Why NIO Looks Like a Better Stock to Buy Now Than Lucid Motors (LCID)

The most awaited SPAC merger of 2021 is finally here. Churchill Capital IV (CCIV) investors will vote on the merger on July 22 and subject to approval, Lucid Motors will start trading on July 23 under the ticker symbol “LCID.” Lucid Motors would join several other pure-play EV (electric vehicle) companies like NIO and Tesla. NIO might be a better EV stock to buy now compared to Lucid Motors.

The EV industry is getting very crowded. Investors have taken note of the intensifying competition, especially from legacy automakers. While legacy automakers like Ford and General Motors are outperforming the markets, pure-play EV names like Tesla and NIO are trading with YTD losses. In 2020, EV stocks outperformed the markets by a wide margin.

There are several similarities between NIO and Lucid Motors. Like NIO, Lucid Motors is also targeting the premium end of the EV market. Over time, Lucid Motors plans to offer affordable and budget models. NIO has also announced the ET7 sedan, which would be priced attractively.

There's another similarity between NIO and Lucid Motors that isn't talked about much. NIO has the strategic backing of the Chinese government, which bailed out the company in 2020 when it was staring at a survival crisis. Lucid Motors is backed by Saudi Arabia’s PIF (Public Investment Fund). Like China, EVs make strategic sense for Saudi Arabia as the country braces for a fossil-fuel-free future.

NIO and Lucid Motors both offer models with high battery capacity. Lucid Air would have a higher battery range than Tesla Model S Plaid. NIO’s upcoming ET7 would have the highest range of over 600 miles.

However, there are several differences too. While Lucid Motors is investing in its car manufacturing, NIO has tied up with state-owned JAC Motors. The business strategy in terms of charging networks is different. While NIO sees its NIO Power charging and battery swapping stations as a competitive advantage, Lucid Motors has tied up with Electrify America for the charging network.

NIO has moved up the curve and has already delivered over 117,000 vehicles. The company delivered over 8,000 cars in June, which took its deliveries for the second quarter of 2021 to almost 22,000 vehicles.

The company is now at an annual run rate of over 100,000 cars and has entered into an agreement with JAC to increase the annual capacity to 240,000 cars. NIO started posting gross profits in 2020 and in the first quarter of 2021 its gross profit margin was a healthy 19.5 percent.

In contrast, Lucid Motors is still in the pre-revenue stage and will start delivering its cars later in 2021. The company has received 10,000 bookings for its first model, the Lucid Air. The company expects its annual deliveries to rise above 100,000 by 2025. It also expects to become free cash flow positive by that year.

Meanwhile, Lucid Motors expects to turn positive on gross profits in 2022 and is forecasting gross margins of over 20 percent by 2023. The forecasts look encouraging but should be read with a pinch of salt.

Increasing competition in the EV industry combined with the execution risk could put Lucid Motors’ plans to test. Also, there are expectations of a price war in the industry whose signs are already visible in China. The rising input costs are another dampener for EV companies.

The EV industry has been working on a “derivative” valuation model where Tesla’s valuation has been a benchmark for other EV stocks. Currently, NIO has a market capitalization of $76 billion while Lucid Motors has a pro forma market cap of around $37.4 billion. Back-of-the-envelope calculations would reveal that NIO is twice as valuable as Lucid Motors.

While NIO doesn't appear cheap when looked at in isolation, a comparative valuation with CCIV makes it look like a relatively cheaper stock. If Lucid Motors stock falls after the CCIV merger in typical post-merger fatigue, it would make sense to buy it at lower levels.