Summary
- Saudi Arabia’s Public Investment Fund owns the majority of Lucid shares.
- With the help of the Saudis, Lucid can quickly scale the production and expand beyond the United States, leading to the creation of additional shareholder value.
- I’m bullish on Lucid stock and believe that it has a solid chance to significantly appreciate even more in the long run.
As one of the biggest exporters of oil, Saudi Arabia is likely going to financially suffer from the decarbonization efforts of governments around the globe that are trying to decrease their reliance on fossil fuels, which could lead to the loss of the biggest source of revenue for the Kingdom from the Middle East. To tackle this issue and decrease its exposure to oil as well, Saudi Arabia's Public Investment Fund has been aggressively adding 'green' investments to its portfolio in recent years, one of which is American automaker Lucid Motors (LCID). As of today, the Saudi fund is the biggest shareholder of Lucid with an ownership stake of 61.7% and is considered to be the company's major partner and a long-term investor.
As Saudi Arabia diversifies its economy, Lucid thanks to its connections to the Kingdom will likely be able to quickly penetrate the growing EV market of the Middle East, expand itself beyond the United States, and become one of the major producers of luxury electric vehicles in the world. In addition, the possible recession and increasing inflation could make it harder for legacy automakers to raise new funds at acceptable terms to expand within the EV market, giving a unique opportunity to Lucid to significantly increase its market share in the ever-growing EV industry by being able to raise funds directly from Saudi Arabia. As a result, this should lead to the appreciation of Lucid shares in the future and it's the main reason why I'm bullish on the company.
Disrupting The EV Field
At this stage, Lucid has only one model in its portfolio, a premium electric sedan called Lucid Air, which has various editions with different characteristics. The base edition of Lucid Air is priced at $77,400, while the Dream Edition sells for as high as $169,000 and is already sold out. The biggest advantage of Lucid is that it has an edge in the EV industry, as its 900-volt battery makes Lucid Air the fastest-changing electric vehicle, which could be charged up to 20 miles in a minute. Thanks to this Lucid Air has already received wide industry recognition and its most expensive edition of Lucid Air is the longest-range EV right now, as it can drive up to 520 miles on a single charge.
Another upside of Lucid is that it manufactures all of its vehicles itself from the production facility located in Casa Grande, Arizona. Thanks to this, Lucid can keep a pricing advantage and have greater control over margins, which is not the case for its peers such as Fisker (FSR) and NIO (NIO) which outsource the production of their vehicles to third parties.
Considering this, Lucid has everything going for it to become one of the major automakers of luxury electric vehicles in the world, as the field is not as saturated in comparison to the luxury ICE vehicle market, while margins are much better and the demand is always high due to the supply scarcity. The company already has over 17,000 reservations, its backlog of orders is now worth over $1.3 billion, and its first deliveries started just this October.
Follow The Money
One of the major issues of Lucid in the past was the inability to rapidly scale its production. Just a couple of years ago Lucid Air was still in the prototype stage and the company's management was looking for ways to raise funds to expand the business. At the same time, Saudi Arabia's sovereign wealth fund was looking for new investments. That's why in 2018 both parties reached a deal, under which the Kingdom's fund invested ~$1.3 billion in the electric automaker and in exchange received a majority of shares in the company.
There are two reasons why I believe Saudi Arabian sovereign wealth fund decided to partner with Lucid. First of all, the Kingdom itself aims to diversify and transform its economy by 2030 to decrease decarbonization risks and start to rely less on the exports of oil. Back in 2016, Kingdom's officials presented a new program called Saudi Vision 2030, the goal of which is to leverage the country's strategic resources by investing profits that are generated from exports into other sectors of the economy. By partnering with Lucid and investing a hefty sum into it, Saudi Arabia is able to electrify its roads and at the same time give the company a unique opportunity to penetrate the EV market of the Middle East. In addition, in October the Kingdom announced that it aims to ensure that at least 30% of the cars in its capital Riyadh will be electric. As a result, it's safe to assume that Lucid will be able to quickly expand within Saudi Arabia. The company's CEO already said that Saudi Arabia is already Lucid's second-biggest market after the United States by the number of pre-orders, and deliveries in the region are expected to start by the end of this month.
The second reason is profit. Considering that Lucid's current market cap is ~$62 billion, Saudi Arabia's 61.7% stake in the company is now worth nearly $40 billion. Since the country's fund invested only $1.3 billion into the business a few years ago, it will be able to exit its position in the company at a significant profit if it decides to do so today. However, sovereign wealth funds generally have a significantly longer investment horizon than even traditional funds, so it's highly unlikely that we'll see the unwinding of such a big position anytime soon. After all, it's in the interest of Saudi Arabia to continue to hold Lucid in its portfolio not only because the company will be able to help the Kingdom to electrify its roads, but also due to the increased demand for EVs, which could push Lucid shares to new highs.
Let's not ignore the fact that Lucid has all the chances to become a solid niche play in the luxury EV market around the globe. The company's biggest upside is that it operates in a highly growing industry that will continue to expand, giving the company's stock solid momentum. As nations are on a quest to significantly decrease their carbon footprint, electrifying the auto sector through subsidies and lower tariffs is one of the ways to achieve it. The preferential treatment to EV manufacturers by governments across the world will keep investments into the sector growing. In 2021, EV sales are already estimated to increase by 98% Y/Y to 6.4 million globally. In addition, the EV infrastructure is also expanding. If in 2019 there were around 175,000 public charging stations in Europe, then by the end of 2030 they're expected to be at around 2.9 million stations. On top of that, the introduction of solid-state batteries by the end of this decade could help to significantly accelerate the adoption of EVs, as people will be required to spend less time on charging their vehicles, while at the same time driving greater lengths. All of this will undoubtedly help Lucid to keep its momentum.
With that in mind, ordinary shareholders of Lucid are very likely going to benefit from the partnership between the company and Saudi Arabia. Let's not ignore the fact that Lucid will likely have preferential treatment in the Kingdom, as the country itself will benefit both financially and strategically from the company's growth in the region. As a result, Lucid will find it easier to enter new markets and receive more orders along the way, all of which will lead to the creation of an additional shareholder value along the way.
The Downside
The major downside of Lucid is that it's still in the earlier stages of its development. The company competes in a capital-heavy industry, and scaling its production will become its biggest challenge in the next few years. Since it has a production facility only in the United States, it will need to open up new manufacturing factories abroad as well to properly expand to other markets, successfully compete with local competitors, and keep its advantages at the same time. Tesla (TSLA) is already doing this by opening factories in China and Europe, and in the latest conference call, Lucid's management also said that it plans to open new manufacturing facilities in China and the Middle East. The problem is that we shouldn't forget that Tesla nearly became bankrupt when scaling its production, so there's a high chance that Lucid will be required to raise additional capital either through a stock dilution or through the leveraging of its balance sheet to implement its expansion strategy.
On top of that, we shouldn't ignore the fact that the competitive landscape is not the same as it was a few years ago when Tesla was in the earlier stages of scaling its production. Right now, Lucid doesn't have the first-mover advantage, the regulatory credits are slowly declining as legacy manufacturers are electrifying their own fleets, and companies such as Volkswagen (OTCPK:VWAGY) and Ford (F) have more capabilities to deliver EVs in high quantity. As a result, there's a risk that Lucid will remain only a niche player in the premium EV market and won't be able to significantly expand to other niches down the road.
In addition, Lucid's latest earnings results also look weak and make it hard to justify its current valuation, especially for value investors. It was reported that the company made a total of only $719,000 in revenues in the first nine months of the current fiscal year, while at the same time its loss for the same period stood at $1.5 billion. Lucid also started to deliver its first vehicles to customers only a few months ago and will likely remain unprofitable in the foreseeable future. As a result, adding its shares to a conservative portfolio is not a good idea at the current levels.
The Bottom Line
Lucid is a growth stock that will likely be able to keep its momentum in the long run, as long as the EV industry continues to expand at an aggressive rate every year. The company already has an operational production facility, its business continues to gain traction, and with $4.8 billion in liquidity at the end of Q3 and only $216 million in long-term debt, Lucid has more than enough resources to fulfill its outstanding orders and continue to grow. On top of that, its strategic partnership with Saudi Arabia's Public Investment Fund, which is also its major shareholder, is only going to benefit all the parties involved. That's why I'm bullish on Lucid in the long-term and believe that despite trading at nearly 30 times its 2022 sales, its stock still has room for growth due to the numerous advantages that were described in this article.
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