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Lucid Group's (NASDAQ:LCID) stock price performance in 2021 can be described with only two words: "irrational exuberance." Former Federal Reserve Board chairman Alan Greenspan used to mention the phrase often. LCID stock saw gains of more than 400% and is priced around $52 today.

For those who are unfamiliar, Lucid is an electric vehicle (EV) company. In the past month, its stock more than doubled as per MarketWatch data. In light of these considerable returns, here is what you should know about this EV play.

LCID Stock Is Overvalued Despite Gains

I have written three articles on Lucid — two when it was still Churchill Capital Corp IV stock, and one after it made its trading debut as LCID stock in early September. All three articles share one common factor: my concern that Lucid Group is overvalued.

History has proved me wrong, though, as this EV company has rallied ever since. But value is not the same as price, and the facts still indicate LCID stock is extremely overvalued.

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Last week, Lucid's market capitalization was measured to be higher than Ford's (NYSE: F) value of $79 billion and almost the same as General Motors' (NYSE:GM) market cap of $93 billion. This is insane not because I say so, but because the valuation is disconnected from reality. Lucid has just started its production phase, with all excitement, risks and problems that come with it.

In my last article, I summed up my concerns about LCID stock:

"Call it FOMO, FUD, or whatever fancy acronym you want. I call it two things. A greater fool's theory game and a return to logic and reality. It is for these reasons that I dislike "meme" stocks.

… As a result, I am still very reluctant about LCID stock. Until I see solid financial results I consider it too pricey, too risky and now too overestimated."

What are these solid financial results that I expect? Profitability, positive free cash flow and strong margins, but also liquidity and efficiency performance. When a newcomer such as Lucid enters the market, what is its efficiency related to its capital and assets used?

The Good and Bad News From Q3 Earnings

We now have the first earnings report since the trading debut of LCID stock, and some highlights to analyze.

First of all, the Lucid Air sedan was named MotorTrend's Car of the Year for 2022. Additionally, customer reservations increased to 13,000 with an order book of approximately $1.3 billion for the third quarter. Since then, the number of orders has increased by at least 4,000. Finally, Lucid ended Q3 with about $4.8 billion in cash on its balance sheet.

The net loss attributable to common stockholders for the nine months ended Sept. 30 was $3.7 billion. Meanwhile, Lucid's loss from operations in the same period was more than $1 billion. As expected, the numbers were much higher and much worse than the figures for the nine months ended Sept. 30, 2020.

Why? The answer lies in another argument below about the economic lesson of Lucid Group.

Is Lucid an Example of an Unhealthy Stock Market?

Matt Maley, Miller Tabak's chief markets strategist, has argued that the price surges of Lucid and Rivian (NASDAQ:RIVN) are "a sign of an unhealthy stock market." Maley elaborated on his concerns:

"this market is being run by liquidity, and much less so than on economic growth or earnings growth. This liquidity is going to become less plentiful and people need to be preparing for how they will react when this market starts to come down at point. It's inevitable, and I think will come down at some point in the next 12 months."

I agree with him 100%. I will add that ignoring valuations, especially for newcomers such as Lucid and Rivian, is a very risky game that leads to violently burst stock market bubbles.

The market at its best is all about results — real financial results. But right now, it operates simply on hopes, dreams and estimates, along with tons of enthusiasm about EV stocks.

Considerable caution is needed, plus a return to the basics of a solid market approach. From that angle, what makes any stock valuable? It is its real financial performance, profits, earnings, growth and the "derivative" of its products.

LCID Stock Is a Valuable Economic Lesson

In any business, the average cost (AC) is the sum of the average fixed cost and the average variable cost. The AC curve is U-shaped. It reaches a minimum point that represents the optimal capacity for a given output.

If a business is expanding its output, it operates above capacity and the AC curve starts rising. This is what Lucid is doing now. It expanded its plant capacity and wants to build 20,000 cars in 2022. Its costs can only go higher.

What does this mean for its profitability? As its costs will rise, profit margins should remain under pressure. Businesses need to find the optimal capacity of production to reach profitability.

Simply pursuing higher production numbers puts companies at risk of being unprofitable for several years while burning cash to support expansion. I reckon Lucid will need plenty of time to reach profitability if we assume it follows the example of Tesla (NASDAQ:TSLA).

Can investors continue to ignore Lucid losing money for several quarters, or even years? I believe they cannot, so be wary of LCID stock's lofty valuation.

On the date of publication, Stavros Georgiadis, CFA  did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn. 

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