Stifel analyst Bruce Chan initiated coverage of Electrameccanica Vehicles (NASDAQ:SOLO) on Dec. 16. The good news for SOLO stock owners is that the analyst gives it a buy rating and a 12-month target price of $9.
As I write this, investors are looking at 27% upside over the next year. That’s not too shabby. However, for many investors, that still might not be enough of a margin of safety.
Here’s why.
What the Analyst Sees for SOLO Stock
According to a brief note by The Fly, Chan sees the company growing its sales by 25% annually or more for the next 10 years. Between the commuter electric vehicle market and the more lucrative commercial market, it’s got a shot to make it big.
While the commuter market is underserved, the three-wheel vehicle won’t handle very well in Canadian winters. So you can forget most Scandinavian countries, etc.
In my last article about Electrameccanica in November, I suggested that the real money for the company is in the commercial arena with delivery trucks operating in heavily populated cities. That’s because the return on investment for a delivery truck is far greater than as a commuter vehicle.
“I could see cities giving EV delivery trucks below a certain size a break on parking fees, etc., as voters in those municipalities demand less time on the roads for large delivery trucks such as Class 8 heavy-duty tractor-trailers,” I wrote on Nov. 24.
“A possible idea would be to only allow delivery vehicles below a certain size during the day, permitting larger delivery trucks once much of the traffic has cleared out, perhaps after 11 p.m.”
Whatever’s ultimately rolled out by cities in the future, a commercial version of the Solo is ideal for meeting these rules.
So, let’s assume that Chan is correct and Electrameccanica grows its sales by 30% compounded annually over the next decade. What will its sales be in 2030?
A 75/25 Proposition
I will argue that the ultimate business model generates 75% from commercial vehicles and 25% from personal commuter vehicles.
The current average 2021 revenue estimate from analysts is $16.4 million. Almost all of this would be from personal commuter vehicles. Let’s assume that the company comes up with a commercial vehicle for 2022, and the sales are half those of the personal commuter vehicles.
Based on 30% growth for the personal commuter vehicles in 2022, it would generate sales of $21.3 million; the commercial sales would be $10.7 million (50% of $21.3M) for a total of $32.0 million.
Over the next eight years, its sales compound at 30% annually. That brings us to $261 million by the end of 2030. Based on a 75%/25% split, commercial sales would be $196 million and personal commuter vehicles $65 million.
So, between 2023 and 2030, the personal commuter vehicle sales would grow at 15% annually, while the commercial vehicles would grow by 44% annually.
You can play the numbers however you like, but from where I sit, greater commercial sales equals greater profit potential, in my opinion. I guess we’ll find out.
However, whatever happens, if the analyst’s right and Electrameccanica executes properly, big things should be on the horizon.
The Bottom Line
I’m of two minds about Electrameccanica and SOLO stock.
While I believe it’s definitely got a shot with the Solo in an electric vehicle market that’s getting more crowded by the day, it’s chewing up a lot of capital before it’s even got the assembly line going.
Look how much money Nio (NYSE:NIO) lost in 2019 – 11.4 billion yuan ($1.7 billion) – and it delivered 20,565 vehicles, all of which were sold for more than the estimated retail price of $18,500 for the Solo.
Electrameccanica is going to need a boatload of capital to keep the lights on while it scales up.
Further, there’s no guarantee Electrameccanica’s going to be able to attract enough personal commuter customers to make a go of it.
“Microcars have tended to sell in microscopic numbers in a new-car market with millions in annual sales,” The New York Times reported in May.
“Fiat sold just 6,556 of its Fiat 500s in 2019, despite their seeming ubiquity. Mercedes pulled its Smart car from the U.S. market after selling just 680 units last year. Toyota yanked its Scion iQ after selling just 482 of them in 2015.”
So, despite big things possibly on the horizon, only the most aggressive investors should be buying SOLO stock. And if you do buy, don’t pay more than $10 to give yourself a margin of safety.
Happy commuting!
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.
