/White%20Tesla%20with%20Outdoor%20Background.jpg)
Lucid Group (LCID), the luxury electric vehicle maker, produced poor Q3 results after the market closed on Nov. 7. Barchart reports two large unusual tranches of puts traded today. This indicates a pessimistic investor outlook for LCID stock.
In morning trading on Wed., Nov. 8, LCID was trading for $3.99, down about 7.2% on the day. The large put tranches that have traded today were for the $3.50 strike price expiring on Jan. 19, 2024. This was reported in Barchart's Unusual Stock Options Activity Report.
That means that the put buyers believe LCID stock will fall at least 49 cents or over 12.2% in the next 72 days by the time the put options expire. Since the puts traded at 35 cents this implies the put buyers believe the stock will drop below $3.15 per share before their investment begins to make money if held to expiration.
That is a drop of 84 cents or over 21% from today's price. Moreover, the volume of puts traded at this strike price is 49 times the normal number of put contracts outstanding.
Another large tranche of puts traded in-the-money (ITM) at the $7.00 strike price for expiration on May 17, 2024, which is 191 days from today (over 6 months). The price of the options they paid for was $3.22 in the middle, so the breakeven price is $3.78 per share (i.e., $7-$3.22).
Since this breakeven price is below the existing $3.99 price, the put option buyers expect LCID will fall 21 cents or 5.26% in the next half year. Note that the volume of puts traded is 34 times the normal outstanding number of put contracts for this strike price.
In other words, these huge put option buyers have serious questions about the ability of Lucid to perform over the next several months. So what is going on here? Why are investors so negative on Lucid?
Lucid's Results Don't Show Much Upside
The bottom line is that the company is still unprofitable and is burning through its cash. Free cash flow (FCF) in the latest quarter was negative $706.1 million. That means that all its cash expenses, including capex spending (which is not posted on the income statement) as well as changes in working capital, are bleeding down its cash balance.
That balance was $4.902 billion at the end of September. This implies that within 7 quarters (less than 2 years) the company could reach zero cash. However, Lucid also has extra liquidity and could do a secondary equity offering.
However, if any of those liquidity-raising events occur, LCID stock would likely drop further. It all depends on whether people are willing to buy the company's luxury EVs.
Lately, there is not good news on this front. For example, numerous reports indicate that people are souring on the high prices of EVs. The problem is that Lucid has some of the highest price EVs in the industry. For example, their cheapest EV starts at $75,000 even with a $7,500 federal tax credit. Lucid produced just 1,457 EVs, which was short of its own production during the quarter of 1,550. That implies their inventory of unsold EVs is rising.
As the WSJ reported recently many other EV makers are facing the same issue and are cutting their prices as a result. Lucid Group won't be able to avoid doing the same. That could hurt its cash burn situation even further.
This is why investors and analysts are souring on the stock.
Analysts are Negative
TheFly.com reported today that two analysts downgraded their opinions on the stock. R.F. Lafferty downgraded LCID from Buy to Hold with a $5 target price. The reason was weaker than expected demand caused by the effect of higher interest rates and recent electric vehicle price wars. In addition, Cantor Fitzgerald to Neutral from Overweight with a price target of $6, down from $10. They cited lower expected revenues, persistent large negative gross margins, revision of the company's annual production guidance, and industry demand slowdown.
Investors can check these analysts' performance at AnaChart, a new sell-side tracking service, to see how well they have performed in the past (full disclosure: I am a consultant with AnaChart). For example, AnaChart says that the Cantor Fitzgerald analyst, Andres Sheppard, has a zero performance score, as none of his price targets on LCID stock have hit their mark. He covers 12 stocks and has an average success ratio of just 28.7% on all of them. So, it might make sense to take his points with a little grain of salt.
Nevertheless, let's take their points at face value. The outlook for Lucid Group does not look all that great, at least right now. That explains why investors are taking huge put positions in the stock.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
