The High Price of Cool Stuff: An Update on Stocks Valued Over 10x P/S

Lucid Motors Logo: A Symbol of the Future?

It’s been a hot stretch of summer for the KCR equity research team.  We have, at times, been accused of writing dry and dense material with an intermittently academic tone.  Not today.  First Friday in August.  Let’s talk cars.

The majority of KCR’s research staff are car enthusiasts.  Automobiles are a frequent source of conversation.  Over the last year, team members have dipped their toes into the sexy, electric vehicle segment.  One bought a Toyota plug-in hybrid electric that has clocked 94mpg, and another owns a fantastic new vehicle from Rivian.

While some on our team harbor deep skepticism on the environmental virtue of these government-sponsored sports cars, there is no denying they are spectacular fun to drive.  A new contender in the now-crowded BEV space has arrived on the scene.  The Lucid Motors logo is as refined and tempered as their cars are superb.

Lucid’s first vehicle recently hit consumer markets and has absolutely stunned the automotive press.

Forbes tagged the Lucid Air as the best luxury car above the 2nd place BMW i4.  Green Car Reports also lauded the car as its #1 pick for 2022.  Lucid tied with Rivian and VW for MotorWeek’s prestigious “Driver’s Choice” for best EV.  The accolades have been ubiquitous and omnipresent across publications.

But none struck us as more compelling than MotorTrend’s decision to award the Lucid Air their prestigious 2022 Car of the Year award.  We encourage car enthusiasts and investors in the BEV space to give MotorTrend’s article, which has 100s of pictures, a full read.  The details boggle our already automotively inclined minds.

With 1,111hp and 1,390 lb-ft of torque, the car posts horsepower numbers beyond Formula 1 cars and offers more torque than a Ford F-350 Diesel, besting almost every rival in the field.  They achieved this while also putting up an incredible 520 miles of EPA-official range with a charging technology that “….makes the Lucid Air today’s fastest charging EV, capable of adding 300 miles in 20 minutes.”

The car does not lack amenities either.  The press is fond of comparing the Lucid’s interior to that of the Mercedes S-Class.  Driving dynamics were lauded as the place the “…Lucid Air really distinguished itself from the Mercedes… [as]…this mere 800-hp version whooshes through the quarter [mile] at 130.1mph.”

MotorTrend’s Car of the Year award does touch on the Lucid Air’s incredible technology.  Fortunately, the magazine dedicated an entirely separate article on the tech that underpins the Lucid Motors logo.  Titled “2022 Lucid Air: Take a Deep Dive Into the Stunning EV’s Powertrain Tech, This electric car’s mass, size, and manufacturing efficiencies will electrify the masses,” Motor Trend offers a detailed education on the engineering feat that is Lucid.

They note that the company’s novel approach is patent rich and has created a drivetrain with “…triple the power density Tesla achieves.”  More important is the stunning 4.6 miles per kilowatt-hour statistic.  That’s how far the Lucid Air can go per kWh.  This highlights that Lucid has moved the industry forward.  Their tech is simply better.  In smaller, less powerful, non-supercar formats, MotorTrend suggests this number could hit 6 miles per kWh.

The article goes into further detail about numerous other technological feats native to Lucid. Truly remarkable.

A meaningful part of what seems to have understandably swayed the judges across numerous magazine reviews was Lucid Group’s technology.  The company appears to have achieved a material competitive advantage.

KCR is not surprised that the LCID message board and stocktwits are a vibrant place.  This company’s launch car and technology rightly inspire admiration and passion.  Those same innovations are also the source of our turn to the dour.

After all, KCR is an investment newsletter whose primary goal is to preserve and protect capital.  The difficult truth of investing in even the most incredible companies, technologies, and products, is that what you pay matters.

In our recent piece, Economic Cycles and Mean Reversion, we updated material from Warren Buffett published by Fortune Magazine in 1999.  Warren Buffett discussed this concept in that piece using cars as an example:

The auto industry transformed the world, but many hundreds of car makes became road kill … If you had foreseen in the early days of cars how this industry would develop, you would have said, “Here is the road to riches.”  So what did we progress to by the 1990s?  After corporate carnage that never let up, we came down to three U.S. car companies – themselves no lollapaloozas for investors.  So here is an industry that had an enormous impact on America – and also an enormous impact, though not the anticipated one, on investors.” -Warren Buffett, Fortune Magazine, 1999

The point is that even the most exciting companies with the most society-altering technology are not necessarily good investments.  This is particularly true if someone starts off paying too much.  We put the below chart out showing the market cap of stocks trading over 10x price to sales in 2021.