With the crazy world we’re living in, it was almost inevitable that the markets had at least one more surprise in store. Sure enough, a big one came last week in the form of a very positive third-quarter earnings report for ElectraMeccanica (NASDAQ:SOLO). The niche electric-vehicle (EV) manufacturer, specializing in the three-wheeled, single-seater Solo, reported higher-than-expected sales, which boosted SOLO stock to incredible heights.
As InvestorPlace writer William White detailed, ElectraMeccanica generated 300,000 CAD in Q3, which was up 50% from the year-ago quarter. However, the operating loss was 8.8 million CAD, which was nearly 13% wider year-over-year. Also, net loss came in at 14.9 million CAD. But management expressed optimism toward its future U.S. facility buildout. Plus, with interest booming for EVs, the encouraging takeaways were enough to send SOLO stock into orbit.
While admittedly impressive, anyone who gambled on the EV maker should seriously consider taking their profits and running. Fundamentally, this story lacks the credible catalysts necessary to inspire investor confidence.
The Practicality Issue of SOLO Stock
As I mentioned earlier, three-wheeled cars have a checkered history in the U.S. automotive landscape. Put simply, there’s a reason why you don’t see too many of them on the road.
Moreover, as in the past, the primary motivation for building such a platform was to save on costs. But the problem with the Solo is that unlike prior generations’ three-wheelers, this is strictly a commuter vehicle. It has virtually none of the conveniences of a regular passenger car.
Frankly, that’s going to be a very difficult sell in the modern consumer market. For one thing, the automotive sector has decisively gravitated toward SUVs. Nowadays, it doesn’t make much sense to make enthusiast cars, such as two-seater convertibles. But even that frivolous purchase is much more practical than the Solo.
Further, the novel coronavirus has inspired urban dwellers to buy their first car. However, these folks are buying normal cars — and for good reason. If you’re going to spend five figures, you might as well go with a practical vehicle. Logically, this doesn’t benefit SOLO stock.
The Commuter Angle Is Troubling
Another factor that hinders the bullish case for ElectraMeccanica is the pandemic’s disruption. After the coronavirus forced millions of Americans to work from home, the commuter angle that initially bolstered SOLO stock took a back seat. Obviously, with cases rising to astronomical heights, the prolonged nature of this crisis doesn’t do the commuter EV maker any favors.
Of course, I’ll concede one point to ElectraMeccanica. Somewhere down the line, the coronavirus pandemic will be addressed, whether through a vaccine, herd immunity or the virus simply going away. Then, the bulls reason, SOLO stock will really hit its stride. However, this idea assumes a number of things:
- People will continue commuting alone en masse.
- They recognize their negative environmental impact.
- As a result, they will buy a cheap EV (like the Solo) to reduce their carbon footprint.
Frankly, I can see the top two points moving in favor of SOLO stock. It’s no secret that commuting is often a lonely affair. According to data from the American Community Survey, “between 2007 and 2016, no transportation mode saw its share of total commuters change more than 1.5 percentage points.”
In other words, all the effort to push people into alternative transportation methods have failed to resonate. Therefore, we will likely continue commuting alone, which isn’t great for the environment. That said, millennials and younger people are generally more environmentally aware than prior generations. And studies by McKinsey & Company reveal that people “are willing to pay to ‘go green.’”
But here’s the rub: I think there’s a big difference between buying an environmentally friendly and cruelty-free shampoo than buying an EV. Yes, if money were no object, most drivers today would likely opt for an EV.
But money is an object. And when faced with buying a convenience-compromised EV that’s great for the environment or a full-sized car that leaves a larger carbon footprint, most people will opt for the latter. It’s just common sense.
Don’t Overanalyze Consumers
One of the biggest surprises this year was how close the election was between Democrats and Republicans. Prior to election day, many believed a blue wave would occur. Instead, former Vice President Joe Biden eked out a narrow victory, while the Democrats lost some seats in the House.
Why? It’s likely that Americans are more ideologically center than progressives care to admit. For instance, a proposition promoting racial preferences in government hiring did not pass in liberal California. As it turned out, voters of all colors and creeds did not want to go too overboard with social justice issues.
Now, that’s dealing with human issues. Something as esoteric as carbon footprints is a concept that most Americans will pay lip service to, but will almost certainly not pay substantial money toward. Why would they? It’s great that fewer pollutants in the air might save an Amazonian butterfly, but people have bills to pay and food to put on the table.
From a real-world perspective, the dollar-for-value proposition of ElectraMeccanica doesn’t make sense. As such, I would avoid SOLO stock.
On the date of publication, Matthew McCall did not have (either directly or indirectly) any positions in the securities mentioned in this article.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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