Why Lucid Group Stock Is Sinking Today

Key Points

• Lucid Group is planning a reverse stock split to increase its share price and attract more institutional investors.

• The move is aimed at boosting appeal for certain investors, but often carries negative connotations.

• Lucid faces significant challenges in increasing sales and achieving profitability.

• 10 stocks we like better than Lucid Group ›

Shares of Lucid Group (NASDAQ: LCID) are falling on Tuesday, down 8.8% as of 2:08 p.m. ET. The drop comes as the S&P 500 (SNPINDEX: ^GSPC) and Nasdaq Composite (NASDAQINDEX: ^IXIC) were both down slightly.

Lucid filed a proxy statement with the Securities and Exchange Commission (SEC) to initiate a reverse stock split.

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Lucid wants to raise its share price

Lucid filed the statement showing that it will seek shareholder approval for a 1-for-10 reverse stock split. This would mean that after the split is executed, Lucid shareholders would own a tenth of the shares they owned prior to the split, but each share would be worth 10 times as much. To be clear, this does not change the overall value of investors' positions.

The move is often used by companies in danger of delisting -- the Nasdaq and the NYSE require a minimum share price of $1. Though Lucid's stock isn't in near-term danger of this, its low-single-digit share price means that many institutional investors that have set rules around minimum stock prices won't consider owning Lucid stock as it stands.

The reverse split could make the stock more attractive to a larger set of investors. However, a reverse split carries a lot of negative connotations, and news of the SEC filing led to today's drop in share price.

Image source: Getty Images.

Challenges remain

It's a critical time for the company, which recently launched a new vehicle, the Gravity SUV. The EV has been selling well compared to Lucid's sedan, but the numbers haven't been transformative. Lucid needs a major boost in sales if it ever hopes to approach profitability -- the low production volume means each vehicle is proportionally more expensive to make. Investors with a high risk tolerance may want to consider Lucid as a turnaround option, but for most, I would avoid the stock.

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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.