As electric vehicle stocks have soared, Electrameccanica Vehicles (NASDAQ:SOLO) stock has done the same. From late May to early this month, SOLO stock rallied as much as 500%.
But the stock is pulling back — and I believe with good reason. Electrameccanica is launching an electric vehicle, but that doesn’t necessarily make it an electric vehicle play.
The first model, the Solo, seems like a niche product whose demand is questionable. Electrameccanica has taken advantage of the rally to boost its balance sheet, but the company still needs substantial funding going forward.
To be sure, it’s possible Electrameccanica succeeds. The company has an interesting history, and big plans. But if it does succeed, it will because of the product, not the sector. As a result, investors at the least need to consider SOLO stock on its own merits, and not yet as part of an industry that I believe has big growth ahead.
Electrameccanica’s first original product should arrive shortly. The company does derive some revenue through the manufacture of custom cars, a legacy of its acquisition of Intermeccanica back in 2017. Intermeccanica has been known for years for building replicas of classic Porsches.
But that business is small, generating less than 800,000 CAD in revenue in 2019. The case here centers on the Solo.
Electrameccanica’s Solo, as the name suggests, is a single-passenger electric vehicle. The three-wheeled automobile is street legal (as it’s technically a motorcycle according to U.S. regulations), and includes air conditioning, Bluetooth, and a roll bar.
Obviously, drivers would be giving up space (though the Solo does offer a trunk). But the battery, with a range up to 100 miles, should be more than enough for urban commuting. And the company’s suggested retail price in the U.S. will be less than $19,000, according to a recent filing with the U.S. Securities and Exchange Commission.
It’s an intriguing product. The question is whether it’s intriguing enough.
We’ve Seen This Before
There does seem to be a use case for the Solo. Most car trips in the U.S. are taken alone. Delivery services, in particular, would seem to be a target market, whether for a pizza place or a third-party operator like GrubHub (NYSE:GRUB).
The Solo is small, presumably easy to park, and cost of ownership should be low.
The concern, however, is that we’ve seen these vehicles before — and they haven’t worked. As the New York Times pointed out, the three-wheeled Bond Bug was released in 1970, and went out of production in four years. More recently, Daimler (OTCMKTS:DMLRY) has pulled the Smart car from the U.S. market. Fiat Chrysler (NYSE:FCAU) sold less than 6,600 units of its Fiat 500 in 2019.
Americans don’t want small cars. Perhaps, economically and environmentally, they should. Regardless, they don’t.
That problem seems like a key stumbling block for Electrameccanica. At the very least, it colors the story here.
I’m on record as believing that electric vehicles are the future of the automotive industry. It’s why I’ve recommended names like Tesla (NASDAQ:TSLA) and Nio (NYSE:NIO) long before their recent parabolic rallies.
But SOLO stock isn’t on the level of those peers. The Solo itself is not the Model 3. It’s a niche product with questionable demand, in a category with a history of disappointment (at least in the U.S.). Just because electric vehicles on the whole are going to see adoption doesn’t mean the Solo will.
The Case Against (And For) SOLO Stock
But Electrameccanica needs to have success with the Solo. Even as the stock has pulled back toward $3, Electrameccanica still has a market capitalization over $200 million.
That valuation requires profits. And profits will require substantial unit sales. Electrameccanica isn’t manufacturing its cars; like Nio, it’s outsourcing production to a Chinese firm. With a $19,000 sticker price, Electrameccanica’s unit margins will be thin. The company needs to sell thousands of cars annually just to break even.
Funding is an issue as well. Electrameccanica did raise about $19 million in June. But that’s only enough to get the company through 2020, based on projections in the aforementioned filing with the SEC. More dilution likely is on the way, and from there Electrameccanica needs to become self-funding.
It seems like too difficult a path. But, to be fair, it’s worth noting that there is some reason for hope. A few significant contracts with major customers could move Electrameccanica toward profitability. And the company plans to next develop the Tofino, a two-seater electric sports car that admittedly looks rather sharp.
There is a “lottery ticket” case for SOLO stock. But I don’t think the odds are good enough. And even investors who feel differently need to understand, again, that SOLO isn’t an EV play. Rather, it’s a bet on a category that simply has never succeeded in this country. Maybe this time will be different. To be honest, I’m skeptical.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.