able to continue its operations for as long as the Saudi fund backs it.

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However, the road to profitability - and a big return for Lucid's investors - now seems to be a long one.

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