It’s good to have friends in high places. That is certainly what Lucid Group (NASDAQ:LCID) thinks. The Saudi Arabian government’s sovereign wealth fund Public Investment Fund (PIF) just injected the luxury electric vehicle maker with another $1.5 billion in cash, which gives it enough money to survive through the fourth quarter of 2025.
Yet, it’s also a sign that retail investors should sell Lucid stock. It is clear the automaker can’t sell enough cars to make it on its own without outside assistance. At some point, PIF will face up to the fallacy of sunk costs and cut off the financial support. The end result won’t be pretty for LCID shares.
Building Something Out of Nothing
Saudi Arabia is trying to build a whole new industry literally from the ground up. Trying to break free from the stranglehold oil has on its economy, the government’s sovereign wealth fund is attempting to launch the EV industry from nothing.
Saudi Arabia has no car manufacturers, which means no skilled labor force for autos and no supply chain. Trying to build a successful automaker on its own would be virtually impossible. PIF seeks to install Lucid as the premier car company in the country and is financing the construction of assembly plants in Saudi Arabia. It opened its first assembly facility there last year.
Lucid builds its vehicles in Arizona, then breaks them down and ships them overseas for reassembly. It helps workers gain the necessary skills that can eventually build up an independent auto industry.
PIF is also financing Lucid’s operations here so that it can continue making cars. The $1.5 billion cash infusion it just gave the EV maker gives it sufficient funding to begin manufacturing its Gravity SUV later this year.
Investment firm Ayar Third Investment, a PIF affiliate, will buy $750 million worth of convertible preferred stock and extend to Lucid a like amount as a line of credit.
An Ever-Growing Money Pit
On the surface this appears as good news for Lucid Group. The automaker doesn’t have to worry about raising cash on its own and can focus on making its vehicles. It also gives it a completely new market in which to sell cars, one that can afford its luxury EVs.
The problem for Lucid investors, though, is the automaker still can’t sell many of its cars. It reported second-quarter results on Aug. 5 though we already knew a lot of the details. Lucid had announced its vehicle production and delivery numbers ahead of time so there was not much new in the earnings report. It produced 2,110 during the quarter and delivered a record 2,394 vehicles.
Lucid said it generated revenue of $200.6 million, which was ahead of analyst expectations for $192.1 million. Yet, it still loses a massive amount of money on every car it sells. Net losses of $790.3 million were wider than the $764.2 million it lost a year ago. What it shows is that as it ramps up production, its losses grow.
That doesn’t bode well for the long term as it prepares to introduce the Gravity SUV. It is a lower-cost model that Lucid hopes will gain more traction than its pricier cars have. The only reason Lucid was able to sell more cars this quarter was because it cut prices, which exacerbated its losses.
The End is Nigh
Saudi Arabia is obviously willing to throw a lot of its petrodollars at Lucid for the moment. In addition to the $1.5 billion it just provided, it gave Lucid $1 billion in the first quarter. In total, PIF has provided $7.9 billion in funding to the carmaker since 2018 but has little to show for it. For that money, Lucid has produced less than 20,000 EVs and sold just over 14,000 cars.
Eventually, the PIF will decide the losses it is sustaining from propping up Lucid stock just aren’t worth it. The fallacy of sunk costs is when someone keeps doing what they have been doing because they have committed so much time, energy and money to a cause. Even though abandoning it would be better, they continue on.
PIF will eventually realize Lucid Group just can’t compete in the EV market and will cut off funding. Lucid stock will crash as its money dries up. Investors would do well to sell the stock now and deploy it elsewhere into more productive stocks.
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.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.