Is Lucid Stock a Buy at $7.25?

Key Points

Lucid's stock price has fallen precipitously from its all-time high.

The struggling EV maker is grappling with huge losses.

Is the dip a buying opportunity or a signal to stay far away?

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There are no guarantees in the investment world. If you bet on the wrong company at the wrong time, be prepared to potentially lose boatloads of money. Lucid Group's (NASDAQ: LCID) early backers learned this lesson well. Shares in the electric vehicle start-up are down by a blistering 99% from the all-time high they reached in early 2021.

The biggest loser is probably the Saudi Arabian government, which controls over 60% of the company's equity through its Public Investment Fund (PIF). But plenty of regular investors have also gotten burned. Let's dig deeper to see if the situation can turn around over the next few years.

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Rising energy costs are a bullish factor

The war in Iran might be an underacknowledged bullish factor for the electric vehicle industry. The conflict has virtually choked off the Strait of Hormuz, through which 20% of the world's oil shipment volumes pass. Many top Middle Eastern energy producers have been caught in the crosshairs, sending oil futures up by a whopping 53% year to date.

Electric vehicles allow people to bypass oil prices by getting electricity from the grid, which is typically less volatile. There are signs that consumers are already changing their behavior. Data from New Automotive indicates that EV registrations surged 51% year over year across 15 countries in the European Union. In the U.S., online marketplace Autotrader reports a 28% jump in inquiries about EVs.

The situation also has substantial political ramifications as governments around the world realize the importance of reducing their reliance on imported oil. This trend could encourage them to support the industry.

Lucid's fundamentals are complex

Favorable macroeconomic conditions don't matter much if a company can't convert them to profits. Lucid's fourth-quarter earnings were a mixed bag. The good news is that top-line figures were phenomenal. Revenue surged 123% year over year to $522.7 million amid a huge surge in deliveries driven by the company's new midsize SUV, the Gravity.

Generally, SUVs are a much more popular vehicle type than luxury sedans in the U.S. The launch of the Gravity last year has quickly expanded Lucid's addressable market. That said, with a starting MSRP of $79,900, the car is a little pricey. Over the next few years, management could boost growth by pivoting to lower-priced offerings such as the Lucid Earth, expected to start at $50,000 when it becomes available next year.

But while Lucid's top line is doing well, the company's bottom line continues to struggle. Q4 operating losses ballooned 45% to $1.06 billion, which is an alarming amount of quarterly cash burn for a company with a market cap of just $2.6 billion. Lucid will struggle to remain in business without massive commitments from its backers.

Could Saudi Arabia and Uber save the day?

Lucid's situation would look hopeless without the continued support from the Saudi Arabian government, which sees the company as a useful tool to transition itself away from overreliance on fossil fuels. The war in Iran further exposes the vulnerabilities in the traditional energy industry. This uncertainty could bolster the Saudi government's commitment to financing Lucid, even if it doesn't make strict financial sense right now.

Another lifeline could come from Uber Technologies. This week, it was reported that the ridesharing giant plans to invest an additional $200 million into Lucid (bringing its total to $500 million) as part of the two companies' robotaxi partnership. This deal will involve using Lucid's new Gravity SUVs as a base for autonomous vehicles. It could also help Lucid increase production volume and improve margins by spreading fixed manufacturing costs across a larger number of vehicles.

But while I am cautiously optimistic about Lucid, it is always risky to catch a falling knife. Investors shouldn't overcommit to the stock until there are signs that its extreme levels of cash burn are coming under control.

Should you buy stock in Lucid Group right now?

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Will Ebiefung has positions in Lucid Group. The Motley Fool has positions in and recommends Uber Technologies. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.