It’s been a boom year for electric vehicles. Tesla (NASDAQ:TSLA) stock has absolutely exploded. A legion of competitors, including the likes of Nio (NYSE:NIO) and Nikola (NASDAQ:NKLA), have also made traders fortunes. As a result, folks are looking for the next big thing in the EV space. ElectraMeccanica Vehicles (NASDAQ:SOLO) stock is one of those contenders seeking to join the big leagues.
SOLO stock soared as much as 400% recently as its development advances. The company seeks to commercialize a small, one-person, three-wheeled electric vehicle called the Solo. ElectraMeccanica’s vehicles are street-legal, as they are officially registered as motorcycles. The company began limited deliveries in 2018, though it hasn’t reached mass production yet.
Many critics have panned the vehicle, saying it is impractical. The thing is tiny, and obviously can’t carry passengers or cargo. It’s certainly unproven whether there is a market — in North America, anyway — for a tiny luxury vehicle like this. Some folks really like the design, however. And there’s some appeal to the vehicle’s sleek environmentally friendly design. The price point, under $20,000, also makes it accessible to many who don’t want to pay up for a Tesla.
The company is gearing up for bigger things. It’s ramping up marketing as it prepares to start producing and delivering far more vehicles. The rally in other EV stocks this year has also helped; ElectraMeccanica has been able to raise money as its share price has increased. Where’s that leave the company now?
Don’t Get Too Hyped Up About Retail Locations
ElectraMeccanica operates a direct-to-consumer marketing method via mall store locations. It opened a prototype location in Scottsdale, Arizona, a glitzy Phoenix suburb. The company recently announced plans to open an additional store at the Washington Square Mall in Portland, Oregon. Washington Square is a nice property and features high-quality tenants such as Nordstrom (NYSE:JWN) and Apple (NASDAQ:AAPL).
Still, traders may be blowing this out of proportion. SOLO stock initially popped as much as 10% on the day of the Portland announcement. However, ElectraMeccanica has a market capitalization of more than $200 million, meaning traders briefly valued this new mall location at around $20 million. That seems out of proportion, given the actual base rent for a small mall store at some high-end properties, such as the tourist mecca Mall of America in Minneapolis, is reportedly less than $10,000 per month.
That is to say that opening stores in malls is potentially a clever marketing strategy. It’s certainly been effective for Telsa. However, with just a few mall locations so far, this isn’t going to really move the needle in terms of sales or popular attention for ElectraMeccanica just yet. If the company spent a similar six-figure sum on digital or magazine ads instead of opening a few mall locations, it’d barely generate any notice.
So, give credit to management for a clever marketing move, but don’t count on it to pay off big rewards just yet — particularly since mall traffic is still way down thanks to the novel coronavirus.
More Fund Raising Ahead
ElectraMeccanica is still far from having a sustainable business. Previously, the company did business producing replica classic cars, but this was never a huge source of revenues or profits. Meanwhile, the Solo business is just kicking off.
The company has got its marketing going. And it appears the vehicle is getting closer to production. Still, we’re a long way from a viable business. Last quarter, the company generated revenue of barely $100,000 CAD ($74,502). That’s a pretty minuscule figure for a $200 million market cap company.
The firm is also actively raising money. In March, ElectrcaMeccanica started an at-the-market offering to the public. It subsequently sold 16 million shares through June, raising $18 million dollars. In July, management amended this share sales plan, upsizing it to take advantage of the four-fold pop in the stock price from $1 to $4 per share. This is understandable — growth-stage companies need capital after all — however, it’s still a serious headwind for existing investors in the company.
SOLO Stock Verdict
ElectraMeccanica has a lot going for it. Unlike a lot of penny stocks promising ground-breaking technology, ElectraMeccanica has a promising product and now has a sound marketing strategy behind it. There’s a real argument that ElectraMeccanica could eventually succeed. That’s more than you can say for a lot of fledgling green technology companies.
That said, be aware that if you buy now, you’re very early in the process. ElectraMeccanica is still far away from any meaningful profits or cash flows. As its stock offerings this year have shown, the company will need to raise a lot more money before it ever becomes highly successful. That means plenty of dilution ahead, even assuming the company continues to have operational momentum.
As such, if you want to own SOLO stock, use strict risk management. There’s a shot it works out, but at this point, ElectraMeccanica is still a highly speculative venture.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.