DiamondPeak Holdings (NASDAQ:DPHC) went public on Feb. 27, 2019, selling 25 million shares of DiamondPeak stock at $10 a pop. As a special purpose acquisition company (SPAC), its goal was to find a company to merge within 24 months.
On Aug. 3, DiamondPeak announced that it had found such a company in Lordstown Motors, the owners of the Lordstown Assembly Plant, which operated as a General Motors (NYSE:GM) production facility for more than 50 years before closing in March 2019. Lordstown Motors paid approximately $20 million to buy the plant from GM.
Terms of the merger included a $500 million private investment in public equity (PIPE) investment along with $75 million from GM. In total, the transaction provides $675 million in financing to get the production of Lordstown Motors’ full-size electric pickup truck off the ground in the second half of 2021.
At the time of the announcement, the merged business had an equity value of $1.6 billion, which includes the PIPE and GM investments. Once the deal closes in the fourth quarter, DPHC stock will change its symbol to RIDE.
There’s a lot to like about this electric vehicle startup, including the fact it has more than 27,000 pre-orders valued at more than $1.4 billion in future potential revenue.
However, in mid-September, it was trading around $26. That’s relatively expensive given it won’t have any substantial revenue until sometime late in 2021.
Should risk-averse investors touch DPHC stock? Maybe. Maybe not.
There Are Other Options Besides DiamondPeak Stock
InvestorPlace’s Sarah Smith recently produced a gallery of 23 electric car stocks to watch in the coming weeks and months. One of those stocks is DiamondPeak/Lordstown Motors.
However, if you are interested in betting on the growth in electric vehicles and at the same time are being honest with yourself, you ought to be able to select three or four other names from the list that are much farther along the pathway to profitability.
Of the electric pure plays, Tesla (NASDAQ:TSLA), Nio (NYSE:NIO), BYD Company (OTCMKTS:BYDDF) and Workhorse (NASDAQ:WKHS) are better options if you want to own companies that are currently producing vehicles and either profitable or should be soon.
The one company Sarah didn’t include is Volkswagen (OTCMKTS:VWAGY) – although she did mention it when discussing its production deal with Fisker (NYSE:SPAQ) – which could reach electric vehicle production of 1.5 million annually by 2023.
If I could only own one electric vehicle stock, I’d go with TSLA every day of the week and twice on Sunday. In 2020, Nio’s turned a corner and looks to be taking the Chinese electric vehicle market by storm. It would be an excellent second choice for here-and-now bets on the electric vehicle market.
Even an investment in the Global X Autonomous & Electric Vehicles ETF (NASDAQ:DRIV) would give you a better risk-to-reward proposition than investing solely in DPHC.
Is the Stock Too Expensive?
If you look at the Lordstown Motors marketing presentation from the merger announcement, you will see that its enterprise value of $965 million is 3.2 times its projected 2023 earnings before interest, taxes, depreciation and amortization (EBITDA) and 1.6 times the 2024 estimate.
This means that Lordstown is projecting 2023 and 2024 EBITDA of $302 million and $603 million, respectively. That goes along with projected sales of $3.48 billion in 2023 and $5.78 billion in 2024.
If you include 14.4 million shares exercisable at $11.50 per share from the SPAC’s warrants, you get 178.4 million shares outstanding. At $26 a share, that’s a market cap of $4.6 billion post-merger or $3.9 billion in terms of enterprise value.
So, investors today are willing to pay 2.7 times an estimated 2022 sales, 1.3 times 2023 sales, and 0.8 times 2024 sales. That doesn’t seem so rich when you consider investors are paying 15.6 times sales for Tesla.
Facing the Risk
The significant risk here is that a lot can change between now and the end of 2021 when Lordstown gets production rolling. Sure, they have pre-orders for 27,000 Endurance full-size pickups, but that’s only a $100 commitment from purchasers. We’ll see how many of those pre-orders turn into $45,000 purchases.
If you’re an aggressive investor, I wouldn’t have a problem owning DPHC at $26.
However, if you don’t like risk, there are better options for the foreseeable future. Most of the gains have been gotten.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.