Lucid, the maker of luxury electric cars, appears to have a demand problem

luxury electric car maker Lucid Seems to have an ordering problem.

The company said during its fourth-quarter earnings report on Wednesday that it had “more than 28,000” reservations for its Air sedan as of February 3. 21. That was a surprise, given that the company claimed “over 34,000” reservations in November and delivered fewer than 2,000 vehicles in the fourth quarter.

Even more surprising: 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 expected — and the roughly 34,000 vehicles a year the Lucid plant is set up to build.

Shares of the company have fallen about 15% since Wednesday’s report.

Lucid had a difficult road getting the Air into production. The company spent much of the first half of 2022 struggling to secure key components and untangle logistics. Now, with production running more or less smoothly, it appears to be facing a new problem: Not enough bookings are converting into orders.

CEO Peter Rawlinson acknowledged this during the earnings call when he reminded listeners that reservations are not binding.

“We’ve sorted out the production. That’s not the gate problem here now,” Rawlinson said. “My focus is on sales. And that’s the thing: We have what I think is the best product in the world… Very few people are familiar with not only the car, but even the company.”

Rawlinson went on to say that he believes this is a “completely solvable problem” and plans to focus on “raising customer awareness” in 2023.

More marketing might help. But it’s clear that demand for Lucid vehicles isn’t materializing as quickly as the company had anticipated, which raises some tough questions for investors.

First, how big is Lucid’s potential market? Any estimate of how much Lucid will grow has to start with a “total addressable market” estimate, and it seems like the company’s estimates on that front might have been too rosy, given that its plant is primed to produce more cars than it’s building now.

Running a car plant well below capacity isn’t quite a path to profitability, CFO Cherry House acknowledged during Lucid’s earnings call.

“As we produce vehicles at lower volumes on production lines designed for higher volumes, we have and will continue to experience negative gross profit related to labor costs and overhead costs,” House said.

Which brings us to a second, related question: How long will Lucid have to run its factory at a loss? Or put another way, how long will it take Lucid to reach profitability – and how much money will it have to raise between now and then?

Bank of America analyst John Murphy has long been bullish on Lucid, but in a note to investors after Lucid’s earnings report, he downgraded the bank on the stock to keep from buying. Murphy writes that he now believes Lucid won’t break even before 2027, and that the company will need to raise capital sooner than he previously expected.

The good news is, Lucid has a wealthy investor. Saudi Arabia’s Public Investment Fund owns about 62% of Lucid, and it showed — as recently as December, when it invested an additional $915 million — that it’s still willing to fund the company. As long as he has the backing of the Saudi fund, Lucid should be able to keep going.

But the road to profitability — and to a big profit for Lucid investors — now seems longer.