Selling off from its September highs, is now the time to dive into DiamondPeak (NASDAQ:DPHC)? The SPAC (blank-check company) could head even higher, once it completes its merger with the privately held electric vehicle (EV) startup Lordstown Motors. But, with the “EV Bubble” slowing down, we may approaching the point in which said bubble starts to pop.
Major EV names focused on the U.S. market, like Tesla (NASDAQ:TSLA), Nikola (NASDAQ:NKLA) and Electrameccanica (NASDAQ:SOLO), have trended lower as of late. Yet, one can argue the situation’s different here with this EV truck maker in the making.
Why? Firstly, unlike some of the other development-stage EV names, the company is already showing signs its flagship vehicle, the Lordstown Endurance, will be a success. The company has received 40,000 pre-orders. That means nearly $2 billion in potential revenue.
Secondly, this EV maker may be barking up the right tree by focusing on the commercial work truck market. With fuel costs a major pain point among this vehicle type’s target market, there’s a clear incentive to pivot towards electric-powered solutions.
Thirdly, this company not only has demand, but the infrastructure to deliver. With its ownership of a former General Motors (NYSE:GM) facility, the company has more than enough capacity to live up to expectations.
So, does this make the stock a buy at any price? Not exactly. With the risk of an EV bubble pop on the horizon, tread carefully before diving into this EV powerhouse in the making.
DiamondPeak Stock Has All The Ingredients to Head Higher
As our own Matt McCall discussed Sep 10, there’s plenty of reason why this EV name can deliver on its high expectations. In a short amount of time, this company’s merger partner, Lordstown, has managed to get many things right.
How so? With the aforementioned 40,000 pre-orders for the Endurance, it’s clear the demand is there for a commercial EV truck. With billions of potential revenue right out of the gate, it may be a shorter-than-expected road to profitability for Lordstown.
Also, as I hinted at above, the switch to EVs may happen sooner with work trucks than with passenger vehicles. Given that fuel costs are a major pain point among end-users of work trucks, this alone could result in a faster move away from internal combustion engines.
Finally, this company not only has big demand behind it, but the infrastructure to deliver. Lordstown gets its name from the shuttered Ohio auto plant the company acquired from General Motors. With this facility, the company has the capacity to produce 600,000 vehicles per year.
But, while the company has so many factors in its favor, that doesn’t mean it’s worth entering a position at today’s prices Mr. Market is well aware of the tremendous opportunity with Lordstown. And that’s why DiamondPeak continues to trade at more than double where it was before the deal announcement.
In short, even as the underlying business moves ahead, this “too hot to touch” stock could head lower. It all hinges how the “EV bubble” plays out over the next few months.
Shares Could Head Lower, Even as Business Takes Off
With EV megatrends charging ahead, despite the novel coronavirus, this sector, which was already richly-priced, trades at an even greater growth premium. Valuation hasn’t been as big of a concern this year. But, that doesn’t mean it won’t be sometime down the road.
Even after the recent declines in Tesla, Nikola and this stock, the sector remains “priced to perfection.” And then some. Any sort of hiccup/headwinds for the industry could mean more declines across the board for the sector.
Sure, an “EV crash” isn’t guaranteed. So far, interest in this sector has cooled, but the bubble has yet to burst. Yet, using past as prelude (Dotcom bubble, etc), the aftermath typically isn’t pretty for sectors in full-blown bubble mode.
So, what’s the worst that can happen? This stock could head lower, even as its underlying business continues to take off. Does that mean the stock falls back to $10 per share? Probably not. But, there’s a good chance shares head lower from here, and take several years to retrace the recent high-water mark.
A Lot of Opportunity Here, But Watch Out
If you missed out on this EV play at lower price, you’re probably kicking yourself. But, chasing it as it trades near all-time highs isn’t the solution.
So, what’s the play here with DiamondPeak? If you are bullish on its long-term prospects, wait for additional pullbacks before buying. The story behind Lordstown isn’t changing anytime soon. But, there’s still plenty of time to get in early, at more reasonable prices.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, contributor to InvestorPlace, has written single stock analysis since 2016.