Electric vehicle manufacturers’ shares, in general, have been performing very well in 2020. It is a stock market frenzy that has caught a lot of momentum, at the cost of totally ignoring valuation and focusing on growth and prospects. Lordstown Motors (NASDAQ:RIDE) is another EV stock that I feel soared too high too soon. But should you buy RIDE stock now?
What you should know about Lordstown Motors first. Lordstown Motors Corporation is an automotive company, that develops and manufactures light-duty electric trucks. It has for now only one electric truck in its range — the Endurance, an electric full-size pickup truck.
Lordstown Motors Corp. was founded in 2019 and is based in Lordstown, Ohio. It has bought a shuttered plant by General Motors (NYSE:GM) to produce its electric vehicle. The truck has a price tag of $52,500 but there can be a federal tax credit of $7,500.
The stock had a volume of 100 shares on Jan. 2, 2020, and a share price of $9.97 at the close back then. On Nov. 27, 2020, the volume for the stock was 3,908,000 and the stock price at the close was at $23.41.
Traders back in mid-June 2020 started buying the stock with increased volume, and the stock eventually reached a 52-week high of $31.80. Then it dipped back to $16, and ever since it has moved up again to the current price of $22. Now, this makes RIDE stock a very volatile stock and a risky one for trading. It’s not the stock conservative investors would place on their watch lists.
But the main argument that makes RIDE stock a very risky bet is not its technical analysis, but the fundamentals.
RIDE Stock: Lets Focus on the Fundamentals
The company is another vehicle startup that entered the public market through a reverse merger with a special-purpose acquisition company, or SPAC. Same story as Hyliion (NYSE:HYLN) recently.
RIDE stock started trading as a merged company with the SPAC (special purpose acquisition company) stock, DiamondPeak Holdings back in late October 2020. The good news is that Lordstown Motors got $675 million as a result of the merger. But what drove its most recent valuation to $3.6 billion?
The key catalyst is news that “Lordstown Motors has received approximately 50,000 non-binding production reservations from commercial fleets for its Lordstown Endurance all-electric pickup truck, with an average order size of approximately 500 vehicles per fleet.”
Now, a simple math calculation reveals potential sales of $2.625 billion from a startup electric truck maker company. But there is a catch to focus on — the word non-binding. That means that the whole number of $2.625 billion is not certain. It can be much higher … but at the same time much lower if cancellations occur. The company mentions that the Endurance is set for first deliveries in September 2021.
Furthermore, Lordstown Motors plans to open a satellite research and development center in Farmington Hills, Michigan.
My main point is that however ambitious the plans are, the sales are non-binding so we just cannot assume what the actual numbers will be. And we can’t apply any valuation metric to the sales, as they are uncertain. Besides, research and development costs should be a huge part, at least at the beginning, and this will be a negative factor for any operational profit in the future.
And then there’s competition.
A Reuters report states that “Eight electric pickup truck manufacturers to load up U.S. market by 2021.”
Yes, there will be very intense competition in the market for battery-powered trucks by 2021. Some of the big names that Lordstown Motors will have to compete with include Tesla (NASDAQ:TSLA), General Motors and Ford (NYSE:F).
The Prospects of Electric Truck Market Look Promising
A report by Allied Market Research about global electric truck market statistics shows plenty of growth for the future years. “The global electric truck market size was valued at $422.5 million in 2019 and is projected to reach $1,893.1 million by 2027, registering a CAGR of 25.8% from 2020 to 2027. Asia-Pacific accounted for the highest share in the global electric truck market in 2019, in terms of revenue, and LAMEA is anticipated to exhibit remarkable growth rate during the electric truck market forecast period.”
U.S. President-elect Joe Biden may further support the “increasing government initiatives for promotion of e-mobility” and the quick transition to electrification in private and public vehicles soon. After all, as Clinical Professor of Finance David Kass at the University of Maryland’s Robert H. Smith School of Business, wrote in an email to InvestorPlace, “Climate change will be a major focus of a Biden Administration.”
Is RIDE Stock a Buy Stock Now?
The answer to me is very simple. No, it is not a buy here. The shares have a very high valuation, and Lordstown is making a vehicle that will face very intense competition. The milestone of securing a large number of pre-orders is not enough to justify the surge of the stock and its valuation.
If you believe that Lordstown Motors will conquer the EV truck market, and your investment philosophy is OK with speculation, then perhaps this stock is right for you. If you are a more cautious investor who starts with the cornerstone of investing, fundamentals, and valuation, the stock leaves no argument than to avoid it. What if production is delayed further in the future? That question raises a lot of uncertainty and risk for RIDE stock now.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article.