Why Lucid Stock Dropped About 14% This Week

Key Points

• Reverse stock splits don't come from a position of strength.

• Lucid investors are worried about the underlying business.

• Growing competition might be the last straw for Lucid.

• 10 stocks we like better than Lucid Group ›

Luxury electric vehicle (EV) maker Lucid Group (NASDAQ: LCID) has been looking for ways to improve its financial health. It is in a precarious position, losing money, which has led to a declining stock price and the decision to do a reverse split of its stock.

That reverse split occurred this week, and the stock has continued to drop. As of Friday morning, Lucid shares have plunged about 14% this week, according to data provided by S&P Global Market Intelligence.

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The problem isn't just the reverse stock split, though. Lucid's business could be in trouble.

Image source: Lucid Group.

Electric vehicle sales are dropping in the U.S.

The United States is Lucid's primary market. The EV maker also sells its luxury electric sedan in Saudi Arabia in an arrangement with the Saudi government. The Saudi Arabian Public Investment Fund (PIF) is Lucid's largest shareholder with about 60% of its shares.

But Lucid needs U.S. sales to thrive. It has supplemented its Air sedan offering with the new, fully electric Gravity SUV. Lucid needs that product to boost sales. It's a tough environment, though. EV sales in the U.S. slumped 6.3% year over year in the second quarter. That comes amid growing competition as well.

Lucid's 1-for-10 reverse stock split went into effect this week. It doesn't change anything about the valuation of the company or the business itself. Investors recognize it as a sign of problems, though, and Lucid stock has dropped to a split-adjusted record low.

Investors considering the drop as an opportunity have to believe in the success of the Gravity SUV. Lucid has been successful in raising capital thus far, including a recently closed $300 million investment from rideshare company Uber Technologies. But Lucid needs to begin generating much more revenue from the business. That will depend heavily on sales of the Gravity vehicle. Any sign that Gravity sales aren't meeting or beating expectations will mean more downside for Lucid stock.

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Howard Smith has positions in Lucid Group. The Motley Fool has positions in and recommends Uber Technologies. The Motley Fool has a disclosure policy.