There is a temptation surrounding Electrameccanica Vehicles Corp (NASDAQ:SOLO). The electric vehicle (EV) space is hot and with SOLO stock trading for about $7, it’s cheap by most investors’ standards.
The fact that the share price recently hit a high of $13.60 also has investors thinking that SOLO stock is a bargain after the latest dip.
I don’t think so. First, there’s a difference between identifying attractive long-term speculative plays and gambling. Allocating a bit to the former as a part of a larger, broader portfolio strategy is fine. Simply gambling or buying and hoping is not.
Further, after a big run in the stock market and some wavering on worries over a new novel coronavirus strain, we don’t want to get caught holding the bag on low-quality stocks.
There is a lot of promise regarding EVs as we push forward as a society. However, that does not mean every EV stock will be a success story — particularly when we are getting a flood of new entrants in the market.
Breaking Down SOLO Stock
For those that read my work even semi-regularly, they know I am a bull on many technologies and long-term trends. For instance, I am bullish on cryptocurrencies, EVs and even space stocks. These are long-term, disruptive technologies.
But just because a company or firm is involved in a category that has long-term potential, doesn’t mean it’s instantly a buy. Take SOLO stock for example.
Despite rallying 25.7% from its recent December low, shares are still down 42% from the recent one-month high. Let’s put that volatility aside for the moment and simply focus on its size. Despite this large correction, the stock still commands a market capitalization of $575 million.
My problem with that? Analysts expect sales of just $540,000 this year. Granted, estimates call for almost 3,000% growth next year, but even then, sales would clock in at just $16.4 million.
Obviously analysts’ estimates can be conservative — but they can also be aggressive. What if $16.4 million is too aggressive? What if there are setbacks along the way?
Even if the company can drum up sales of $25 million next year, we’re still talking about 23 times forward revenue for an automaker. To me, that’s not just rich or trading at a premium. It’s downright overvalued.
Plus, there’s no guarantee that customers are going to want to switch to a vehicle that is this untraditional. I enjoy innovation and like to see companies pushing the boundaries. But those products have to resonate with consumers in a sustainable way as well.
What I mean by that is, aside from an initial pop in sales, will there be constant and growing demand? For SOLO stock, I don’t know that there will be and that makes it a hard investment.
The Bottom Line
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SOLO stock would be one thing if it had strong sales momentum, earnings and cash flow. Obviously with less than $1 million in revenue, it’s neither of the latter two — profitable or cash flow positive.
But all that does is make it more difficult to get bullish on this name.
As we drift over from the cash flow and income statements, let’s turn our attention to the balance sheet. With just 11 million CAD in cash and equivalents, there is reasonable concern of Electrameccanica’s assets. Admittedly, it’s enough cash on hand to cover current liabilities of 3.3 million CAD.
However, it’s foolish to think that the company will not need to raise capital down the road. To be clear, raising capital is not necessarily a bad thing. But investors prefer for that capital to fuel growth that’s already there, not sustain a business that lacks revenue.
In the end, I hope Electrameccanica is successful and SOLO stock investors reap a fortune. But if they do so, they will do it without me. There are simply too many question marks with this one at a time where other EV players have shown their dominance.
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 this article.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.
