Lordstown Motors (NASDAQ:RIDE) will owe a lot of money to Foxconn Technology, a public company listed in Taiwan. Unless they can finalize a deal, Lordstown could be forced out of business or close to it. Late on Friday, April 30, the two parties agreed to extend the deadline from April 30 to May 9 on reaching an agreement. Investors have to decide now what to do with RIDE stock.
Lordstown received a total of $2oo million from Foxconn as down payments for a Lordstown plant that sold for $230 million. They are arguing over the last $30 million payment, as well as Lordstown’s need for more capital. Foxconn is apparently balking at providing more capital and potentially some other issues in the deal. The problem is that Lordstown has already spent a lot of the money it has received from Foxconn. It would likely go into bankruptcy if no final agreement can be reached by May 9. I suspect that the lawyers and legal strategies are also playing a huge part in the delay.
Needless to say, this is anathema for RIDE stock. It is down to close to its lowest point at $2.18 per share. At this point “investors” so to speak in RIDE stock have to decide if they are willing to gamble. Here is how that could play out.
Using Probability Analysis to Invest in RIDE Stock
Speculators will likely put odds on the likelihood of the deal closing. We can use probability analysis to estimate what RIDE stock is worth and whether it’s worth investing in.
For example, let’s say that there is a 40% chance the deal closes by May 9 and that this allows Lordstown to raise more capital. RIDE stock would likely spike back to $3.69, where it was on April 4. That is 69% higher. In fact, let’s say there is a 10% chance it could reach its prior Nov. 11 high of $6.89 (up 216%).
On the other hand, let’s assume there is a 50% chance the deal won’t close. Foxconn would close on its collateral and the stock tanks to 10% of where it is today, or 22 cents, down 90%.
Next, we add up all of these possibilities or outcomes. The probabilities all add up to 100%. But the outcomes must be multiplied by these probabilities.
For example, 40% x 69% = +27.6%, and 10% x 216% = 21.6%. So the upside potential is 27.6% + 21.6% or 49.2%. On the downside, 50% x -90% = -45.0%. So the total likelihood is 49.2% – 45.0%, or +4.2%. This means that there is a slight chance positive chance that RIDE stock will survive. On the other hand, it really is probably not worth more than 4% more than today’s price.
In other words, given the risks, there is not much potential upside, at least now, in RIDE stock.
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On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.