Lucid Group’s (NASDAQ:LCID) stock is down about 9.5% in after-hours trade. The decline follows the company’s announcement about its intention to raise $1.5 billion in capital through the issuance of stock.
The issuance of shares results in dilution for shareholders and often lowers the market price. Nevertheless, investors shouldn’t worry much, as it is normal for an early-stage company to raise capital from the sale of its stock to fund future operations. What concerns us most is the EV maker’s lofty valuation.
Let’s Dig Deeper into Lucid
Lucid Group is in the capital-intensive business of manufacturing cars and will require more capital to ramp up its production. Further, raising capital through stock sales is often cheaper than debt.
Thus, in an SEC filing, Lucid announced that it plans to sell up to $600 million in new shares under the equity distribution agreement. Further, its majority shareholder, Ayar Third Investment Company (which owns about 60.4% stake in the company), has agreed to purchase up to $915 of its stock under the subscription agreement.
While the stock sale will impact the stock price, investors shouldn’t be overly concerned as long as the company is on track to hit its production guidance of 6-7K vehicles and is growing delivery numbers.
However, Lucid’s valuation is one area where investors should focus. LCID stock is trading at a price-to-sales multiple of 128.1, indicating that the stock is highly overvalued. While higher adoption of EVs and Lucid’s solid technology are positives, the valuation is way too high and unjustifiable, especially as the company is not profitable and recently reduced its production targets.
Is LCID a Buy, Sell, or Hold?
On TipRanks, LCID stock is a Hold based on three Buy, one Hold, and two Sell recommendations. Meanwhile, due to the 68% decline in its price, LCID’s average price target of $18.80 implies 39.3% upside potential.
LCID stock has a positive signal from hedge fund managers who bought 4.2M shares last quarter. However, it scores a five out of 10 on TipRanks’ Smart Score system, implying a Neutral outlook.
Bottom Line
Growing EV adoption, strong customer demand, and higher reservations will support Lucid’s financials and stock price. Yet, its high valuation is a dampener and could limit the upside potential.
