The trend in electric vehicles (EVs) is undeniable, causing some investors to take a closer look at Electrameccanica Vehicles (NASDAQ:SOLO). Let me save you some time and just say, avoid SOLO stock.
Just because certain stocks in a certain industry are booming, doesn’t make all stocks in that industry a buy.
For instance, Tesla (NASDAQ:TSLA) is clearly leading the trend when it comes to electric vehicles. It has become the most valuable automaker on earth, amassing a market cap of more than $350 billion.
Nio (NASDAQ:NIO) has clear momentum as well. That stock is hitting new all-time highs as we speak and deliveries continue to come in stronger than expected.
Other startups or SPAC plays are gaining momentum, too. But just because a company is in the space, doesn’t mean it’s the next Tesla. In the case of Electrameccanica, its $190 million market capitalization likely goes unnoticed by many investors. Should that remain the case?
Breaking Down Electrameccanica
The company “reported earnings” in late July, missing on revenue estimates and reporting a net loss of 12.9 million CAD. I put that in quotations because it’s hard to report earnings when there is no real business at the moment.
That’s as revenue came in at less than 20,000 CAD. A $190 million market cap and 20,000 CAD in sales. Granted, starting up an auto company is expensive and it’s hard to have sales before the company has a vehicle produced.
So the seemingly underwhelming result is not all that surprising. But investors must realize that just because Tesla did it, doesn’t mean Electrameccanica will do it. It doesn’t mean that other startup automakers can or will be able to make it. This is a hard business with traditionally low margins and high costs.
As more companies flock to the EV space — particularly the well-established giants of the auto industry — the harder it will be for late-comers to survive, let alone thrive.
With that said, this is not your standard EV producer. Electrameccanica is set to begin production of Solo, a three-wheeled all-electric vehicle. The one-passenger vehicle is expected to have an MSRP of $18,500. While Electrameccanica has other vehicles in the pipeline, this will be its lead-off vehicle. With production set to begin on Aug. 26, deliveries are expected in November or December of this year.
Thanks to a recent “capital market activities,” the company has shored up its liquidity. It has more than 50 million CAD in cash and short-term investments as it enters into the production stage of its business.
Hopefully the cash starts coming in, though. While its current balance sheet is enough to buoy operations, that kind of money won’t last forever. Especially as it remains operating cash flow negative.
Trading SOLO Stock
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Put simply, I don’t love the fundamental situation with SOLO stock. Production is just getting started and each day that goes by, the electric vehicle market becomes more competitive. In a capital-intensive business, that’s not a good thing when you’re the new kid on the block.
With that being said, the technicals actually look okay here.
The stock is clearing the 20-day and 50-day moving averages, a move that comes after SOLO stock cleared downtrend resistance (blue line). That move was notable, as shares were being squeezed against $2.50 support.
The $2.50 level has been significant, now acting as both support and resistance. A few days ago, this was setting up as a descending triangle, a bearish technical development. Traders were looking for downtrend resistance to push SOLO stock below support, likely putting $2 in play.
Instead, resistance gave way, potentially putting $4 or higher on the table.
The problem with these speculative plays is that they can make big volatile moves, even if the fundamentals don’t support it. I wish Electrameccanica the best. But its business is too young and speculative for me at this point. I would rather go with the more well-established names.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.
