Should you buy Lucid Motors while the price is under $2.50?

There’s no doubt that the percentage of electric vehicles sold worldwide will continue to rise, but that doesn’t mean every electric vehicle company is worth buying. It is difficult to make sustainable profits in the automobile industry, and competition is quickly entering the market.

Clear (NASDAQ:LCID) Having seen some of these issues first hand, the stock fell to $2.01 per share when the market closed on Friday. Is it time to buy EV stocks below $2.50?

Competition is now a problem for Lucid

I want to start by watching Tesla (NASDAQ:TSLA)which Lucid would most like to be like. Tesla has positive margins and free cash flow, but in the chart below you can see that margins were highest during the pandemic when vehicle supply was low. The company had to cut prices in 2023 to maintain sales, and revenue has not grown since then. Margins were wiped out at that time.

TSLA Gross Profit Data from YCharts

This is a challenge for automakers. A hard product like a car has high marginal costs, inventory costs are high, and supply and demand are very real dynamics. As the supply of electric vehicles increases, demand lags behind, pushing prices and profitability down.

Lucid’s problems are bigger than Tesla’s

Like most electric vehicle makers, Lucid’s mission isn’t just to sell more cars; he makes a profit from the cars he sells. Below you can see that gross margin is negative (106%) and shows no signs of inflection.

LCID Revenue Data (TTM) from YCharts

Lucid has a couple of problems that don’t seem to be getting resolved. First, its cars are expensive, starting at $69,900, making them out of reach for the average buyer. This makes scaling difficult as demand is below the 9,000 vehicles expected to be produced this year. It’s hard to sell a car for $70,000 when there are options for half that amount.

The second problem is costs, which are not falling fast enough given the size of the company. Playing in the luxury market is inherently a low-volume market, and if a company can’t make money in small volumes at these prices, it’s in for a tough road.

Debt and cash flow

With losses mounting, investors need to wonder how long Lucid can sustain its current level of losses. It is generally believed that the Saudi Public Investment Fund (PIF), Lucid’s largest shareholder, will come to the rescue.

In August, the fund committed to invest $750 million in preferred stock and $750 million in an unsecured deferred loan. This may seem like good news, but these new funds take precedence over common stockholders. Lucid could go bankrupt and PIF could still control the company.

Lucid’s position against this background is tough. The company is saddled with $2 billion in debt and cash is dwindling.

LCID Total Long-Term Debt Data (Quarterly) from YCharts

The money will only last for a year or so without raising additional money. And falling stock prices are making it difficult to raise new capital.

LCID Free Cash Flow Data from YCharts

Lucid is in trouble

Losses, the balance sheet and the competitive landscape make things challenging for Lucid. The company will not be able to survive without increasing capital, and even then it is difficult to see how it will be able to achieve a sustainable position.

Lucid stock is not a buy right now, and I don’t see a recovery in the future. The risks are too high to bet on, and falling stocks are leading to a downward spiral that won’t stop anytime soon.

Is it worth investing $1,000 in Lucid Group right now?

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Travis Hoyum has no position in any of the stocks mentioned. The Motley Fool has positions in Tesla and recommends it. The Motley Fool has a disclosure policy.