Romeo PowerIs Well-Positioned Enough to Be Worth a Look on This Dip

I wasn’t familiar with Romeo Power (NYSE:RMO) before writing this article. I’ll admit to going down the rabbit hole on the company’s website. But after about 20 minutes, I stopped and read Matt McCall’s article where he outlined three reasons to buy RMO stock.

Battery concept powering electric vehicle.

Source: Shutterstock

After that I looked at the company’s stock chart. And more importantly, I looked to see what some in the trading community were saying. There are either many weak hands or a lot of elevated expectations.

At that point, I came to the conclusion that the market might really be suffering from electric vehicle (EV) fatigue. However, when that fatigue passes I believe Romeo Power will get a good long look from investors. That’s one reason why you might want to open a long position ahead of the upcoming wave.

The Commercial EV Battery Market and RMO Stock

If, like me, you’re just getting familiar with Romeo Power, let’s start with this. Romeo is focusing on commercial vehicles, from Class 1 to Class 8 trucks. This includes delivery vans along with long-haul buses and garbage trucks.

As McCall points out, electric vehicle battery adoption faces three challenges that are amplified on the commercial side. The first is energy density. The greater the energy density the further a vehicle can operate on a single charge. Romeo touts solutions that will deliver a 25% energy density advantage.

The second is temperature control (or thermal management). Many lithium-ion batteries have challenges in extreme climates because they require optimum operating temperatures. This is another area where Romeo Power excels.

And finally, the company’s rigorous manufacturing process puts safety at a premium.

Now let’s go back to Romeo’s addressable market. The commercial vehicle market has unique requirements and Romeo’s specific focus on developing a battery architecture and solution that is sensitive to the commercial market has genuine appeal.

Revenue Is Coming Through the Door

In late January, Romeo Power announced a strategic alliance with Republic Services (NYSE:RSG). The company also has a compelling $234 million multi-year production contract with Lion Electric Co.

The deal was the eighth production contract that Romeo has in North America. In fact, the company’s contracted revenue has already cleared $300 million.

When you consider how many EV-related companies went public last year on little more than a wink and a smile, this is something that should get investors’ attention. My colleague Mark Hake wrote about the company in the midst of its merger process. He was interested in Romeo Power’s valuation.

“[B]ased on projections in the slide presentation and its valuation analysis, the stock is deeply undervalued,” Hake wrote. “For example, its peers have an average EV-revenue ratio for 2023 of 2.6 times, while Romeo has a ratio of 1.3 times.”

A Clearer Path to the Future

The EV fatigue I’m referring to is occurring because many things have to come together at one time. As the special purpose acquisition company (SPAC) frenzy of 2020 showed, all of those things are competing for investor’s attention at the same time.

One of the central issues is developing the most powerful, efficient, and safe battery. Many different storylines are emerging on the consumer side.

You have Elon Musk pretty much doing his own thing at Tesla (NASDAQ:TSLA). Then you have Nio (NYSE:NIO) with its battery-as-a-service (BaaS) program that treats the battery as a commodity. There’s also QuantumScape (NYSE:QS) which is attempting to literally build a better battery with solid-state technology.

Romeo Power is focusing on the commercial sector, which makes the picture a little clearer. There is competition from hydrogen fuel-cell companies like Plug Power (NASDAQ:PLUG), but for electric applications, lithium-ion will be the way to go. Romeo Power has a product that is different for all the reasons I mentioned.

RMO Stock Should Reward Patience

I’m sure many traders wish Romeo Power would make more announcements to boost its stock. I think it’s more important that they say less and do more. RMO stock is recently-public at a time when the bar is being raised on all EV stocks. Fortunately, the company has a story that should meet the moment.

The EV market is still in its early innings, particularly in the commercial space. Growth is not going to happen overnight. But many fleet operators are motivated to accelerate the sector’s electric future. Romeo Power is well-positioned to help them do just that.

On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.

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