There are many factors driving EV (electric vehicle) names like Lordstown Motors (NASDAQ:RIDE) stock higher. But, in recent weeks, the U.S. Presidential election was what gave “EV Mania” a second wind. With President-elect Joe Biden pushing for $2 trillion in federal spending on green initiatives, a change of the guard in the Oval Office could be a game-changer for the industry.
However, it’s likely not enough to keep the bubble going. The astronomical valuations of EV stocks are not sustainable. It’s not a matter of if, but when, they will come back to earth.
Yet, that doesn’t necessarily mean it’s high time to cash out, and head for the hills. The megatrends helping this industry accelerate remain in motion. But, after 2020’s solid gains for EV stocks, it may be time to hit the brakes.
And, that’s the case here for Lordstown. If you own it, hold onto your position. But, for those who haven’t bought it yet, wait for an additional pullback.
What Does A Cooling ‘EV Bubble’ Mean for RIDE Stock?
It’s not out of the question to say EV stocks are in the midst of a bubble. Valued at frothy multiples that would make SaaS stocks blush, many on the bearish side have been waiting for this speculative frenzy to fizzle out. Much like what happened 20 years back with the “Dotcom bubble.”
Yet, while those bearish on EV stocks this year have lost out (or lost big, if they short sold popular stocks in this sector), the tide may be turning. As seen from the recent sector-wide declines, the party may coming to a close.
But, while that means electric vehicle stocks overall could fall further, what does that mean for the stronger contenders, like Lordstown?
Simply put, this early-stage automaker may have what it takes to become to pickups what Tesla (NASDAQ:TSLA) became for luxury sedans. As I’ve discussed previously, not only does Lordstown Motors own its own facilities. With preorders for its flagship Endurance pickup truck surging past 50,000 units, at first glance it appears this company is already “crushing it” early in the game.
Yet, the ingredients for success alone may not be enough to soften the blow for RIDE stock. Given so much remains speculative with this high-risk stock, shares could crater if its fortunes reverse in the coming year.
A Larger Pullback Could Be on The Horizon
I believe Lordstown has a better shot of riding out a potential burst of the EV stock bubble. Yet, that doesn’t mean further big declines can’t happen in the near-term. What do I mean? Besides EV stocks in-general heading lower, there are factors at play with this company that could send shares lower going forward.
Firstly, pre-order numbers alone may not justify its current valuation. InvestorPlace’s Larry Ramer touched on this in his Nov. 25 article on the stock. Sure, as Ramer discussed, at first glance the company’s 50,000 preorders (representing over $2.6 billion in potential sales) looks impressive for a early-stage company. But, these “nonbinding” pre-orders are not confirmed sales. If a good amount of these deals fall through, this could drive shares lower, as the company falls short of expectations.
Secondly, with production of Endurance trucks not starting until 10 months from now (September 2021), investors are still buying this stock on its future, not its current, success. If Lordstown Motors experiences any hiccups in the near-term, this could also drive further declines.
Thirdly, it’s not enough for Lordstown Motors to get preorders. It needs to deliver as well. Sure, the company has the infrastructure to build 600,000 vehicles per year. But, capacity is just one part of the equation. Between the risk the company fails to stay on schedule, and the potential for logistical/manufacturing hiccups, there’s a lot that can go wrong between now and next September.
Yes, these three factors aren’t guaranteed to have a negative impact on RIDE stock. But, given the uncertainty, it may be best to sit on the sidelines for now.
Wait for The Dust to Settle Before Buying Lordstown Motors
While I sound bearish above, I remain bullish on Lordstown’s long-term prospects. Those who bought in at lower prices shouldn’t throw in the towel just yet. But, for those looking to enter a new position, or add to an existing one? Hold off for now. At today’s prices, the risk/return proposition isn’t in your favor.
With the EV bubble losing steam, and other potential risks on the table, we could see further near-term declines for RIDE stock.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.