All of Lucid Group, Inc.’s (NASDAQ:LCID) concerns stem from insufficient manufacturing. To address this issue, LCID launched a $3 billion offering, which will result in a 20% dilutive effect. As a result, stockholders voiced their displeasure, causing the price to drop 21% since the announcement. Despite the reasonable disappointment of LCID’s long-suffering shareholders, I feel this is an overreaction because dilution is required for LCID to safeguard its future. Having said that, I feel LCID is a good buy at the present dip price after the offering closes. Now that LCID has enough finances to grow to manufacture, its production problems may be over.

Production

Despite CEO Rawlinson’s claim during the company’s Q4 earnings call that LCID has “solved production,” I remain skeptical.

LCID lowered its output target twice in 2022, producing only 7,180 EVs that year. Polestar alone produced 21,000 EVs in the fourth quarter of 2022. Due to these cuts, LCID extended its waiting period for EV bookings, leading demand to fall as buyers sought out EV manufacturers with lower waiting periods.

Previously, LCID’s production was a two-pronged problem. The first was supply chain concerns, and the second was manufacturing capacity. The first issue is mostly overcome because of easing COVID limitations in China and LCID’s battery deal with Panasonic. LCID must now focus its efforts on growing production capacity.

LCID currently plans to boost its Arizona plant’s yearly production capacity to 365 thousand EVs. Furthermore, its Saudi Arabian plant is expected to produce 155 thousand EVs per year by 2025. These facilities, when combined, should significantly increase its production capacity, but finance is required.

Production Funding

LCID has launched a $3 billion offering consisting of a $1.2 billion public offering of 173.5 million shares and a $1.8 billion private placement of 256.6 million shares with its primary shareholder, the PIF, to obtain funds for expanding its production capacity. Although this capital raise would dilute shareholders significantly, these funds are important for LCID to grow production, which will improve the share price in the long run.

LCID currently has $900 million in cash and $2 billion in short-term investments. After factoring in the $3 billion from this transaction, LCID will have roughly $6 billion in liquefiable funds, which is unique for an EV firm. I believe that these monies will be sufficient for LCID to enhance production, resulting in increased demand as the wait time decreases.

PIF Support

This is not the first time the PIF has stepped in to help LCID. In late 2022, the PIF donated $915 million in funding to LCID and gave the Saudi government a 100,000-vehicle purchase order. It is obvious from its actions that the PIF considers LCID to be a key component of its Saudi Vision 2030, and as such, the PIF will most likely continue to support LCID.

Saudi Arabia’s 2030 Vision Plan is primarily concerned with developing a diverse economy that is no longer reliant on fossil resources. To that end, the country is directing more of its workforce toward the private sector, and the EV market plays a key role in those ambitions.

After previous attempts to enter the standard ICE market failed, it appears that the EV market represents a second chance for the country. Lucid’s planned EV plant in Saudi Arabia is expected to be finished by 2025-26, and it will be combined with KSA’s own EV brand, Ceer, to produce 500 thousand EVs yearly beginning in 2030.

The Saudi government is also supporting Lucid’s vehicles, as it has agreed to purchase 100,000 vehicles from LCID over the next ten years for use by government personnel. This will boost Lucid’s reputation in the region.

With this level of output in the region, I expect Lucid will begin exporting to developed Gulf countries. The UAE is already set for EV adoption and could become a promising LCID market in the future.

TSLA: A Dilution Story

While Lucid’s future seems optimistic due to its Saudi Arabia production plans, this current round of dilution has undermined investors’ faith in the firm. It is crucial to note, however, that all EV startups dilute.

Tesla, Inc. (NASDAQ:TSLA) is the most visible example of this. Without dilution, TSLA would not have been able to raise the financing needed to grow manufacturing. When TSLA went public, there were 110 million shares outstanding; now, there are 3.1 billion.

TSLA was able to increase manufacturing and create new vehicles through dilution, allowing it to become the EV industry leader it is today.

I believe LCID has reached a stage where dilution is required to scale, which is why I see the offering as a plus rather than a negative. If LCID is able to optimize its output as a result, it will be the best long-term decision, despite the short-term discomfort.

Getting Into China

LCID appears to be following in the footsteps of TSLA, with its head of China operations, Zhu Jiang, announcing the company’s plan to join the Chinese market. LCID is anticipated to sell imported vehicles while considering Chinese manufacture. Given the huge demand for EVs in China, LCID has a golden potential to rapidly grow its sales by entering the world’s largest EV market.

It’s worth mentioning that TSLA’s decision to build automobiles in China aided the company’s potential to attain profitability in 2020 when it began delivering these vehicles. As a result, this decision represents another exciting possibility for Lucid, which was most likely made possible by the company’s recent cash increase.

On the hourly period, LCID has been trading in a downward trend, although a sideways channel could form. According to the indicators, LCID is trading below the 200, 50, and 21 MAs, with the RSI at 38.

LCID is now testing support formed in January 2023, when LCID set a new all-time low. It ran more than 95% after consolidating at this level in January. While this rally was spurred by a variety of factors, it does illustrate LCID’s ability to recover from this low if the fresh cash is leveraged to spur growth in the coming quarters.

As a result, I see long-term potential for the stock now that the company has approximately $6 billion in highly liquid assets to strengthen its manufacturing capabilities and scale output. While I feel LCID is a buy, I recommend that investors wait to see if the support level holds before entering a new position or averaging down.

Risks

Despite its development, LCID’s capital burn is a danger that investors should be aware of. Even with $6 billion in liquid assets, as LCID ramps up production, the company’s cash burn rate might skyrocket from $921.5 million in Q1 2023.

LCID’s gross profit margin is already troubling. LCID generated $149.4 million in revenue in Q1, but its cost of revenue was a whopping $500.5 million, resulting in a gross profit margin of -2.35.

If LCID is unable to control its rising costs, it may be forced to spend a large portion of its freshly earned funds in future quarters. For example, if LCID sells double the 1,406 vehicles it sold in the first quarter as a result of its planned growth in production, its cost of revenue might exceed $1 billion, implying that the company may need to raise more capital in the future.

Demand is a second concern. In March, the corporation cut off 18% of its workers, indicating that demand may be waning. Furthermore, only 1,406 of the 2,314 automobiles produced in Q1 2023 were delivered. This could indicate that LCID is having difficulty converting reservations into orders. Resolving delivery delays may aid demand recovery, but there is no guarantee that this is the sole issue confronting demand.

Conclusion

After falling 24% after announcing the $3 billion capital issue, I feel LCID is a good time to buy on the dip. Following this capital raise, LCID will have $6 billion in liquid assets, which will be used to increase production and enhance long-term value to the company.

At the same time, I consider the PIF’s participation in the capital raise as a positive sign because the PIF has demonstrated its commitment to assisting LCID’s growth. This, together with its entry into China’s EV market, gives me cause to be bullish on the stock, and I believe LCID is a buy at its current price.

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