Lucid Group (NASDAQ:LCID) is a perfect example of why you should not short a stock. As famed economist John Maynard Keynes once noted, “The market can stay irrational longer than you can stay solvent.” Lucid should be doing even worse than it is. Yet here we are watching Lucid stock soar because someone posted a meme on X.
If not for the cash infusions of the Saudi government, the electric vehicle maker would be history. Yet because of that largesse, Lucid continues producing cars, but that does not mean you should invest in its stock. The rally (and subsequent sell-off again) shows just how irrational the market is about LCID stock and why you should avoid it.
A Large and Growing Problem
Lucid’s first quarter revenue jumped 15% from the year-ago period as it delivered more EVs than ever before. There were 1,967 deliveries for the quarter, a 40% year-over-year gain. It also marked the first time in the company’s history that it delivered more cars than it produced. Production in Q1, however, was 1,728 vehicles, a 25% decline from last year.
Unfortunately, that does not make much of a dent in Lucid’s huge unsold inventory. Since Lucid EVs began rolling off the assembly line in 2022, the EV maker has produced over 17,300 vehicles but sold fewer than 12,000 vehicles. There is a surplus of over 5,000 Lucid EVs on dealer lots and little prospect of selling them down.
While the price cuts Lucid enacted last year did spur some demand — it’s why sales jumped in Q1 — it’s not nearly enough to move the excess inventory.
Data source: Lucid Group SEC filings. Chart by author.
The Root Cause of Lucid’s Problem
The primary reason Lucid EVs are not selling is because they cost too much. Luxury EVs are a niche market in an already niche industry. Particularly for battery electric vehicles (BEV), there is a finite universe of customers.
It is why industry sales growth has slowed to a crawl and manufacturers everywhere are resorting to price cuts. Even Tesla (NASDAQ:TSLA) only sold about 20,000 Model S vehicles last year, which start at about $75,000. It sales far more affordable Model 3 and Model Y vehicles.
Far more popular are hybrids, which have a backup gasoline-powered engine drivers can fall back on. Toyota Motor (NYSE:TM) is the leading hybrid vehicle seller, and now both Ford (NYSE:F) and General Motors (NYSE:GM) are pulling back the reins on BEVs in favor of building more hybrids.
Moreover, the vast majority of buyers interested in EVs have already purchased one. It is into this market that Lucid is trying to push its high-end vehicles. That is a tough sell.
It is why Lucid is losing money on every vehicle it sells and relies upon the Saudi government’s investment fund for money to stay afloat. Lucid raised $1 billion in the first quarter with a private placement with the Public Investment Fund.
That gives Lucid $5 billion in liquidity now, so the EV maker can remain operational, but it’s against all sense that Saudi Arabia should pour so much money into a money-losing business like this.
Dead Man Walking
Lucid is a doomed automaker. It is a zombie EV company that doesn’t know it is dead yet. Only because the Saudi government is trying to create an automobile market out of nothing has the market not given Lucid the headshot it so desperately deserves.
It is likely Lucid stock will continue to shamble along, occasionally showing signs of life when a meme stock short squeeze rally animates its lifeless corpse. But that does not mean you should be putting your money at risk buying its shares.
On the date of publication, Rich Duprey 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.