Is Lucid a Good Stock to Buy? An Update on Stocks Valued Over 10x P/S

It’s been a hot stretch of summer for the KCR equity research team. We have, at times, been accused of writing dry and dense material with an intermittently academic tone. Not today. First Friday in August. Let’s talk cars.

Lucid Motors Logo: A Symbol of the Future?

The majority of KCR’s research staff are car enthusiasts. Automobiles are a frequent source of conversation. Over the last year, team members have dipped their toes into the sexy, electric vehicle segment. One bought a Toyota plug-in hybrid electric that has clocked 94mpg, and another owns a fantastic new vehicle from Rivian.

While some on our team harbor deep skepticism on the environmental virtue of these government-sponsored sports cars, there is no denying they are spectacular fun to drive. A new contender in the now-crowded BEV space has arrived on the scene. The Lucid Motors logo is as refined and tempered as their cars are superb.

Lucid’s first vehicle recently hit consumer markets and has absolutely stunned the automotive press.

Lucid Logo

Forbes tagged the Lucid Air as the best luxury car above the 2nd place BMW i4. Green Car Reports also lauded the car as its #1 pick for 2022. Lucid tied with Rivian and VW for MotorWeek’s prestigious “Driver’s Choice” for best EV. The accolades have been ubiquitous and omnipresent across publications.

But none struck us as more compelling than MotorTrend’s decision to award the Lucid Air their prestigious 2022 Car of the Year award. We encourage car enthusiasts and investors in the BEV space to give MotorTrend’s article, which has 100s of pictures, a full read. The details boggle our already automotively inclined minds.

With 1,111hp and 1,390 lb-ft of torque, the car posts horsepower numbers beyond Formula 1 cars and offers more torque than a Ford F-350 Diesel, besting almost every rival in the field. They achieved this while also putting up an incredible 520 miles of EPA-official range with a charging technology that “….makes the Lucid Air today’s fastest charging EV, capable of adding 300 miles in 20 minutes.”

The car does not lack amenities either. The press is fond of comparing the Lucid’s interior to that of the Mercedes S-Class. Driving dynamics were lauded as the place the “…Lucid Air really distinguished itself from the Mercedes… [as]…this mere 800-hp version whooshes through the quarter [mile] at 130.1mph.”

MotorTrend’s Car of the Year award does touch on the Lucid Air’s incredible technology. Fortunately, the magazine dedicated an entirely separate article on the tech that underpins the Lucid Motors logo. Titled “2022 Lucid Air: Take a Deep Dive Into the Stunning EV’s Powertrain Tech, This electric car’s mass, size, and manufacturing efficiencies will electrify the masses,” Motor Trend offers a detailed education on the engineering feat that is Lucid.

They note that the company’s novel approach is patent rich and has created a drivetrain with “…triple the power density Tesla achieves.” More important is the stunning 4.6 miles per kilowatt-hour statistic. That’s how far the Lucid Air can go per kWh. This highlights that Lucid has moved the industry forward. Their tech is simply better. In smaller, less powerful, non-supercar formats, MotorTrend suggests this number could hit 6 miles per kWh.

The article goes into further detail about numerous other technological feats native to Lucid. Truly remarkable.

A meaningful part of what seems to have understandably swayed the judges across numerous magazine reviews was Lucid Group’s technology. The company appears to have achieved a material competitive advantage. Please visit Lucid Motor’s Website for more information about the company’s incredible tech.

KCR is not surprised that the LCID message board and stocktwits are a vibrant place. This company’s launch car and technology rightly inspire admiration and passion. Those same innovations are also the source of our turn to the dour.

After all, KCR is an investment newsletter whose primary goal is to preserve and protect capital. The difficult truth of investing in even the most incredible companies, technologies, and products, is that what you pay matters.

In our recent piece, Economic Cycles and Mean Reversion, we updated material from Warren Buffett published by Fortune Magazine in 1999. Warren Buffett discussed this concept in that piece using cars as an example:

The auto industry transformed the world, but many hundreds of car makes became road kill … If you had foreseen in the early days of cars how this industry would develop, you would have said, “Here is the road to riches.” So what did we progress to by the 1990s? After corporate carnage that never let up, we came down to three U.S. car companies – themselves no lollapaloozas for investors. So here is an industry that had an enormous impact on America – and also an enormous impact, though not the anticipated one, on investors.” -Warren Buffett, Fortune Magazine, 1999

The point is that even the most exciting companies with the most society-altering technology are not necessarily good investments. This is particularly true if someone starts off paying too much. We put the below chart out showing the market cap of stocks trading over 10x price to sales in 2021.

YOU ARE NOW READING BASIC MEMBER LEVEL CONTENT

We like 10x P/S because Scott McNealy’s Sun Microsystem’s Quote makes the importance of this valuation metric obvious in a comically clear manner.  You can see that post the recent carnage,

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Will  Lucid Stock Go Up? History Tells a Tough Tale

People who are wondering Will Lucid stock go up are, in our view, making a wager that the company will be taken out by a competitor.  The current valuation pre-supposes that they will go on to create tremendous commercial success.  Maybe a better question would be “What will Lucid stock be worth in 5 years?”  

KCR says this because we believe the firm’s near-term prospects are challenged by the stock’s high valuation.  5 years from now, one could speculate that they will be rapidly taking market share from other, currently more popular BEV manufacturers.  With what appears to be a stunning technological advantage, it certainly cannot be ruled out.

KCR would like to be emphatic and clear that we are not experts on LCID’s stock price.  This piece merely discusses the stock because we 1) recognize the technological progress they have brought to the table and 2) have seen this story play out badly in the past.    For a deeper dive discussion on this please see our prior piece How to Build a Growth Stock.

That piece highlighted Akamai in 1999.  The company had a technology that, like Lucid Group’s today, was cutting edge.  Yet, like Lucid Motors today, Akamai had a painfully high valuation in 1999.  Despite becoming a default industry standard critical to the operation and growth of huge swaths of the internet, Akamai suffered sharp losses post the bubble peak and has not been a great investment. 

In the interests of full transparency: this newsletter has been skeptical of another popular BEV stock.  While we continue to be pessimistic on investors’ prospects, we have been and continue to be “wrong” as it valuation continues to defy gravity.   None of the content provided here is a recommendation to buy or sell Lucid stock.  It is merely meant as a general example.  As always, please talk to a Financial Advisor for personalized investment advice and thank you for your interest in our work! 

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.
The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra reading for anyone seeking out more information related to the topics above.

  1. Click the following to read more about Definition of Stock Speculation, Avoid Being Enroned, Vanguard Small Cap Index Admiral

[i] The 9.11% annualized rate of return over centuries is sourced from Shiller’s data at Yale and is consistent with academic studies over various horizons.  The variations around this average rate of return are material based on starting valuations, profit margins, and interest rates.  We will touch on our favored valuation metric at the end of this piece and will discuss margins in detail in our upcoming work.

[ii] Hat tip to BB!

[iii] Bloomberg, 06/30/1970 – 01/10/1973

[iv] At a whopping 23 trading days with trillions in government stimulus abrogating the COVID crash and triggering a speculative mania that sent multiple expansion soaring creating a crop of glamour stocks with impossible valuations hardly strikes us as a bear market.

[v] To fall to the long run expected return, the value index would need to fall a mere 15% by year-end.

[vi] We readily acknowledge that the data is murky, but believe that this merely exacerbates the problems of soaring leverage and asset bloat in one of the most crowded and procyclical investments we have seen in our 55 years of combined experience managing money.

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.

August 5, 2022 |

Categories: Quick Takes

August 5, 2022

Categories: Quick Takes

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