Although premium EV manufacturer Lucid (NASDAQ:LCID) theoretically offered an exciting alternative to Tesla (NASDAQ:TSLA), the harsh reality is that the difficult environment in the space makes the company’s long-term trajectory difficult to predict. However, as a short-term trading opportunity, it could be appealing to speculators. Presently, meme stocks have taken center stage, which involves leveraging social media to facilitate loosely coordinated bidding activities.
The buying activity tends to focus on embattled organizations that feature high short interest. That fits Lucid to a “T.” As a result, I’m cautiously bullish on LCID stock, especially in the context of short-term trading.
LCID Stock Brings Many Pros and Cons to the Table
Fundamentally, Lucid offers a clear alternative to Tesla’s now-ubiquitous vehicles. While it has done an excellent job of mainstreaming electric transportation, consumers often get tired of the same brand. They want options, and Lucid provides exactly that. Further, management aimed to target the higher-income crowd from the get-go.
Historically, I argued that this decision was the right one. Whenever new technology enters the retail market, it’s typically adopted by the wealthy. Since full mainstream integration of EVs – where modest-income households can, with relative ease, acquire electric-powered cars – is probably many years away, it made sense for Lucid to target the viable consumer demographic first.
In time, as innovations and economies of scale improve, Lucid can pivot to the middle-income crowd. I still believe that was the right decision. It just hasn’t panned out due to broader economic challenges and market/industry dynamics.
Nevertheless, Lucid’s engineering and design team were incredibly successful in delivering a home run. In 2022, the Lucid Air won MotorTrend’s 2022 Car of the Year award. Industry analysts raved about the company’s luxurious interior, ample features, and powerful performance. In its top trim, the Lucid Air delivers more than 1,000 horsepower. Yet, it’s incredibly restrained if the driver wants it to be.
If that was the only framework around the Lucid Air, it would mean that LCID stock is a no-brainer investment. However, auto critics have also pointed out the Air’s flaws. Electronic gremlins can occasionally sprout, leaving drivers stranded. Maddening error messages can also impact core functionalities at critical moments.
These are not ideal situations for a car priced in six-figure territory. And thus, the Lucid Air – just like LCID stock – is a mixture of strong positives and distracting negatives. Notably, Lucid is presently trading at parity with its January 18, 2024, closing price after starting the new year off poorly.
In other words, it’s been difficult to make heads or tails out of LCID stock.
High Short Interest Could Make Lucid Interesting
Still, the ambiguous nature of LCID stock isn’t the end for the enterprise. Instead, the underlying company could easily pick up speculative interest from meme traders.
Currently, LCID stock carries a short interest of 28.05% of its float. Generally speaking, a short interest above 20% is considered extremely high. In addition, Lucid’s short interest ratio stands at 26.79 days to cover. This statistic represents the number of sessions – based on average trading volume – required for the bears to unwind their positions.
Mechanically, betting against LCID stock is dangerous at this moment because of the feedback loop that could materialize. In order to initiate a short position, a speculator must first borrow the target security from a broker and then dump the shares. The idea is to wait for the stock to fall in price. When it does, the trader scoops up the shares at a discount, returns the nominal amount borrowed back to the broker, and pockets the rest as profit.
However, if LCID stock, in this case, decides to swing higher, the bearish trader would end up pocketing losses. The higher shares rise, the more damage ensues for the pessimist. Thus, it’s better to cut losses early. Of course, other bearish traders understand this dynamic. If the price rises, there’s an increasing incentive to cut out early before a margin call materializes.
This dynamic creates a feedback loop where more and more bearish traders exit their positions. Because exiting a short requires buying to close, the target security ends up rocketing higher. The threat of this situation occurring gives plenty of charm to LCID stock.
Financials Aren’t That Bad, Relatively Speaking
Another factor that might help LCID stock is that the underlying financial position might not be all that bad. Sure, in 2023, Lucid generated revenue of only $595.3 million, well off of rival Rivian Automotive (NASDAQ:RIVN) and its $4.43 billion sales last year.
However, Lucid’s net loss landed at $2.83 billion, in contrast to Rivian’s net loss of $5.43 billion. Moreover, on the balance sheet, Lucid’s retaining loss as of its most recent earnings report came in at $10.9 billion. On the other hand, Rivian’s retained loss reached just over $20 billion.
In a capital-intensive market such as the automotive industry, managing the bottom line is essential. Now, Lucid needs to pick up the pace when it comes to revenue growth. Still, relatively speaking, it appears to be approaching its circumstances in a judicious manner.
Is LCID Stock a Buy, According to Analysts?
Turning to Wall Street, LCID stock has a Hold consensus rating based on one Buy, six Holds, and one Sell rating. The average LCID stock price target is $3.16, implying 15.75% upside potential.
The Takeaway: LCID Stock Isn’t the Most Convincing Investment, But It Could Still Pop
To be blunt, Lucid doesn’t offer the most convincing investment idea. Its Lucid Air EV received rave reviews upon its introduction. However, it has also received its fair share of criticism. On the investment side, management arguably made the right call in targeting the higher-income crowd, but the share price just hasn’t cooperated amid broader challenges.
Still, LCID stock could benefit from speculative trading, thanks to its extremely high short interest. Combined with not completely terrible financials (relatively speaking), this EV maker could be interesting.
