Lucid Q4 22 & Alibaba FQ3 23 – Rough ride

Lucid Q4 2022 – Cash conservation.

• Lucid has moved into cash conservation mode as it is clearly concerned about demand and cash burn but ironically, all is likely to remain well for as long as the oil price stays relatively high.
• Lucid managed to produce 3,493 vehicles in Q4 2022 which beat expectations but the forecast of 10,000 – 14,000 vehicles for 2023 did not impress the market and sent the shares down 12%.
• This is because Lucid is supposed to grow its way to profitability in order to gain the scale to cover the fixed cost base, but this is not the route the company is taking.
• Instead, it is slowing investments and cutting costs to eke out the cash that it has on the balance sheet for as long as it can before it has to raise more money.
• The problem is that the valuation of the company still demands rapid growth which now looks like it is going to be much more pedestrian.
• This makes sense because the simultaneous fall in the price of oil and the increase in the price of electricity combined with the cost of electric vehicles has many consumers thinking again about the switch.
• Lucid currently has $3.8bn of cash and $2.0bn in long-term debt, none of which is due this year but most importantly it has PIF, the public investment fund of Saudi Arabia.
• PIF has been a steady backer of Lucid and, in my opinion, rightly so because Lucid can make claim to the best technology in the EV space which has been put to good use in the vehicles it has produced so far.
• Hence, I think that as long as the price of oil does not crash, PIF will be willing to finance Lucid if it gets into difficulty and so I am not too concerned that Lucid will run out of money.
• However, with 1.7bn shares in issue, the EV of the company is still $13.2bn which is expensive for a company generating $3.2bn in revenues, burning $2.2bn in cash from operations and unlikely to grow that much in 2023.
• I like this company a lot but not at this price.

Alibaba Q4 2022 – Rising tide.

• Alibaba reported reasonable results and has managed the current environment pretty well which I continue to think sets it up well for the H2 2023 economic bounce that I think President Xi has no choice but to deliver.
• Q4 2022 revenues were up 2% in USD and 12% in RMB while net income rose by 69% which was 16% ahead of estimates thanks to the efficiency drive upon which Alibaba has been engaged.
• The sudden change in Covid policy caused problems in fulfilment but the company has adjusted and has seen a sales uptick already during the month of February.
• The cloud has also suffered badly posting broadly flat growth compared to its Western peers who are continuing to chug along at 30%+ growth despite the poor macro situation.
• As the biggest e-commerce player in China, Alibaba is very well positioned to benefit from a bounce in the Chinese economy that President Xi badly needs to get past the reputational damage he has suffered as a result of the Covid Zero policy.
• There is space to cut interest rates and inflation is not particularly high meaning that intervention combined with a return to normality in China could cause a sharp bounce in the economy.
• I think that this would trigger both an improvement in revenue growth for the Chinese technology sector as well as rising investor sentiment so long as no more investment bankers go missing.
• This is a rising tide that will lift all boats, but I suspect that Alibaba as one of the hardest hit, has more to recover than most.
• This is why I am comfortable remaining a holder of Alibaba and I am adding slightly to the position that I already have at these levels as everyone else wants nothing to do with Chinese technology and will sell shares to me cheaply.