I can see why, at first glance, Lucid Group (NASDAQ:LCID) may look appealing right now to some contrarian investors. Following the release of its latest quarterly results, LCID stock has fallen back to single-digit prices.
As a speculative growth stock, LCID can make outsized moves in either direction. All it may take for it to spike once again is a modicum of positive news. In recent months, such situations have played out.
While another catalyst could potentially emerge from left field, there are three good reasons why LCID is more likely to re-hit its 52-week lows rather than experience another super rally.
With this, let’s dive into each one, and see why it’s best to avoid/sell this stock.
Lucid Keeps Falling Short of Production Goals
EV companies, including Tesla (NASDAQ:TSLA), have been guilty at one point or another of overpromising and under-delivering. However, in its relatively short history as a public company, Lucid has taken this to a whole new level.
As you may recall, back in 2021, the company provided the investing public with very aggressive growth projections. For instance, this EV maker was supposed to be producing 49,000 vehicles annually by this year. By 2026, the company projected that it would be producing over 250,000 vehicles annually.
But in less than two years, Lucid has had to, multiple times, walk back these projections. Worse yet, despite all of this moving of the goalposts, the company has still either fallen short or only slightly beat, these estimates with its actual production numbers.
The bar is set fairly low for this floundering EV contender in 2023. Its current goal is to produce 10,000-14,000 vehicles.
Factors like the easing of supply chain headwinds may enable the company to beat back these dialed-back estimates. Still, this may at best only stem further declines for LCID stock. In contrast, having to walk back this forecast again could mean another sharp sell-off for shares.
Falling Reservation Numbers Signal Falling Demand
During the pre-revenue stage, Lucid Group may have believed it had what it took to build itself into a world-class brand that could compete with not just Tesla, but incumbent automakers, for a meaningful share of the luxury EV market.
However, despite the sleek design, not to mention the performance and range advantages, of its flagship Air luxury electric sedan, the company’s vehicles haven’t exactly caught on with affluent car buyers, or any buyers, for that matter.
At least, that’s the takeaway from Lucid’s net reservation numbers. Back in August, reservations for the Lucid Air totaled 37,000. By November, that figure had fallen to 34,000. As of Feb. 21, that figure was at only 28,000 vehicles, presenting a nearly 25% drop in around six months’ time.
Lucid has pulled all the stops to reverse-engineer Tesla’s “wow factor” and brand cache. Nevertheless, despite these efforts, Lucid appears destined to remain a “wannabe Tesla,” rather than the “Tesla killer” it originally set out to become.
As the leading EV maker continues to dominate the luxury end of the space, and as European luxury automakers go electric, building up this brand will likely remain an uphill battle.
There’s High Dilution Risk With LCID Stock
Lucid was initially considered one of the top EV contenders in large part due to its strong capital backing. At the end of 2021, the company had $6.2 billion in cash.
Within a year, Lucid had burned through a large portion of this war chest, requiring it to raise $1.5 billion in additional capital, through the sale of new shares. Saudi Arabia’s Public Investment Fund, or PIF, led this funding round, which increased LCID’s outstanding share count by 8.4%, and was therefore dilutive to existing shareholders.
Sure, 8.4% may not sound like a lot, but this recent capital raise may be the first of several infusions. PIF may have been rumored to be considering a takeover of Lucid, yet as I’ve argued before, PIF may find acquiring additional shares in secondary offerings to be a more cost-effective way to increase its ownership.
If these additional dilutive capital raises occur, it will likely place more pressure on Lucid stock. This dilution also negatively impacts future upside potential.
With its above-mentioned production and demand headwinds major risks, and this third factor limiting the possible reward, there are plenty of reasons to pull the plug on LCID stock.
On the date of publication, Thomas Niel 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.