With electric-vehicle (EV) stocks selling off in recent days, there may be opportunity to “buy the dip” with stronger names in the space. But that’s not the case with ElectraMeccanica (NASDAQ:SOLO). Despite shares falling from $10.81 per share to around $7 per share since Nov. 20, the bear case with ElectraMeccanica stock still stands.
Why? As I said last month, the story behind this maker of three-wheeled EVs lacks creditable catalysts. That is to say, long term there’s not much here to inspire investor confidence. I’m sure you’re wondering, “If that’s the case, why did this stock perform so well last month?”
Chalk it all up to speculation. Thanks to the election, speculation boosted any stock associated with EVs. Yes, an administration led by President-elect Joe Biden could bode well for electric-car and truck makers. But, niche EVs like ElectraMeccanica’s three-wheeled Solo? The impact is not as significant.
So, what’s the play here? My answer is simple: Stay away. Shares may be “cheaper” now after the recent sell-off. But, there’s good reason why this stock could become even “cheaper” in the coming months.
ElectraMeccanica Stock and Its Upcoming Vehicle Launch
Why did EV stocks sell off just before Thanksgiving? Chalk it up to investors cashing out after profiting from the “Biden boost.”
As I said above, the recent sell-off may create a solid entry point for some EV stocks. But, this company isn’t in that category. Sure, the company had positive news to share with investors when it reported results on Nov. 10.
Namely, that positive news related to its anticipated rollout of its flagship Solo EV early next year. But management’s bullishness over what’s on the horizon doesn’t do much to change my bearishness.
While it’s putting in the work to grab a share of the market, there’s just one little problem. It’s trying to sell a three-wheeled vehicle, in what remains a four-wheeled world.
Sure, this vehicle, which is technically classified as a motorcycle, may find its niche. But overall, there’s simply not enough demand to make this a viable business, much less justify the current valuation of ElectraMeccanica stock.
A Three-Wheeled EV Won’t Thrive in a Four-Wheeled World
As I said back in October, there’s a reason why you don’t see many three-wheeled cars on America’s roads and highways. Why is that the case? Two key reasons. Firstly, the safety factor. Having three wheels instead of four isn’t just a novelty. It’s a regulatory loophole as well.
Because it lacks a fourth wheel, three-wheelers like the Solo are exempt from crash-testing requirements from the National Highway Traffic Safety Administration. That’s good for ElectraMeccanica. But, for the safety of its prospective buyers? Not so much.
Secondly, practicality. Granted, as the company touts on its website, the vast majority of North Americans who drive a personal vehicle to work commute alone. With its significantly lower sticker price ($18,500), at first glance this one-seater car looks like a good deal for those who mostly use their car to get to and from work.
But, while most drive to work alone, they also use their car for other purposes. If we are talking about families, they obviously need a car that fits more than one person. Even those who are single or without children have little use for a car that has no purpose other than commuting.
Despite 105 million “solo” commuters, the total addressable market for this vehicle will never come close to this figure. Sure, its current market capitalization of $549 million reflects the fact it has lower potential than the EV makers targeting the mainstream automotive market.
Yet, even this valuation overestimates how large this company can eventually become. And as more investors start realizing that, expect shares to continue heading lower.
Shares Will Continue to Drop, So Don’t Buy the Dip
Don’t get me wrong, trends continue to be firmly on the side of the overall EV industry. With U.S. states mandating more sales of electric cars, and younger generations embracing the call to “go green,” there’s a bright future ahead for this automotive innovation. Unfortunately, this does little to boost this particular EV maker’s prospects.
By marketing a three-wheeled “car” in a four-wheeled world, the company is fighting a war it can’t win. Even as most commute to work alone, overall single-seat vehicle demand remains low.
With my bearish view on ElectraMeccanica stock left unchanged, I still see this as a name to avoid.
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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