Companies like Electrameccanica Vehicles (NASDAQ:SOLO) are trying to ride on Tesla’s (NASDAQ:TSLA) coattails with their electric vehicles (EVs). However, SOLO shares have cratered from their 52-week high of $13.60 per share down to single digits. Nevertheless, the stock remains highly inflated. Competition in the broader EV space is heating up. And even though Electrameccanica has a novel concept, I don’t think that its premium valuation at this stage is justified.
Firstly, Americans are obsessed with trucks, and the novel coronavirus pandemic has only exacerbated this trend. Data suggests that people are increasingly moving to the suburbs due to the virus, and there is nothing to suggest the migration will let up until a sizeable chunk of the U.S. is vaccinated. The Solo, a single-passenger all-electric vehicle with a range of 100 miles and a top speed of 80 mph, isn’t the ideal transport if you do end up taking the plunge and moving to the city.
Secondly, the company has outsourced manufacturing to a Chinese company called Zongshen Industrial Group. Although it affords SOLO an asset-light model, it doesn’t do much in terms of quality control. Finally, three-wheeled internal combustion vehicles don’t have an excellent sales track record. It’s unlikely that excess demand for conventional EVs will boost sales for alternative EV vehicles.
SOLO Stock: A Divorce Between Valuation and Fundamentals
I spoke on how SOLO is an interesting company in an overcrowded EV space in my previous article. An all-electric three-wheeler is certainly interesting when pitted against the Tesla Model X and Model Y. Plus, the Tofino, a high-performance two-seater electric roadster sports car, tells you that the company is aware of diversifying.
But is that enough to justify a one year gain of 264%?
I don’t think so. But, then again, we are living in a world where Elon Musk is now the richest person in the world, passing Jeff Bezos, and the Chinese EV maker NIO (NYSE:NIO) has a market capitalization of $89 billion while General Motors’s (NYSE:GM) is at $73 billion. However, unlike these large EV companies, SOLO doesn’t have a long-term growth story or a history of rich returns that investors can latch onto.
You have to give credit where it’s due. Share count has exponentially grown by 111.41% to 77.8 million from 36.8 million in 2018. That doesn’t seem strange considering the share price hike. Unfortunately, it comes at the expense of current shareholders.
Looking ahead, analysts estimate that the company will become profitable by 2024, with an earnings-per-share (EPS) of 65 cents. Even if you take that EPS estimate, you will end up with a fair value of $6.96, a negative 24% margin of safety. I have taken a growth rate of 5% during a 10-year growth period and 4% in the terminal stage. I’ve taken a discount rate of 12%, close to the stock market’s long-term average return of about 11%, because investors can always invest passively in an index fund and get an average return.
Let’s take a simpler approach. Analysts have a low 12-month price target for SOLO stock that points to a 3.3% downside.
Winning the American Consumer
Much like the Canadian pot industry, the EV sector of our “neighbor to the North” heavily relies on the American consumer. National cash rebates have helped in the uptake of EVs. But Transport Canada says it won’t hit the first zero-emission vehicle sales targets in 2025. According to an analysis, Canada will only reach between 4% and 6% by 2025 and 10% by 2030. Targets called for 10% of all light-duty cars to be electric by 2025, 30% by 2030 and 100% by 2040.
Meanwhile, in the U.S., only 4% of cars were electric in 2020. However, let me hit you with an interesting stat. For the year, Tesla is expected to deliver 204,274 cars for 2020 in the U.S., according to one analysis. Meanwhile, in Canada, 11,998 vehicles were sold in the first quarter of 2020. If you extrapolate it for the year, you have a figure shy of 50,000 vehicles, largely in line with the past two years’ figures. So, if SOLO wants to be successful, it must capture some portion of the U.S. EV market.
However, it is unlikely. As I have mentioned in my intro, Americans love their pickups. In fact, the pandemic has only rekindled our romance for this vehicle type. With more people living in the suburbs, reliability, durability and efficiency needs will tilt toward trucks. There is a certain novelty with the Solo. But that doesn’t justify a market cap of $605.28 million.
Shares should shed a lot of value before SOLO stock become an interesting play again.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan does not directly own the securities mentioned above.