People test the Dream Edition P and Dream Edition R electric vehicles at the Lucid Motors plant in Casa Grande, Arizona, September 28, 2021.
Caitlin O’Hara | Reuters
Manufacturer of luxury electric vehicles Clear seems to have a demand problem.
The company said during its fourth-quarter earnings report on Wednesday that it had “over 28,000” reservations for its Air sedan as of Feb. 21. That was a surprise given that the company had taken “over 34,000” reservations in November and delivered fewer than 2,000 vehicles in the fourth quarter.
Even more surprisingly, Lucid said it plans to build just 10,000 to 14,000 vehicles in 2023, far fewer than the roughly 27,000 Wall Street analysts were expecting — and than the roughly 34,000 vehicles a year Lucid’s factory is projected to build.
Shares of the company are down about 15% since Wednesday’s report.
Lucid faced a bumpy road getting the Air into production. The company spent much of the first half of 2022 securing key components and solving logistical problems. Now that production is running more or less smoothly, it seems to be facing a new problem: not enough of its reservations are being converted into orders.
CEO Peter Rawlinson confirmed this during the conference call when he reminded listeners that reservations are not binding.
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“We solved the production. Now that’s not the gating issue here,” Rawlinson said. “My focus is on sales. And here’s the thing: We have what I think is the very best product in the world. … Too few people know not only the car but even the company.”
Rawlinson went on to say he believes this is a “completely solvable problem” and plans to focus on “increasing customer awareness” in 2023.
More marketing might help. But demand for Lucid’s vehicles is clearly not arriving as quickly as the company anticipated, raising some tough questions for investors.
First, how big is Lucid’s potential market? Any estimate of how much Lucid could grow has to start with an estimate of the “total addressable market,” and it appears the company’s estimates have been too rosy on that front given its factory is designed to produce many more vehicles than it does it is now building up.
Running an auto plant well below capacity isn’t exactly a route to profitability, Chief Financial Officer Sherry House acknowledged during Lucid’s earnings call.
“As we produce vehicles in low volume on production lines designed for higher volume, we have and will continue to experience negative gross profits associated with labor and overhead costs,” House said.
This leads to a second, related question: how long will Lucid have to operate its factory at a loss? In other words, how long will it take Lucid to be profitable — and how much money will it need to raise by then?
Bank of America analyst John Murphy has long been bullish on Lucid, but in a note to investors following Lucid’s earnings report, he downgraded the bank’s rating on the stock from a “buy.” Murphy wrote that he now believes Lucid won’t break even until 2027 and that the company will need to raise more capital sooner than he previously anticipated.
The good news is that Lucid has a well-funded investor. The Saudi Arabia Public Investment Fund owns about 62% of Lucid and has shown — most recently in December when it invested another $915 million — that it’s still willing to fund the company. As long as it has the support of the Saudi fund, Lucid should be able to continue.
But the road to profitability — and a big payday for Lucid’s investors — looks longer now.