If we didn’t have the novel coronavirus, 2020 would most likely be known as the year of the special purpose acquisition company, or SPAC for short. Essentially, this is a backdoor method of going public, with several electric vehicle firms electing this option. Lordstown Motors, via a reverse merger with DiamondPeak Holdings (NASDAQ:DPHC), is one such name. And early on, DiamondPeak stock was the toast of town.
Yes, fresh EV firms have had their trials and tribulations. But against the competition, DiamondPeak stock seemed to have substantial credibility. As I pointed out in early September, “… Lordstown plans to build its trucks late next year in a former General Motors (NYSE:GM) factory. Further, it has investments from GM, while Workhorse Group (NASDAQ:WKHS) owns a 10% stake.”
Shortly after my article was published, DiamondPeak stock went on a blistering, albeit short, run. Since Sept. 21, DPHC has been on a volatile slide downward, erasing most of the earlier gains. So, what the heck just happened?
DiamondPeak Stock Got Overheated
Perusing other analysts’ work, I’ve come to the conclusion that Wall Street is freaked out about the mad rush toward EVs. Of course, I’m referencing Nikola (NASDAQ:NKLA), one of my personal speculative bets. Heavy accusations that not all is what it seems has ground down NKLA from its prior lofty highs. Therefore, some suggest that DiamondPeak stock may have gotten overheated.
It’s possible, although I’m not sure if that narrative makes sense. Again, DPHC stock garnered more credibility off the bat thanks to its production facility. Lordstown Motors has a very tangible path forward while other EVs have always been speculative affairs at best.
In my view, DPHC is going negative because reality is sinking in.
‘Net Costs’ May Be Concern
As proponents of EVs are quick to argue, the electric platform has fewer moving parts. Therefore, all else being equal, EVs are cheaper to maintain. Theoretically, this would be music to the ears of commercial construction fleet owners, which comprise Lordstown’s target buying audience.
But one aspect that could negate the cost-savings argument for DiamondPeak stock is insurance. According to Bankrate.com, some of the insurance costs for EVs are reasonable. However, many are also on the more expensive end of the spectrum. For example, the Tesla (NASDAQ:TSLA) Model S costs $775 for a six-month premium.
Yes, the Model S is a pricey luxury EV. But the electric version of the Fiat 500 costs $750 to insure based on the same study. This indicates that insurance firms are taking a dim view of the electric technology. But why?
According to Forbes, EVs are more expensive to insure in part because they’re more susceptible to damage. Typically, battery packs are the single-most costly component that goes into an EV. Further, they encompass much of the bottom surface area of a vehicle. Thus, a fender bender which a combustion-engine car might drive away from with only cosmetic damage could result in massive bills for an EV owner.
Unsprung Weight Disadvantage
More critically, Lordstown Motors is incorporating a unique technology for its flagship Endurance pickup truck. Utilizing four in-wheel hub motors, this methodology provides superior traction and reduces moving parts, among other benefits. But the key drawback, as I mentioned in my last write-up, is unsprung weight. Basically, “unsprung components absorb the forces of the road independently to the rest of the vehicle. Thus, this creates potential reliability issues.”
To be fair, Lordstown has stress-tested this system and obviously, it has confidence in it. However, wheels are susceptible to damage beyond road impacts. If something strikes the wheels from the side, the Endurance owner could be looking at hefty repair bills.
It’s also fair to point out that hub motors have been around for more than a century, according to MachineDesign.com. Thus, manufacturers have had difficulty bringing this methodology to the public, which says something. As well, insurance firms may not be in a hurry to cover a radical automotive design without some sharp premiums.
Longer-term Upside Plus Nearer-term Pressure
Ultimately, I don’t think it’s time to hit the panic button. Anyone can see that society is shifting toward electrification. First, it’s passenger cars and currently, we’re talking about e-pickup trucks. Later, industrial and agricultural machines will start shifting toward alternative energy sources.
Therefore, if you have a longer-term view on DiamondPeak stock, I wouldn’t worry just yet. But the markets appear to be assessing the realities of EV integration. And issues such as insurance will apply pressure. For those who are looking to get in, I’d wait a bit to let this volatility bleed out.
On the date of publication, Josh Enomoto held a long position in NKLA.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.