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In the past two months, Lucid (NASDAQ:LCID) the stock recovered strongly. This happened after a long period of correction and consolidation.
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When I wrote about the LCID stock in September 2021, I was of the opinion that the stock is likely to continue to increase. However, investors should be wary of a potential correction with dilution in equities as the likely catalyst.
I stand by this view and believe it is time for some profit on LCID stocks after the big rally.
I would come back to the dilution potential of equities.
However, let’s look at a relative comparison first. This will clarify the point at which LCID stock may be stretched to current levels.
LCID stocks seem expensive on a relative basis
Nio (NYSE:NIO) the stock is currently trading at a market cap of $ 64 billion. On the other hand, LCID stock has a market capitalization of $ 65 billion.
Nio delivered 66,395 vehicles in the first nine months of 2021. By comparison, Lucid has just started vehicle deliveries. The company plans to deliver 20,000 vehicles in 2022.
In addition, Nio declared a cash buffer of $ 7.5 billion in the second quarter of 2021. In addition, the company raised $ 2.0 billion in a recent offer on the market. The cash buffer will be used for international expansion and improving manufacturing capacity.
On the other hand, Lucid expects the current cash buffer to be sufficient for operations until 2022. Additionally, according to the company’s own estimates, free cash flow will not be positive until 2025. Between 2022 and 2024, Lucid Motors expects cash consumption of $ 7.5 billion. This would imply significant external financing through equity and borrowing.
Of course, for a growing business, this is natural. However, the point I’m trying to make here is that LCID stock looks expensive compared to its peers. For now, it makes sense to recognize the profits and roll them back to lower levels.
It is also true that the timing of the market is impossible. As the action has gained momentum, there may be a case for another 10-15% hike. The risk / reward ratio, however, is risk-weighted higher than a significant rise from current levels of nearly $ 43.
Getting back to the point on equity dilution, it is quite likely that management will take advantage of the current rally to mop up funds for expansion beyond 2022. This is only a speculative view, but seems very likely given the outlook for cash consumption.
Positive business developments
Leaving valuations aside, there are several positive points to talk about.
First of all, Lucid Air Dream Edition was fully booked with total Air bookings greater than 10,000. The markets also appear bullish with the initial response. It should be noted that Lucid already has opened its first studio in Canada. In the coming quarters, the first model should be marketed in other countries. Lucid already has 2,300 employees in North America, Europe and the Middle East.
Additionally, Motor Trend provided a very positive review of Lucid Air. According to Motor Trend, Air is the “the most convincing American luxury car in recent memory. “The positive review associated with the initial response to the reservation is encouraging.
In September 2021, Lucid Air received an official certificate from the United States Environmental Protection Agency. rating for 520 miles of range. This puts Lucid ahead of its peers and underscores the fact that the company is focused on innovation.
Another point worth mentioning is that Lucid starts off with a luxury car. However, the company plans to target the mass market in the coming years. It is very likely that the company will license of its technology for production of a consumer car.
Final result
Lucid has ambitious long-term plans with several models in the works over the next few years. In the short term, however, the LCID stock appears stretched.
I think management will likely take this opportunity to dilute equity and raise funds for expansion.
For now, it makes sense to post profit and consider reentry at lower levels.
As of the publication date, Faisal Humayun does not have (directly or indirectly) any position in any of the stocks mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.
Faisal Humayun is a senior research analyst with 12 years of experience in credit research, equity research and financial modeling. Faisal is the author of over 1,500 stock-specific articles focusing on the technology, energy and raw materials industry.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.