Lucid (NASDAQ:LCID) is an electric vehicle (EV) company that aims to produce luxury cars with cutting-edge technology and design. Many investors enthusiastic to find the next Tesla (NASDAQ:TSLA), have hyped Lucid as a potential rival. But, so far, the new EV maker has failed to deliver on its promises.
Not to mention, the EV market has been undergoing a rapid transformation in recent years as more automakers enter the fray with new models and technologies. However, there are new concerns that demand will weaken in the near and medium term as high-interest rates continue to bite at consumer spending. In this context, investors should be wary of Lucid, a luxury EV maker that faces several challenges in its quest to become profitable and competitive. Below are three reasons why investors should sell their LCID stock and forget about it.
Competition in the EV Space Is Too Fierce for LCID Stock
One reason is that Lucid faces fierce competition from Tesla and other dominant EV players, such as Volkswagen (OTCMKTS:VWAGY), Toyota (NYSE:TM) and Ford (NYSE:F). These companies have more experience, economic resources, innovation and market share than Lucid. They also offer a wider range of models, prices and features to cater to different customer segments and preferences. Lucid’s flagship model, the Air, has a starting price of $74,900, which limits its appeal and demand. Lucid has not proven it can compete effectively with established players and carve out a niche in the crowded EV market.
Moreover, even if Lucid decides to expand internationally because of the difficulty wrapped into taking market share in North America, the EV maker would have to contend with China’s formidable BYD (OTCMKTS:BYDDY), which is growing immensely and crowned the largest EV maker in the world by sales in 2022.
The Market Outlook for EV Demand Is Dismal
Another reason is that the EV market outlook is dismal, especially in the wake of higher interest rates and a slowing economy. One thing that kept growth up for EV makers like Tesla was the price cuts for certain vehicles. However, investors are increasingly becoming skeptical of how that strategy will turn out in the long run.
The current U.S. Federal Reserve target interest rate range is between 5.25% and 5.50%. While many believe interest rates have peaked due to encouraging economic data, rates will likely stay elevated until at least the second half of next year. During this time, interest rates will have more time to really impact consumers’ wallets, potentially dampening demand for new EVs. Lucid is primarily selling high-end EVs, and as consumers become even more price-conscious, these vehicles could lose out to mid-range vehicles from General Motors (NYSE:GM) — for example.
LCID Had to Raise Equity to Cover Its Losses
Being a company that generated significant losses for investors, Lucid has had to turn back to the equities markets for more capital. For instance, the EV maker turned back a number of times to its main investor, Saudi Arabia’s Public Investment Fund, for more capital. After burning through nearly $3 billion between 2021 and 2022, the company sought another $3 billion common equity raise in May 2023. It blew through another $3.6 billion over the past 12 months. Lucid still has $4.4 billion of cash and similar investments, which should last into 2025.
Still, that is not a good sign for current shareholders who have had their stakes diluted. Ultimately, Lucid has been burning cash at an alarming rate as it invests heavily in research and development, manufacturing, marketing and expansion. While these investments make sense, it’s unclear whether or not they will be worthwhile as the company has yet to carve out a significant market share for itself.
On the date of publication, Tyrik Torres did not hold (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.
