Jun 16, 2022
[9 min Read]
Today I am looking at Lucid Group, Inc. (NASDAQ: LCID), to determine if LCID is a buy. I'll cover key financial ratios, analyst ratings, and a LCID Stock Forecast. Furthermore, I will cover an interesting find in LCID's SEC filings, and Musk's thoughts on LCID's financial position.
*Before getting into this, I am not 100% sure about my “cooked books” conclusion and would appreciate some input from accountants and people who work in accounting/SEC compliance so that my article is not misleading. The last thing I want from this analysis is to be misleading myself.*
Lucid Group, Inc. a technology and automotive company, develops electric vehicle (EV) technologies. The company designs, engineers, and builds electric vehicles, EV powertrains, and battery systems. As of December 31, 2021, it operates twenty retail studios in the United States. Lucid Group, Inc. was founded in 2007 and is headquartered in Newark, California.
In order to undergo a comparable analysis (to determine LCID stocks value), we need to first outline who LCID's competitors are.
These competitors need to be publicly listed, have valid financial metrics/multiples, operate in a similar manner to LCID, and have a market cap similar to LCID (if possible).
By keeping this in mind, I found the following list of companies to be some of LCID stocks closest competitors:
Elon Musk warned investors in Rivian (NASDAQ: RIVN) and Lucid (NASDAQ: LCID) the duo are on a path towards bankruptcy, and if they don't change course they could both end up among many other failed EV start-ups. Musk went on to say, “Unless something changes significantly with Rivian and Lucid, they will both go bankrupt,”. This is due to the Automotive Manufacturing business very slim profit margins, with the bulk of earnings coming from the aftermarket business. This aftermarket segment to automotive businesses is something both Rivian and Lucid have not accounted for. As a result of this Musk thinks that they could both up bankrupt.
To continue reading more about this story, you can do so here.
I think that Musk's concerns are warranted and shared to a certain extent. Currently, MacroAxis is predicting the probability that LCID runs into "financial distress" as 31%, which is based heavily off of the Altman Z-Score for predicting Bankruptcy. One might look at LCID's financials to determine how they are doing financially to see if they will be able to turn a profit and remain afloat. In doing so, you might look at their quarterly statement and see that LCID reported an $80.9M net loss for Q1 2022, which is significantly better than their $1.05B loss in Q4 of 2021. You might look at this and think "WOW! LCID is looking like they might be profitable in Q2 2022 at this rate." While I do not blame you for thinking this at a quick glance, I do blame you for not looking deeper into this.
The only reason why this occurred was because Q1 2022 and Q4 2021, LCID's gain on sale of securities increased by $1.08B, which is more than that of their increase in net income QoQ. Factoring this out, LCID would actually be in a worse place (financially) in Q1 2022 than they were in Q4 2021. Now you might be thinking "Who cares? They were able to achieve Nancy Pelosi-esque returns in the market, good on LCID!", this is far from the truth. The only reason that they were able to report this "gain on sale of security" was due to the fact they have their 44.35M Private Placements Warrants (from their CCIV reverse-merger deal) listed as their "securities", and the reason why they "gained from sale of security" is because the Private Holders of these Warrants have not yet exercised their rights and have lost money (unrealized) on their LCID warrants. As you can see this figure is very misleading and to me is quite criminal as they did not "realize" a gain on any "sale" of security, their stock simply dropped, and they were able to claim it as income. I believe this should not be on LCID's income statement but rather on LCID's balance sheet.
This is horrendous for LCID as it poses a double-negative scenario for the future. Firstly, their stock price could decrease further. This would be bad for investors as they would lose more money, however, come financial reporting time, they can report another large "gain on sale of security" and further mislead their investors. This is especially true if LCID reports a profitable quarter solely due to this reason.
Next, LCID shares could go increase in price, which would seem to be good for investors. However, all of the investors who buy on the way up will be in for a rude awakening, as LCID will report another large "loss due to sale of security" which will likely cause them to miss earnings, and their stock to decrease very sizably.
Is there Accounting Discrepancies in LCID's Books?
LCID reported their decrease in value of existing warrant agreements as "gain on sale of security" as some of their warrants have fell below their exercise price. As you can see this figure is very misleading as it should not be a gain on any "sale" of security, but rather a decrease in their liability account, or maybe even an increase in their unrealized gain (owners' equity) account. Once again, I am not 100% sure if this is correct, however, the SEC has made some statements pertaining to the way in which prior SPAC companies (LCID in this case) have been accounting for their warrants.
“SEC staff has concerns that the warrants issued by many SPACs should be properly accounted for under the liability method on the balance sheet. As such, the staff advises that companies with these outstanding warrants (whether SPACs or the combined company following a de-SPAC transaction) consider the need to amend previously filed audited and unaudited financial statements.”
It is important to note that LCID has in fact accounted for their warrants also as a liability under Non-Current Liabilities under “Derivative Product Liability”, however, I have no idea why they also decided to account for it as a “gain on sale of security”. If anyone knows why this may be please let me know?
Even if this is an accepted practice it is still quite misleading, and as previously mentioned will likely hurt investors regardless of if the LCID share price decreases or increases.
Overall, LCID had a very poor financial performance in 2021, which may be off-putting to many investor (me included). However, we will give LCID the benefit of the doubt here and look to their more recent earnings to see if there is much hope for the future.
Additionally, LCID stock missed their EPS estimate by $-0.07 (or -23.33%), as they reported an EPS of $-0.37 for the quarter (compared to their estimated EPS of $-0.3). Overall, LCID earnings on a more current timeframe still look very poor.
Since their reverse-merger with CCIV, LCID has gone from 1.42B to 1.67B shares outstanding. This occurred over the course of 9 months and represents a share dilution of 17.6% which is very high. Even taking a more recent approach to their share dilution, over thee past 5 months, their shares outstanding has increased from 1.65B to 1.67B shares outstanding, representing a share dilution of 1.2% over this time (which is noteworthy).
Furthermore, if LCID has 166,023,000 shares outstanding that are snot currently counted in their shares outstanding. These shares can be issued via private warrants, outstanding options, Restricted Stock Units (RSU's), and Convertible Notes, all of which can be converted into common stock at expiry (given that they are eligible (ie. in-the-money)). If even 50% of these potential shares were issued, LCID would be diluted by 5%, which is a lot of dilution, and represents an ongoing dilution battle for LCID.
Here is the current spread of LCID stock ratings. In total there are 6 LCID stock ratings, which fall in the following categories.
Analyst Ratings have provided relatively strong indicators of future price movement, which is why they are used to determine if LCID stock is a buy or sell. Overall, there is not a lot of analyst coverage on LCID just yet, however the coverage that they currently have is almost all bullish or neutral, which can be a good sign for the LCID stock.
Overall, LCID stock is overvalued and needs to experience a change in stock price of (an average of) -33.45% to be considered “at fair value”.
Overall, due to the fact that Musk thinks LCID is going to struggle financially, LCID Stocks financials being horrible over the past year and quarterly reports, high historic LCID stock dilution, large potential LCID stock dilution, my LCID Stock Price Prediction implying that they are overvalued by 33%, and some sketchy accounting practices, I have been able to confidently conclude the following.
LCID Stock is a strong sell to me. There is so many negative aspects around the LCID stock right now, and even if I am fractionally right about their accounting practices, their stock will get destroyed. I would again appreciate the input from someone with more extensive accounting and SEC compliance experience to chime into this in the comments below with your thoughts and why you agree/disagree with my findings.