Batteries are going to be a big part of the electric vehicle revolution. That alone suggests investors should take a long look at Romeo Power (NYSE:RMO) stock.
To be sure, Romeo Power is far from the only battery play out there. The explosion in SPACs (special purpose acquisition companies) has brought a few EV battery developers to the public market.
But RMO stock might be the most attractive of the group. The company has intriguing products, contracted revenue, and a partnership with a so-called ‘Tier 1’ automotive supplier. Meanwhile, after soaring toward the end of 2020, RMO stock has retreated, bringing valuation in to more reasonable levels.
Simply put, there’s a lot to like here. If Romeo Power can capture a decent share of that growing market, RMO stock has potentially enormous upside.
An Intriguing Strategy
What’s interesting about Romeo Power is not just that it’s a battery play, but that it’s a battery play targeting the commercial market.
In the near term, that’s not necessarily a winning strategy. Electric adoption has taken place earlier on the consumer side of the business. Commercial customers still are playing catch-up.
But from a longer-term perspective, the focus on trucks, buses and vans is intriguing. And, as always, it’s on the long term that investors should focus.
After all, commercial vehicles are different. Their batteries will need to be different as well. Romeo Power is building batteries for those vehicles, rather than trying to repurpose packs designed for cars.
And the company already has had some success. Customers include a number of Class 8 trucks (i.e., semis) manufacturers. In total, those manufacturers account for roughly two-thirds of the North American market, according to the company’s merger presentation. Contracted revenue already has cleared $300 million.
We’ve seen investors greet the manufacturers of commercial electric vehicles with enthusiasm. RMO stock should merit that same enthusiasm.
RMO Stock on the Pullback
Indeed, investors were enormously enthusiastic toward RMO stock after its own SPAC merger was announced. But since late December, the stock has pulled back by more than half.
That correction probably is healthy. It’s likely RMO was caught in the updraft (and then the downdraft) of another battery stock that went absolutely crazy last month.
But after the pullback, valuation here looks reasonable. Romeo Power has a market capitalization of about $2.4 billion.
That’s only about 1.5x the company’s projected revenue for 2025. It’s a little more than 7x expected EBITDA (earnings before interest, taxes, depreciation and amortization).
Now, investors can’t take company projections as gospel. That’s particularly true with SPACs, which unlike traditional initial public offerings can make these kinds of projections. Every management team believes its company will win. Not every one will.
Still, the current valuation hardly is pricing in that kind of growth, or really anything close. And with an estimated total addressable market of $225 billion in the North America and Europe, and $665 billion worldwide, Romeo Power has the potential to drive literally decades’ worth of growth, even if that growth doesn’t exactly meet the company’s currently expected timeline.
What Goes Wrong
It’s worth emphasizing: nothing here is guaranteed.
Competition will be stiff. And while Romeo’s projections for 2025 look grand, its expectations for 2020 are far more muted. The company expects revenue of $11 million, with negative gross profit.
Romeo Power does expect losses until 2023. And if growth comes in slower than expected, the company may have to go back to the capital markets to raise more cash. That may entail equity offerings, which would dilute shareholders.
There’s also the chance that the market develops far more slowly than expected. Electric trucks have great promise, but also enormous challenges. Investors learned that lesson last year.
Again, I believe electric vehicles will be the future. That future will include electric trucks and vans. But the road to that future may well be bumpy.
So RMO stock is not a stock that investors should own with money they can’t afford to lose. There are going to be EV stocks with great potential that don’t realize that potential, and it’s possible RMO stock winds up one of those names.
With those caveats in mind, investors still can focus on the rewards. And they are potentially huge. Whatever 2025 (or 2035) revenue turns out to be, the case here is reasonably simple.
The leading battery provider to the commercial EV industry is going to be worth many multiples of Romeo Power’s current market cap. If RMO stock winds up a winner, it’s going to be a big winner. And investors now can buy that stock at a much cheaper price.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.
