It’s been a couple of months since DiamondPeak Holdings (NASDAQ:DPHC) announced its combination with Ohio-based Lordstown Motors. The deal closes Oct. 22. When it does, DiamondPeak stock will change to the symbol RIDE.
It’s great news for the people of Lordstown, who saw the General Motors (NYSE:GM) plant close in March 2019 after 52 years making vehicles there.
Lordstown Motors Corp. has revived the plant’s usefulness by creating the Lordstown Endurance, a full-size electric pickup truck that’s expected to deliver 75 miles per gallon and intended for the commercial market. The company plans to start production in 2021. At capacity, it will be able to produce 600,000 vehicles a year. It has $1.4 billion of pre-orders.
That’s all good. It’s why DiamondPeak stock has gone from $10 at the end of July to around $22 today. The question on most investor’s minds is where it goes next. I can’t tell you the answer.
What I can tell you is I recently read an article in the Drive section of The Globe and Mail that led with the headline Automakers are going all in on EVs. But is it a good bet?
I think it is, but there are plenty of people who think this whole electric thing could end very badly for the world’s automakers, which got me to wondering if Lordstown Motors was one too many electric vehicle makers.
Let’s look at both sides of the argument.
Lordstown Motors Is the Tip of the Iceberg
I recently wrote about Switchback Energy Acquisition (NYSE:SBE), the special purpose acquisition company that’s merging with ChargePoint Inc., one of the world’s largest electric charging station networks.
One of the things that opened my eyes to the potential growth for companies such as Lordstown Motors was a statistic from an International Energy Association report.
“According to the International Energy Agency (IEA), there were only 17,000 EVs on the world’s roads in 2010. In 2019, the IEA says this number jumped to 7.2 million, with 47% in China. Exclude China from the mix, and the rest of the world accounted for approximately 3.8 million,” I wrote on Oct. 15.
“That might seem like a lot, but considering the IEA projects the global EV stock could hit 245 million by 2030, the growth potential for ChargePoint’s network is off-the-charts.”
This is the same organization that recently suggested that oil demand will plateau in 2030, coincidentally around the same time electric vehicles become more mainstream.
Now, I’m not about to suggest that oil production and sales are suddenly going to dry up come 2030. We still use way too much oil for plastics, etc., to completely lose our dependence on fossil fuel. But when it comes to internal-combustion engines (ICE), I believe the writing is on the wall.
EVs and Operating Costs
Consumer Reports recently reported that electric vehicles do save consumers money over the long haul.
“[I]f you chose to buy a Model 3 instead of a BMW 330i, you’d see a total US$17,600 in savings over the lifetime of the vehicle, based on average driving,” according to a recent Consumer Reports survey.
“In the SUV sector, buying a Tesla Model Y instead of a Lexus crossover would save US$13,400 (provided the former’s roof doesn’t fly off) and buying a Nissan Leaf over a Honda Civic would save US$6,000 over the lifetime of the vehicles.”
If you own DiamondPeak stock and believe in Lordstown Motors’ plan, these survey results ought to be reassuring. Companies love finding ways to cut expenses. The Endurance is pegged to do just that.
Electric’s Not Ready for Prime Time
The IEA’s Global EV Outlook 2020 is a double-edged sword.
On the one hand, it does say that the number of electric vehicles on the planet could possibly increase from 7.2 million to 245 million over the next 10 years. However, on the flip side, under the optimistic scenario of EVs reaching 245 million in 2030, that would still only represent 12% of the estimated 2 billion vehicles that would exist worldwide.
So, under incredibly optimistic scenarios, internal-combustion engines would still account for most of the world’s vehicles. Somebody has to make those vehicles. Those who go all in on electric could be on the outside looking.
For a company like Lordstown Motors, whose pedigree is solely electric, it won’t have the ICE-powered vehicle production to lean on while it gets up to speed with Endurance and other possible future vehicles.
Major Investments Have Been Made
Which leads me back to the article in the Globe. It talks about how much money auto manufacturers have dumped into EVs with no guarantee that consumers will come around to adopt the technology.
“Major automaker investments in EV are staggering. The total investments announced by global manufacturers for North America between 2020 and 2025 is estimated at US$300-billion,” Globe and Mail contributor Doug Firby wrote on Oct. 12. “German automaker Volkswagen alone has said it will spend $66-billion through 2024 on digital technologies and electric cars.”
As Firby writes, that is a staggering amount of money. And as I stated above, in a best-case scenario, that investment gets us to 12% electric and 88% ICE, which means a lot more than $300 billion will have to be spent to get further down the road from 12%.
Just as it’s going to take decades and decades to lose the addiction to fossil fuels, the same likely holds for ICE-powered vehicles.
That’s bad news if you’re backing Lordstown Motors.
The Bottom Line on DiamondPeak Stock
In my September article about DiamondPeak stock, I said aggressive investors shouldn’t have a problem owning DPHC because its valuation isn’t as crazy as people might think. It’s since fallen back a few more dollars. My opinion hasn’t changed.
Until something alters the Endurance’s 2021 production goal, I still think it’s a good long-term speculative bet.
However, as I said in September if you don’t like risk, even at $22, the margin of safety’s not nearly enough to bite. I’d wait to see if it falls into the mid-teens. Then, and only then, should you consider a bet around $15?
Is Lordstown Motors one electric vehicle maker too many? I don’t think so, but I guess we’ll find out in 2 to 3 years.
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.