Are we facing a potential stock market bubble for electric carmakers? Electric vehicle stocks have soared in 2020, and investors in NIO (NYSE:NIO), Tesla (NASDAQ:TSLA) and XPeng (NYSE:XPEV) have solid gains that outperformed the major stock indices. Electrameccanica (NASDAQ:SOLO) is another company that makes electric cars, but with one major difference — its flagship car is a three-wheeled vehicle. So is SOLO stock worth a look?
ElectraMeccanica is a Canadian designer and manufacturer of electric vehicles. The big deal is that instead of a more traditional vehicle, the company’s flagship creation is a single-seat electric vehicle car.
The company, in the investor presentation for November 2020, mentions there are three market segments for SOLO EV: The ride-share market; the market for car fleets and deliveries of goods; and the solo-drive urban commuters market. In a market where four-wheeled cars electric or not dominate can a three-wheeled electric car become a success? And justify the decision to buy the SOLO stock now?
Electrameccanica, in its marketing material, claims that “This vehicle will revolutionize commuting, delivery and shared mobility. The SOLO provides a driving experience that is unique, trendy, fun, affordable, and environmentally friendly.”
Before focusing on two major arguments in favor and against buying SOLO stock, let’s mention the fact that three-wheeled cars are nothing new. INFLUX shares an informative article on the history of three-wheeled vehicles. Karl Benz pioneered production automobiles in 1886, and yes, with a three-wheeled car.
The Three-Wheeler Market Is Expected to Grow by 2027
If the SOLO car is to become a success and boost SOLO stock then a growing market demand for three-wheeled cars should be present and have the growth potential. This seems to the case.
A ReportLinker report released named “Three-Wheeler Market to 2027 – Global Analysis and Forecasts by Type; Fuel Type” states that “The global three-wheeler market was valued at US$ 9. 14 billion in 2018 and is expected to grow at a CAGR of 4. 9% during 2019–2027 to reach US$ 13. 73 billion by 2027. The developing economies are providing lucrative opportunities for international automotive manufacturers to expand their business, which would eventually lead to the introduction of three-wheelers in the market.”
A growing and global three-wheeler market may be supportive of SOLO stock. Electrameccanica plans to sell its SOLO car globally, starting at a base price of $18,500.
Still, the company plans to launch two other electric cars, the Tofino sports car, and the eRoadster vintage and classic sports car, both of which have four wheels. So from a business perspective, it is clear that three-wheeled cars are not the only business segment ElectraMeccanica is focusing on.
What is the competitive advantage then the company is trying to achieve? The production of SOLO cars will not be massive either, as the plans are to build 20,000 cars per year, with the production having begun in late summer 2020.
It is worth mentioning that InterMeccanica, a subsidiary of ElectraMeccanica, has been building high-end specialty cars for 60 years. This expertise and business know-how is a big advantage for ElectraMeccanica.
SOLO stock: The Fundamentals and Valuation are not Inspiring
With a market capitalization of $539.164 million at the close of Nov. 4, 2020, and sales of 775.821 CAD for the fiscal year 2019, converting this amount to U.S. dollars, we get sales of about $605.521. The multiple of market capitalization to sales is a figure of 890 at the time. Yes, 890 times, which is excessive and irrational for a company has started sales of its flagship product a few months ago.
The most recent third-quarter report for 2020, released on Nov. 10, 2020, compared to the third quarter of 2019 shows the following key financial metrics:
- A large improvement in cash and cash equivalents
- An improvement of 50% for total revenue
- Research and development expenses that have decreased
- Operating loss and net loss that have both increased
Yes, operating profit and net profit are both negative. No surprise that free cash flows are also negative for the past three consecutive years.
What is very interesting and a trend to monitor is the capital expenditures figure. For a company starting its production only a few months ago, I would expect a huge increase in the capital expenditures for the past three years. And this has not happened, as in 2019 capital expenditures were less than in 2018.
The Bottom Line for SOLO stock
It’s hard to justify SOLO stock’s current price and valuation. Risks are too high. We do not know yet how the consumers will react to the launch of SOLO EV. Will the demand and sales of this three-wheeled electric car meet — or better, exceed — the yearly capacity of building 20,000 cars? What if this demand is significantly below the building capacity? In this latter case, the weaker sales will probably build selling pressure for the SOLO stock.
The prudent choice is to avoid the stock for now. It does not seem cheap, but significantly overvalued. Patience is a key virtue in investing and trading, and investors should wait and see what the future quarters’ performance will be before deciding whether SOLO stock fits their investment risk tolerance. Fundamentals at this present time do not support the more than 250% year-to-date gains.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article.