Ideanomics’ (NASDAQ:IDEX) business model sounds like it will be quite viable for at least several years. IDEX stock has plenty of room for growth.
Nonetheless, after the shares’ huge runup earlier this year, I would advise investors to wait for a large pullback in the stock before buying the shares.
Focusing on China, Ideanomics brings together fleet operators that need to purchase large numbers of vehicles and manufacturers of electric vehicles (EVs). It also links businesses looking to buy EVs with financing companies and makers of chargers for EVs.
Without question, the EV market in China, whose government is pulling out all the stops to heavily promote the sector, is growing rapidly. Moreover, there are more than 100 EV makers in China, many of which are relatively new, and buying and securing financing for large numbers of EVs can be tricky.
Given the many new companies in the sector, it’s probably difficult to choose the EV maker that will provide high-quality EVs at the cheapest possible price.
Compounding the latter issue is that, according to Damien Robbins of Seeking Alpha, “EV vehicles don’t have a true blue book value yet, as the battery can range up to 50% of the cost.”
That uncertainty also makes it difficult for lease financiers to “determine residual values” of EVs, Robbins wrote. Ideanomics has found a group of financiers that understand how to accurately value EVs and consequently offer “affordable” deposits on leases.
A Closer Look at IDEX Stock
So Ideanomics has become a “middle man” in the relatively new and complicated EV sector.
For several years, until fleet owners become more familiar with navigating the EV sector through experience, research and word-of-mouth, Ideanomics can be quite successful playing the “middle-man” role.
As a result, its top and bottom lines are likely to grow rapidly. Already, over the company’s last three reported quarters, its revenue has come in at $379,000, $4.69 million, and $10.6 million. So IDEX stock is already on the right track.
Over the longer term, as the company’s deal-facilitation role becomes less essential, I believe that Ideanomics will start offering financing of automobile purchases on its own.
And vehicle financing can actually be quite lucrative. Credit Acceptance (NASDAQ:CACC), Santander Consumer USA Holdings (NYSE:SC), and Ally Financial (NYSE:ALLY) all reportedly generate much of their revenue from auto financing.
The market capitalization, respectively, of their stocks are about $5.85 billion, $6.83 billion, and $12.63 billion.
The current market capitalization of IDEX stock is just $494 million, so the shares are likely to surge over the longer term if the company becomes a major financer of auto leases and purchases.
In recent weeks, the euphoria over EV stocks appears to have faded somewhat, as many of the sector’s hottest names have cooled off. Meanwhile, Ideanomics is trading for 21 times its trailing sales, which is a very steep valuation for a company that focuses on facilitating deals.
Given those points, I expect IDEX stock to drop meaningfully in the coming weeks.
The shares have tumbled about 50% since Nov. 24. But in light of their steep valuation and the continued sluggishness of EV stocks, I think they will drop much further in the short-0to-medium-term.
The Bottom Line on IDEX Stock
Given the rapid growth of China’s EV market, which is likely to continue for many years, Ideanomics has a very good longer-term outlook. Nevertheless, in light of the shares’ still-elevated valuation and the recent weakness of EV stocks, longer-term investors should wait for a better entry point before taking a bullish position in the shares.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Roku, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.