Why Investors Should Pass on ArcLight for Now


Over the longer term, electric bus maker Proterra should do very well. But, due to the impact of the novel coronavirus pandemic, I would not recommend buying ArcLight (NASDAQ:ACTC) stock anytime soon. One of the SPACs that are so in vogue these days, ArcLight has agreed to merge with Proterra.

A close-up shot of an electric vehicle charging station with a row of electric buses in the background.
Source: Shutterstock

Among Proterra’s significant positive attributes are its high revenue compared with most electric-vehicle companies, its long experience with building electric buses, and its alliance with giant automaker Daimler (OTC:DDAIF).

However, since state and local governments, along with mass-transit operators that get most of their funding from governments, are the primary buyers of buses and many of them are suffering mightily financially due to the coronavirus, I think that investors will likely get the chance to buy ACTC stock at a meaningfully lower valuation down the road.

Bullish Points

Proterra has been building electric buses since 2004, and it reportedly has a 50% share of the North American market. Also positive for ACTC stock is the fact that, unlike many other EV makers, Proterra generates meaningful revenue; its 2020 top line is expected to come in at $193 million, and it has an impressive backlog of $750 million. Moreover, it is believed that Proterra’s EBITDA will turn positive in 2023.

Another attractive point is Proterra’s partnership with Daimler (OTC:DDAIF), the huge automobile conglomerate. Daimler, which led a $155 million investment round in Proterra in 2018, has partnered with the smaller company on the development of an electric school bus.

And after Proterra developed charging solutions for fleets of EVs, as well as electric powertrains, the alliance is certainly positive for those two businesses.

That’s because, as one of the world’s largest maker of commercial vehicles, Daimler could very well purchase hundreds of millions of dollars of these solutions from Proterra. And given Daimler’s high profile, many other truck makers are likely to hear if Proterra’s products work well for the German automaker, driving further sales for Proterra.

Finally, in order to become “greener,” many cities and mass-transit operators are likely going to eventually look to electrify their bus fleets while multiple companies will probably use battery-electric trucks for certain short-distance tasks.

Budget Problems Can Weigh on ACTC Stock

Due to the Covid-19 pandemic, many cities and states are experiencing large budget shortfalls. Further, in the wake of the tough lockdowns generally imposed by Democratic mayors and governors, many of the worst-hit governments are heavily “blue” ones that would be most likely to put a great deal of money into buying electric buses. That’s far from the best situation for ACTC stock.

That said, I do believe that Congress will give hundreds of billions of dollars to states, cities, and mass-transit operators. However, President Joe Biden – in order to get the votes of congressional Democrats from rural areas who may not be thrilled with bailing out large cities, states, and mass-transit operators – might have to settle for a lower aid package than he would like.

In that event, the sales of Proterra’s buses could drop significantly, resulting in meaningful declines in its stock.

The Bottom Line on ACTC Stock

As of Jan. 13, the shares reportedly had a market capitalization of $5.25 billion. That works out to about 27.5x the company’s expected 2020 revenue, making the shares rather expensive.

Given that point, along with the budgetary issues that I described above, I think the chances of the stock pulling back meaningfully within the next few months are significantly higher than 50%. Consequently, I recommend waiting for such weakness before taking a bullish position in ACTC stock.

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 Plug Power, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.

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