It’s been a little over a month since Romeo Power (NYSE:RMO) merged with RMG Acquisition in a business combination valued at $1.3 billion that included $234 million in cash raised from selling RMG stock as part of its February 2019 special purpose acquisition company (SPAC) offering.
I won’t get into a lot of the specifics about Romeo itself. My InvestorPlace colleague, David Moadel, does a good job explaining the attractiveness of Romeo’s current infrastructure and business model.
What interests me is the battery maker’s relationship with Lion Electric, a Canadian manufacturer of all-electric commercial vehicles, and its relationship with Amazon (NASDAQ:AMZN).
Here’s why.
One of Romeo’s Newest Production Contracts
In November 2020, Romeo announced that it had secured a contract to supply Lion with lithium-ion batteries for its all-electric class 6-8 commercial trucks and all-electric buses.
The five-year deal, Romeo’s eighth North American production contract to date, could generate up to $234 million in future revenue by the end of the contract in 2025.
“Lion has already proven itself as a formidable leader in the electrification of the transportation industry with its growing fleet of commercial electric vehicles on the road today,” Romeo Chief Executive Officer Lionel Selwood, Jr. stated in November. “This contract demonstrates increasing customer demand for our products, reinforces our ability to turn our pipeline into contracted revenue, and further validates Romeo Power as the industry leader in battery pack and module technology.”
The electrification of personal and commercial vehicles is getting a lot of attention from investors and the media these days, so it’s only natural that Romeo’s story is a hot topic with InvestorPlace readers.
While I’m interested in anything electric, this is the first time I’ve written about Romeo.
The first thing I’m asking myself is whether there’s a better way to play the electric battery angle?
The first possibility is QuantumScape (NASDAQ:QS), which my colleague wrote about in early January. However, as he pointed out, QuantumScape batteries won’t be available until 2025, so only those with a long-term hold should consider its stock.
I, too, like QS and said so in November. But Moadel’s right to warn investors about the risks associated with investing in this innovative company.
For those without this kind of risk appetite, you could always look toward Lion’s dance partner.
What to Do If You’re a Former Owner of RMG Stock
If you sold your RMG stock shortly after it began trading as RMO at the end of December and you want to get back in, you could always buy into Northern Genesis Acquisition Corp. (NYSE:NGA), which is merging with Lion Electric sometime in the first quarter of 2021.
According to InvestorPlace’s Mark Hake, Lion Electric expects to generate annual revenue of $1.7 billion in 2022 with robust earnings before interest, taxes, depreciation, and amortization (EBITDA) of $295 million. A year later, Lion sees its EBITDA increasing by 140% to $707 million.
That’s not chump change. And it’s two years before QuantumScape even gets production going.
However, my colleague throws water on the fire by suggesting NGA stock is fully valued at $25 or $26.
The intriguing part of Lion Electric — besides the fact it’s Canadian — is that the company’s secured both a business relationship and potential investment from Amazon, a company with no shortage of money to make things happen on the electric front.
In mid-January, Lion Electric announced that it would put aside the manufacturing capacity necessary to supply Amazon with 500 electric trucks annually over the next five years. Starting in 2026, the agreement calls for 500 annually over the next five years or 10% of the company’s overall capacity, whichever is higher.
Amazon has already tested the trucks in the fall, so the fact that it’s going ahead with this supply agreement is good news for NGA shareholders. A 5,000 truck order over 10 years is definitely something to write home about.
Add in the option to buy 15.8% of Lion Electric, and you’ve got the makings of a beautiful relationship.
You Can Play It Safe
Although it seems likely that NGA shareholders will vote yes to the combination with Lion Electric, a no vote would most certainly crater its share price. At the same time, however, Lion Electric’s situation vis a vis Amazon most likely wouldn’t change a bit.
Further, since Amazon’s been granted warrants to buy shares in tranches over the next eight years equivalent to 15.8% of the company — it must spend $1.1 billion to receive all the warrants — the safest way to bet on both Lion Electric and Romeo Power is to buy AMZN stock.
Amazon’s exercise price on the stock is $5.66 a share, one-fifth the value of NGA’s current share price.
To me, Amazon is definitely the smartest way to have your cake and eat it too.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
