Electric vehicle stocks have been big winners in 2020. The latest arrival to the party is DiamondPeak Holdings (NASDAQ:DPHC) stock, which has roared higher over the past few weeks.
Optimism around this sector makes obvious sense. Simply put, EVs are the future. They’re more reliable, better for the environment and cheaper to own over the long haul.
But what’s been notable about 2020, the past couple months in particular, is changing sentiment within the sector. It’s not just the well-established passenger vehicle names that are gaining. Investors are taking a hard look at the commercial side of the industry as well.
DPHC stock has been a clear beneficiary of that trend. This SPAC (special purpose acquisition company) announced at the beginning of last month that it was merging with Lordstown Motors. DPHC has nearly tripled since.
Here too, the optimism makes obvious sense. Lordstown is a leader in a key niche of the EV space. Its growth potential is significant. And even after the huge gains, valuation is reasonable. DPHC stock soon will be RIDE stock, but whatever the ticker, I believe there’s significantly more upside on the way.
An Attractive Niche
Again, we’re seeing more niche players and even EV suppliers show big gains in this market. The model for Lordstown and DPHC stock can go toe-to-toe with any of those peers.
Lordstown is focusing on the electric pickup truck market. And while there are other manufacturers in that category, Lordstown plans to focus on light-duty models — and fleet sales.
That focus seems smart, particularly in the early going. Commercial customers likely will be more amenable to being sold on total cost of ownership, where an EV truck should do particularly well. After all, both fuel costs and maintenance expense should be lower.
It also means that Lordstown doesn’t have to spend significant capital on building out a nationwide network of dealers — or pay commissions to entrenched incumbents. Pickup trucks have the highest profit margins in the auto industry, and the fleet focus means that Lordstown should keep more of those margins for itself.
And it’s not as if that niche is too small for DPHC stock to be a winner from here. The company’s recent investor presentation estimates a $65 billion addressable market just for fleet sales of full-sized pickup trucks. From there, Lordstown can offer additional models or move into SUVs (sport utility vehicles).
Up 180%, DPHC Stock Still Is Cheap
It might seem like the massive rally — DPHC has gone parabolic of late — has already priced in my optimism. But that just isn’t the case.
Once the merger closes, RIDE stock will have 164 million shares outstanding. The current price of $28 suggests a market capitalization around $4.6 billion. Backing out cash on the balance sheet, the business itself is valued at closer to $4 billion.
That’s hardly an onerous valuation. Lordstown estimates that its manufacturing plant has a replacement value in the range of $3 billion. Other EV plays in the market have valuations that are multiples of the current $4.6 billion market cap.
Meanwhile, Lordstown is projecting production of over 100,000 vehicles by 2024. Even $1,000 in profit per-vehicle gets annual earnings to $100 million — and that’s just the start. There’s a potential move into new vehicle classes and, eventually, international expansion as well.
As long as Lordstown executes, the valuation remains reasonable, even after the big rally so far.
The Market Lesson
More broadly, valuation hasn’t been a reason to sell good growth stories in this market. Yes, we’ve seen some volatility of late. But the market’s biggest winners in 2020 (and 2019) have been the stocks with the biggest potential for future success.
RIDE stock will qualify as one of those stocks. The market is big enough. Lordstown should have a key “first mover advantage” in its niche. The SPAC merger will provide more than enough capital to get to profitability. And over time, just like other EV plays, the company will have the opportunity to expand its reach — and grow its profits.
That’s not to say that the 180% rally so far doesn’t matter — it does. Rather, it is to say that the rally isn’t a sign that the DPHC story is over. Instead, it’s a sign that the story is just getting started.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
