Lucid Dismisses Bankruptcy Rumors After Nasdaq Halts Trading. Here’s Why the Stock Plunged Anyway.

Shares of Lucid (NASDAQ:LCID) plunged following a rumor that the company was working with restructuring expert AlixPartners. Lucid quickly dismissed the idea that it was preparing for bankruptcy, and the stock recovered much of the ground it had lost. However, the shares still ended the day down by more than 10%. Here's what investors need to know.

Lucid confirms part of the rumor, denies bankruptcy is the goal

When asked about the rumor, Lucid confirmed to Bloomberg that it was working with AlixPartners. The company explained that AlixPartners is helping it improve execution and operations, and nothing more, adding that it "has sufficient liquidity to carry its operations well into next year."

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At the end of the first quarter, the electric car company had roughly $700 million in cash on its balance sheet and no short-term investments. A year ago, its cash balance was roughly $1 billion, with over $600 million in short-term investments. Meanwhile, at the end of the first quarter, it had $2 billion in long-term debt and another $500 million in other long-term liabilities, about the same as it had a year prior.

In the first quarter alone, Lucid spent $630 million on research and development and selling, general, and administrative costs. Given the early stage of its development, those aren't optional costs. It generated only $282 million in revenue from car sales while spending nearly $600 million to build them. The business is not performing well, Wall Street is well aware of the problems, and telling investors that it has enough liquidity to last a year or so may not be as reassuring as the company thinks.

New leadership could just be looking for extra help

To be fair to Lucid, the management team is relatively new. And AlixPartners does offer more than just bankruptcy services. So it is completely reasonable that a new management team would seek additional assistance as it looks to improve the performance of a troubled business.

However, this is just another sign that Lucid is a very risky investment. Only the most aggressive investors should consider it, and even then, caution is advisable. Notably, Lucid had been falling short of its own production guidance and recently suspended its guidance amid the turnover of the top brass. Even if AlixPartners is simply there to help the company improve its business, investors have good reason to wonder what the exact goal of the company is at this point. And until there is more clarity on the business situation, most investors should probably watch from the sidelines.

Lucid needs a new plan

What Lucid has been doing hasn't been working out as well as hoped. At this point, the company remains a money-losing start-up that has been falling short of its own goals. With cash running down and material debt, the new management team can use all the help it can get. It isn't a bad thing that Lucid has reached out to AlixPartners for an assist.

However, given the state of the business, it also isn't a bad thing that investors see the involvement of a restructuring expert and fear the worst. Given the circumstances, that's a perfectly reasonable reaction.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.