With so much attention driven toward electric vehicles and the environmental sustainability they represent, I suppose it was inevitable that Electrameccanica Vehicles (NASDAQ:SOLO) would eventually mimic other EV plays, like Tesla (NASDAQ:TSLA) and Nio (NYSE:NIO). However, the scope of the rise in SOLO stock certainly caught me by surprise.
But now, the question is whether it can maintain. On the one hand, the events associated with the novel coronavirus suggests it can.
In the pre-pandemic era, Electrameccanica’s flagship EV Solo was designed as a commuter vehicle. On paper, the math made sense. Everyday, millions of people commute to work alone. Logically, this means they’re lugging around unnecessary doors, seats, and cargo space. By making a single-seater, three-wheeled car, you’re maximizing efficiency. This is made all the more conspicuous when you realize that most cars today are parked 95% of the time.
Further, InvestorPlace contributor Faizan Farooque wrote that prior to the health crisis, the idea of a single-seat, three-wheeled EV was “a bit out of left field. But the novel coronavirus pandemic makes the design interesting and worth exploring.”
Specifically, Farooque notes a major shift in attitude regarding infectious diseases which could help lift SOLO stock. “When you are on your own versus traveling in a four-seater with someone, the transmission risk is lower.” As well, people generally are more environmentally conscious than in years past. Certainly, shocking events like the West Coast wildfires this year pushed the threat of climate change to the forefront.
However, we should also note that the pricing of Electrameccanica’s flagship is really geared toward younger consumers. And based on mainstream reports, along with shocking videos of parties where social distancing was non-existent, many young people don’t seem to care too much about contracting and spreading the coronavirus.
If that’s the case, I don’t see what the incentive would be for the target audience to consider the Solo.
Geopolitics Could Be the Biggest Challenge for SOLO Stock
Still, consumer tastes can change in a hurry, especially when you’re dealing with young people. Therefore, let’s set that argument aside. Instead, I believe at the moment, geopolitics represents the biggest challenge for SOLO stock.
According to our own Mark Hake, Electrameccanica is “currently facing a dilemma. SOLO stock has a $793 million market capitalization at the time of this writing, but the EV maker needs a lot more capital in order to ramp up production.” Further, Hake explains:
The Solo will cost consumers only about $18,500, plus any amounts charged under the tariff rules. This is because the EV is made in China, in partnership with a motorcycle manufacturer called Zongshen.
But right now, the company still has not yet determined how much extra the tariffs will cost. ElectraMeccanica’s most recent filing — which just came out on Nov. 10 — says the extra cost may be 27.5%. Needless to say, that could put a damper on demand for the Solo.
First, the $18,500 price tag is already a cheap price but poor value. A commuter-specific car is something that more affluent households buy. If Electrameccanica is targeting younger consumers, that’s a problem because their purchase must accommodate everything. That’s why young people are pragmatic with their automotive purchases.
Obviously, if the $18,500 price point increases significantly (like 27.5%) due to the tariffs, the value proposition will die. I’m not kidding.
Second and more critically, we have a shaky relationship with China made worse by the coronavirus. According to the Pew Research Center, unfavorable views of the world’s second-largest economy reached historic highs in many countries. True, older demographics hate China the most. However, not a single age bracket in the countries Pew surveyed indicated that it had a favorable opinion of the Asian juggernaut.
But Americans are going to open their pocketbooks to benefit the Chinese? It could happen through slick marketing. Still, I believe the China risk isn’t something you should ignore.
Wait Until January to Decide
Despite the above challenges, SOLO stock may be a profitable investment in addressing the last-mile problem in logistics. Basically, it’s the urban, stop-and-go deliveries where products reach their final destination that is the most expensive or cumbersome. However, with the attributes of EVs – such as regenerative braking – they are better suited as delivery vehicles.
That’s the argument that my friend and InvestorPlace colleague Will Ashworth posed recently. It could very well work out in the new normal. However, if you’re thinking about gambling on this narrative, I’d wait until January.
Of course, that’s when the Georgia runoff elections will occur that will probably determine control of the Senate. If Democrats win both races, they will secure control. Otherwise, President-elect Joe Biden will contend with a very angry and uncooperative Republican-dominated Senate.
And that would imply that Biden must avoid controversial actions, such as offering too many olive branches to the Chinese. Remember, the Democrats had an otherwise disappointing performance in the 2020 elections. They’ll be keen not to rock the boat too much to avoid losing control of the House in two years’ time.
Therefore, watch the rumblings in Georgia carefully. It could determine the fate of our country and the viability of SOLO stock.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.