Is Lucid Group a millionaire?

The car business is a tough game, but The Lucid Group (LCID -1.25%) apparently makes a good product. Its flagship Lucid Air has garnered rave reviews, and the company has a new SUV coming soon. However, Lucid has struggled with heavy losses as it tries to raise production levels high enough to sustain the business financially.

Investors recently received great news when Lucid announced that it had secured a new $750 million preferred equity investment and $750 million in loans from Saudi Arabia’s long-standing Public Investment Fund (PIF) the company. Management says the additional funds will fund operations until the end of 2025, giving investors some stability.

Does this position Lucid stock as a long-term winner capable of generating life-changing investment returns?

Here’s what you need to know.

Additional funds are a help, but not a solution

Lucid Group is a young car company facing a simple problem that all new competitors in this industry face: they need to increase their vehicle production fast enough to make money. before they run out of money.

Manufacturing vehicles requires expensive factories that must build many vehicles to run profitably. This obstacle and the competitiveness of the automotive industry make it difficult to stay. adze once faced the same problem and nearly went bankrupt before reaching that magical threshold where he built enough cars to tip the business toward profitability.

Lucid, which produced 2,110 units in Q2 and shipped 2,394 (up 70.5% year-over-year), is on a roll. You can see below that gross losses and free cash flow have apparently bottomed out and are starting to improve:

LCID Gross Profit (TTM) data by YCharts

The company ended June with about $3.9 billion in cash and couldn’t go much more than another year at that rate without running out of cash. Management believes the additional total liquidity of $1.5 billion from Saudi Arabia’s PIF will fund the business until the fourth quarter of next year, another 18 months from now.

Lucid’s near-term stability is easily a win for investors, which helps explain the stock’s positive reaction to the news. However, it is more like a Band-Aid on a wound than a solution; the stock’s long-term returns will depend on how quickly Lucid can stop its cash burn.

Lucid’s investment potential decreases over time.

Only time will tell when (or if) Lucid stops losing money, but it’s an important question because the stock has less upside potential the more cash it burns.

Lucid can and has raised money from debt. But you can only do that when you’re losing money, because servicing that debt only drains your cash faster. The other option is to sell more shares to raise the cash. You can see that Lucid’s stock numbers have risen dramatically since the company went public in 2021:

LCID Total Long Term Dab data (quarterly) by YCharts

The more shares, the less company each share represents. In other words, this concept (called dilution) is terrible for shareholders because it lowers the value of the stock per share. There is a scenario where Lucid ultimately survives and thrives, but investors don’t make as much money because Lucid had to dilute its shareholders into oblivion to keep the company afloat.

While Saudi Arabia has once again come to the rescue, it is worth considering the risk that they may eventually decide that Lucid is no longer worth investing in and shut down before Lucid can survive on its own. Saudi Arabia has so far locked up about $7 billion in Lucid, so cutting losses would sting. However, Saudi Arabia’s PIF is worth nearly $1 trillion, so it can easily continue without feeling too much pain.

Is Lucid shares a millionaire?

Few stocks generate life-changing returns without assuming some risk, but not all opportunities are created equal. Lucid is undoubtedly a risky stock, but the ongoing dilution and the risk of Saudi Arabia withdrawing its support are serious red flags. Even if Lucid survives, it still needs to cement itself as a leading electric vehicle brand capable of sufficient long-term growth to generate such high profits. Tesla delivers hundreds of thousands of vehicles every three months; Lucid hopes to hit 9,000 for the year.

Lucid claims its technology makes its product superior to the competition, but that doesn’t matter if the vehicles don’t sell well.

Yes, Lucid stock can be a home run if all goes well. It is a colossal if in Lucid’s case. The evidence says it’s a low percentage that investors shouldn’t get too close to.