Lucid Motors (LCID) saw its market capitalization reduced and investors put the brakes on speculative electric vehicle stocks that had soared ahead of the bear market.

At its peak in November, Lucid’s market capitalization exceeded $80 billion. With the stock down 70% in seven months, is all the air out and does the valuation now look reasonable?

Bear markets, after all, have a way of bursting asset bubbles and cleaning up the scum of risky stocks.

Lucid now has a market capitalization of $28 billion with around $3 billion in net cash. The automaker is posting huge losses as it tries to ramp up manufacturing, and the stock has a high price-to-sales ratio – around 9 times expected 2023 revenue. That’s on par with Tesla (TSLA), which is already recording significant profits and cash flow.

Note that traditional automakers are trading at sales well below 1x. The LCID, by this measure, still looks well overvalued with plenty of downside risk. Lucid is racing in the capital-intensive automotive manufacturing sector against deep-pocketed competitors. Investors should anticipate additional capital raises to replenish net cash of $3 billion, as the company is expected to lose $1.5 billion this year.

Rivian (RIVN), Lucid’s close EV competitor, has $17 billion in net cash to invest in ramping up manufacturing and to bear losses until its business turns positive. With Rivian’s market cap of $23 billion, the company’s value is just $8 billion, less than a third of Lucid’s. Raising funds and maintaining sufficient liquidity will be an ongoing concern and challenge for these automakers.

“Unless something changes significantly with Rivian and Lucid, they will both go bankrupt. They’re headed for bankruptcy,” Tesla’s Elon Musk said in a recent interview. “Hopefully they can do something, but unless they can drastically reduce their costs, they’ll be in big trouble.”

Admittedly, there is a self-serving aspect to these comments for Musk, but it is nonetheless a cautionary tale for investors.

Lucid has a deep-pocketed majority owner in the Saudis, who hold 60% of the outstanding shares. But additional capital increases will always have a dilutive effect on equity or be accompanied by a high interest rate. The 60% stake is partly responsible for Lucid’s overvaluation; there is a limited number of actions. Short-term interest is high as a percentage of free float, at 23%, but much lower as a percentage of shares outstanding, at around 8%.

Like other automakers, raw material prices and availability, supply chain constraints and other cost pressures have worsened Lucid’s profitability outlook. Starting June 1, Lucid increased prices for most of its vehicle lineup by approximately 11%. Although the luxury electric vehicle maker serves an affluent consumer, demand may suffer.

Additionally, Lucid shut down the assembly line for a week due to manufacturing issues, according to a recent report by Business Intern. Rivian had similar manufacturing difficulties. This speaks to the costs and challenges ahead and confirms Elon Musk’s quote: “Large scale manufacturing is extremely difficult”.

Even after the LCID fell significantly this year, down 55%, investors are still paying a hard-to-justify valuation. In a bear market, this foam will likely be wrung out, leaving the LCID at much lower levels.

It’s tempting to think back to Tesla’s skepticism and imagine that buyers can once again take short sellers on the wrong side. But, at a minimum, Tesla had the field all to himself as it expanded. Today, Tesla is part of a competitive electric vehicle landscape that is only looking to get stronger over time. There are too many reasons in a difficult investment climate to avoid owning shares of Lucid.

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