There are plenty of reasons to be skeptical of Arcimoto (NASDAQ:FUV). One of those reasons is the parabolic rally in Arcimoto stock over the past few months. FUV has gained a whopping 628% from March lows.
Those gains haven’t really come from anything Arcimoto itself has done. Indeed, Arcimoto stock sold off after second-quarter earnings on Thursday, as revenue remained minimal.
Rather, FUV stock has been caught up in optimism toward electric vehicle stocks. Tesla (NASDAQ:TSLA) obviously is the key driver (pardon the pun), with its stock breaking through the $2,000 level.
Arcimoto hasn’t yet proven it merits that kind of optimism on its own. To be fair, that doesn’t mean the company won’t do so. And there is an aspect of its strategy that does look intriguing. But even with a 9% sell-off, I’d like to see a lower price before I bet that Arcimoto winds up being a long-term winner in EVs.
EV Stocks Soar
The rally from March lows in Arcimoto stock alone is cause for concern. Again, the company itself hasn’t changed its story all that much. Production shut down in the second quarter amid the novel coronavirus pandemic. Revenue in the quarter was just $269,000, down sharply from $617,000 in the second quarter.
Neither figure was anywhere close to covering expenses. Net loss for Q2 was $3.7 million. In fact, even gross profit was negative: cost of goods was $1.2 million in the quarter.
Certainly, FUV is not the only EV play being caught in Tesla’s updraft. Nio (NYSE:NIO) has soared. Nikola (NASDAQ:NKLA) went parabolic before pulling back, but still is up ~300% from its merger price. Spartan Energy (NYSE:SPAQ) spiked after announcing plans to merge with Fisker.
To at least some extent, all of those stocks have retreated of late. Indeed, the most direct analogue to Arcimoto is Electrameccanica Vehicles (NASDAQ:SOLO). SOLO stock too climbed from about $1 in March to more than $5 last month. From those highs, it has kept fading. I expect after earnings that FUV stock will do the same.
The Market Problem
Indeed, Electrameccanica and Arcimoto share a common risk. The enormous rallies in both stocks were based on the idea that each company can benefit from industry growth. But neither necessarily is an electric vehicle stock just because they manufacture electric vehicles.
Both companies, after all, are niche plays. Arcimoto currently is producing the FUV, a two-seater, three-wheeled electric vehicle. The “Deliverator” version of the FUV designed for last-mile delivery, and the Rapid Responder, for fire, EMS and security markets, are set to follow.
For all of those vehicles, however, the fact that they’re electric is perhaps the least interesting part of the equation. Certainly, the electric motors provide fuel savings. But these are unusual-looking cars with relatively specific use cases – primarily in urban environments. It will take more than an electric motor to drive adoption.
Put another way, if the EV industry succeeds, it does not mean that Arcimoto itself will succeed. Note that Daimler (OTCMKTS:DMLRY) has pulled the Smart car from the U.S.
Arcimoto is trying to succeed where Daimler failed. It might do so. But it won’t be because its cars are electric (the Smart platform now is all-electric) or because EVs are “the future.” It will be because the company developed a car that customers want.
No company in the U.S. has done so with tiny vehicles. Arcimoto will have to succeed where others have failed.
The Case for Arcimoto Stock
After all that negativity, it’s worth pointing out the positives surrounding Arcimoto stock. And there are two worth highlighting.
The first is that the rally in FUV allowed the company to strengthen its balance sheet. According to the 10-Q filed with the U.S. Securities and Exchange Commission, Arcimoto finished the second quarter with $7.8 million in cash, and about $1.1 million in notes payable. It added another $11.6 million in the third quarter, per the Q3 earnings release, thanks to the sale of stock and the exercise of warrants.
The company will need to raise substantially more capital. Arcimoto burned $6.7 million in the first half of 2020. And there are plans for additional manufacturing facilities down the line. Still, the company has enough cash to get through the next year or so.
The second is that, as Arcimoto itself puts it, the company has a few “shots on goal.” A current market capitalization around $250 million doesn’t require that all three initiatives work out. Success in the delivery market alone probably could create profitability, and that might be enough to support the current price.
Still, for real upside from here, Arcimoto needs real success. And I’m still skeptical. The history of small vehicles in the U.S. is dismal. More shareholder dilution is on the way, even if not until 2021. And trading elsewhere in the EV sector, TSLA aside, suggests the post-earnings pullback could continue.
But as a high-risk play, FUV stock at the least is worth watching. Electric vehicle sales are going to rise, and Arcimoto has at least a chance of capturing a sliver of the market. That might be enough.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.