When it comes to Lucid Group (NASDAQ:LCID) right now, all eyes are on the electric vehicle company’s upcoming earnings release on May 8. Some may be optimistic, but many are concerned that the release will result in LCID stock tanking.
InvestorPlace contributor David Moadel sees this happening, as he argued last month. Mainly, because Lucid’s disappointing production and delivery numbers last quarter point to underwhelming results for the period.
So does InvestorPlace analyst Louis Navellier. As he noted recently, possible downward revisions to guidance could also drive a sharp move lower for LCID after the results hit the street.
However, said plunge could pale in comparison to the big selloff Lucid may experience a few months from now. Why? It all has to do with this early stage company’s heavy cash burn.
This could result in an event that causes shares to go down like a lead balloon.
LCID Stock: What Could Really Knock It Lower
Over the two trading days following Lucid Group’s last earnings release on Feb. 22, the EV maker’s shares fell by more than 15%. A similar drop may not be out of the question, even as the market’s expectations are low due to last month’s delivery numbers release.
If such a drop occurs, it’s possible that some of those investors sitting on the sidelines with LCID stock today could jump in, thinking they are getting in at an ideal entry price. After all, while Lucid’s current performance may not be up to snuff, that may not be the case indefinitely.
For instance, while the Lucid Air luxury EV sedan has been a bust thus far, things could be different for Lucid’s upcoming SUV, the Gravity, set for release in 2024. However, well before there’s even any indication that the company has a hit on its hands with the Gravity, there may be an event that pushes LCID substantially lower. Perhaps down below the penny stock threshold (under $5 per share). Maybe even to the low single-digits.
So, what is this potential event? That would be yet another dilutive secondary offering of new LCID shares. Here’s why Lucid needs to raise money again.
Running on Low Battery
When it comes to this company and its liquidity, you can say that it is starting to run on low battery. As a Seeking Alpha commentator argued recently, based on 2022 cash burn ($4.5 billion), the company is likely to run out of cash by early 2024 at the latest, citing statements made by CFO Sherry House.
Yes, Lucid has implemented some aggressive cost-cutting measures in recent months. You may recall how the company announced that it was laying off 1,300 employees back in March. Yet while this round of layoffs is massive, representing 18% of its workforce, it may at best produce only a few hundred million in annualized cost savings.
Even with plans scaled back, Lucid could be running dry within the next year. To finance the continued buildout of its production capacity, not to mention the launch of the Gravity, the EV maker likely needs several billion to replenish its coffers.
The good news is that Saudi Arabia’s Public Investment Fund, the company’s majority owner, is likely willing to buy billions more shares of newly issued LCID stock. The bad news is that selling more shares will place further heavy pressure on shares.
The Takeaway
While raising another few billion may represent just moderate dilution compared to Lucid’s market cap ($13.6 billion), it could still have an outsized negative impact on the stock. The reasons for this are twofold.
First, by raising the total share count, this potential dilution would limit much of the possible upside, in the event Lucid finally scales into a profitable automaker.
Second, the mere act of needing to raise this additional money, as organic growth is failing to narrow losses, may lead to an additional decrease in confidence that Lucid, once considered a top contender to threaten Tesla’s (NASDAQ:TSLA) dominant position in the EV market, will ever be anything more than an industry “also ran.”
Weighing the risk of further heavy dilution against what continue to be questionable rebound prospects, irrespective of the upcoming earnings report, take a hard pass 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.