Why Lucid Group Plunged Today

Shares of luxury electric vehicle company Lucid Group (NASDAQ: LCID) were on a roller-coaster Tuesday, plunging as much as 57% before substantially recovering to a "mere" 16% decline at the end of the trading day.

Lucid has been under severe pressure recently, as enthusiasm for electric vehicles has tempered, and it has also experienced technical problems with its new Gravity SUV. In June, the company announced it would lay off another 20% of its workforce and close a production line, on top of a 12% workforce cut earlier this year. Last week, the company drew on an $800 million term loan to enhance liquidity.

Today, a source familiar with Lucid told an industry news outlet that the company had been advised to file for Chapter 11 bankruptcy; however, the company later disputed that report, leading to the big recovery.

Lucid pushes back on the reports of bankruptcy

According to EV news outlet electric-vehicles.com, sources familiar with the matter said that Lucid had retained restructuring advisor AlixPartners, which recommended that the company either file for Chapter 11 bankruptcy or go private. A potential buyout could come via Lucid's major investor, the Saudi Arabia Public Investment Fund (PIF); however, it's unclear how much existing shareholders would get in that scenario.

The word "bankruptcy" certainly scared investors, leading to the tremendous decline in the stock earlier in the day. However, later in the day, Lucid stated to Bloomberg:

The company has sufficient liquidity to carry its operations well into next year. AlixPartners is assisting us in that and nothing else, and has not recommended bankruptcy to management or the board.

The refutation spurred a big recovery in the stock later today.

Where Lucid goes from here

There is some hope for Lucid, as its production and deliveries are growing, and the company has a new CEO, who just took the helm in June after being appointed on April 14.

However, new CEO Silvio Napoli will have his work cut out; Lucid's revenue growth hasn't been able to outpace skyrocketing costs; last quarter, the company lost nearly a billion dollars on the operating loss line, an increase from the prior year, while Lucid also carries several billion dollars in net debt, even after a recent equity raise.

While the company does have a large, cash-rich backer in the PIF, any further cash injection would either increase Lucid's debt load or dilute its equity holders. Therefore, the stock is still highly speculative and could very well end up a zero for investors if the bankruptcy scenario comes to fruition. It's best to stay away and watch from the sidelines until the company gets back to profitability, if that happens at all.

Billy Duberstein and/or his clients have 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.