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Thesis

Many articles one reads nowadays in the financial news media seem to be taking massive sales of electric vehicles (EVs) as a given. Such fawning EV coverage is not due to mere hype, either; EV sales have been increasing exponentially for over a decade, according to the International Energy Agency, and show no signs of slowing down. In fact, EV demand in the United States (US) looks particularly robust, and appears to be spiking. Battery electric vehicle (BEV) registrations were 3.1% of the US car market in 2021, but doubled to nearly 6% in 2022. what’s more survey results by Deloitte show that 8% of Americans want their next car to be a BEV, higher than the current percentage of US BEV owners. For now, then, it is probably safe to say that demand for EVs in the US, and abroad, outpaces supply.

Yet Lordstown Motors (NASDAQ: RIDE) is not benefiting from this market trend. Lordstown is producing far fewer of its products than initially projected for the year, meaning reduced sales opportunities due to constrained supply. To add insult to injury, Lordstown recently announced a pause in production and deliveries and a recall of 19 vehicles, a large share of its vehicle fleet. With all the bad production news surrounding the company, demand not favoring its products, and competition ramping up, I believe it is unlikely that Lordstown survives its production hell.

Lordstown’s Financials

Lordstown Motors Corporation had no revenue in 2020 and 2021, and only small amounts of revenue in 2022 when it began selling trucks. Operating income and operational cash flow are negative, although this is to be expected since the company hasn’t had a full year of product sales yet. Nevertheless, increasing losses are increasing losses. The last 3 full years of data, 2019-2021, do not paint a good picture. Operating income was a loss of just $15 million in 2019, $100 million in 2020, and nearly a whopping $400 million in 2021. Operational cash flow losses ballooned from less than $8 million in 2019 to about $100 million in 2020, which rose to almost $390 million in 2021. Net income isn’t comforting either, with losses of $15 million, $124 million, and over $400 million for 2019, 2020, and 2021, respectively. Despite these numbers, a silver lining is visible for Lordstown: its debts are only about $13 million, and its cash is over $200 million, meaning it is unlikely to see a debt crisis precipitate its failure in the near future. But the cash alone does not remove the concern over the company’s widening losses.

Lordstown’s core business of selling vehicles is far from profitable, and the company is losing more money as it makes more vehicles. To be fair, though, it’s only just begun its journey as an automaker, with production of vehicles commencing in late 2022. Still, financials like this are poor, period, and they are why startups are considered such risky investments: if too much goes wrong at this stage, the company has no profitability to rely on.

Lordstown’s Valuation

To determine RIDE’s value, many measures like Price/Earnings and Price/Cash flow cannot capture it since the company is at such an early stage. No earnings, no cash flow. But some measures do remain, even at this stage of its life. The Price/Sales ratio appears to be ~100, while Price/Book is less than .6 at the time of writing. Compared to the Consumer Discretionary sector averages of ~.9 and ~2.5, respectively, one can argue that RIDE is either incredibly overvalued, or incredibly undervalued. Looking at the valuation alone, one’s value judgment of RIDE may well depend on if one thinks a company’s sales or its book value is a more important measure of its worth compared to competitors.

For a startup, especially one that only just started selling a product a few quarters ago, valuing the business is a very difficult matter. How is one to really gauge the value of something whose future prospects are so difficult to know in the present? Since there is almost no operational track record on the company, RIDE’s valuation ironically has little value at this stage. The valuation today may reveal an early look into a good future or a bad one for a young firm; only time will tell. Unfortunately for Lordstown, its time may run out before we can know for sure.

Lordstown Faces Immense Competitive Pressure

Compared to EV demand rising in the US and abroad, Lordstown faces dismal sales and disappointing revenues. As a result, investors have been very displeased, selling RIDE stock and sending the price down by about 50% from a year ago at the time of writing. Startups almost always begin life in poor financial circumstances until their businesses can make money on their own. This is less concerning in more favorable times, but a rising-rate environment at the end of a stock market bubble is a bad time for an unprofitable startup to be publicly listed and in need of capital. With Lordstown’s large downward production revisions, its pause on production and deliveries, and its recent recall of much of its fleet, the company appears to be facing an existential crisis, and looks far less likely to deliver products to customers than it anticipated.

As Lordstown faces these challenges, its competitors are ramping up production. This will exacerbate the demand problem by driving demand towards themselves and away from Lordstown. American legacy automaker Ford (F) is easily outselling the American startup, and is satisfying demand that may have otherwise gone to Lordstown. Ford sold 15 thousand F-150 Lightning trucks, directly competing with Lordstown’s EV trucks. As if this wasn’t enough, Rivian (RIVN), another EV startup and EV truck company, was able to nearly achieve its 2022 production guidance of 25 thousand vehicles, and delivered about 20 thousand vehicles, dealing another blow to Lordstown’s demand hopes in the truck market. While Rivian did cut its guidance in half from the beginning of 2022, its truck sales far outnumber Lordstown’s in any case, and its production cut of 50% is still far lower than Lordstown’s cut from 500 vehicles to about 30, a reduction of over 90 %. And let us remember, even with Rivian’s cut to production guidance and Ford’s recent production woes, the thousands of EV trucks sold by Rivian and Ford compare to only 31 trucks produced by Lordstown, most of which have just been recalled.

Now to address the elephant in the room. Tesla, Inc. (TSLA) is still the dominant EV maker in the US, and is meeting the most EV demand that exists in the country, allowing the company to maintain ~65% market share in 2022. Tesla was also the best-selling luxury vehicle brand in 2022 , beating out the likes of Lexus and BMW, and was recently dubbed the brand with some of the highest customer loyalty in the industry (Tesla takes the customer loyalty title from Ford, ending the Dearborn automaker’s 12-year streak). As relevant to this article, Tesla has been planning its debut on the pickup market for some time, and has announced that it will finally begin deliveries of the Cybertruck this year. Considering Tesla’s track record of execution compared to Lordstown’s lack thereof, it seems possible that Tesla will sell more trucks than Lordstown produces by the end of 2023, despite Lordstown having started truck production almost a year earlier than Tesla. Assuming the Cybertruck receives a warm welcome from its +1 million reservation holders, as consumers have welcomed Tesla’s other vehicles, EV truck demand and consumer sentiment will be addressed, and at least partially satisfied, by Tesla for years to come, with a projected production rate of at least 100 thousand Cybertrucks per year within the next few years. Nevermind Tesla’s order backlog, the production rate alone will be detrimental to EV truck makers like Lordstown, especially if Lordstown can’t ramp up its own volumes and sales quickly enough. This is to say nothing of the scandal Lordstown has already courted that may have hurt its reputation as a trustworthy automaker.

To recap, despite increasing EV demand in the US and globally, Lordstown is in a poor position compared to its competitors, both legacy automakers and EV pure plays. If things don’t improve for the company soon, it will be at risk of bankruptcy or acquisition.

Is Lordstown Going to Make It?

If Lordstown Motors is unable to fix its demand problem, increase revenues and production, become profitable, and pay off its debts, it will be forced to seek capital to continue operations, or liquidate assets – or the entire company – to pay off what it may owe.

Frankly, I don’t like Lordstown’s odds. Unlike General Motors (GM), which received a hefty government bailout during the Great Financial Crisis, Lordstown has little visible comparable government support. Its $200 million market cap suggests limited investor support. Shockingly, it also displays nonexistent insider support, with insider selling consistently outpacing insider buying every year for the past 3 years. With its minute production and sales, ballooning losses, and increasing competition, Lordstown seems to have little hope in the long run, especially due to the added risks and expenses involved in using hub motors instead of conventional motors. Unappealing engineering choices like these, as well as general bad news and publicity, may mute consumer interest in Lordstown’s products. Meanwhile, investor interest in the company will further crater if it dares to go to market to raise what little capital it can and dilute current shareholders – regardless of whether raising capital is essential to propping itself up. Yet a capital raise is exactly what the company’s CEO has said it must pursue to produce its first 500 vehicles. Even a large cash pile and relatively low debt can’t smooth over all the wrinkles in the fabric of Lordstown’s growth story. Things simply do not look good for the company.

Risks to Thesis

While things look poor for Lordstown, the company can still turn it around given enough time. For startups that succeed, the night is always darkest before the dawn. Tesla went through several years of heavy losses before it finally turned a profit, and it’s certainly possible this startup could follow suit as EVs take off. A slow-and-steady march toward profitability could upend the bearish future I see today for Lordstown. Should the company find ways to steadily stimulate organic demand for its vehicles and get around its production hurdles, it could improve its outlook immensely, and would indicate that my bearish sentiment is misplaced.

Another risk is that if the demand for EVs far outpaces supply to the point that even the clear mass producers like Tesla cannot make enough vehicles to satisfy it, over time impatient EV shoppers may consider opting for vehicles from currently unpopular EV makers, just to get their hands on any EV they can. In many respects, all EV cars and trucks have common features that internal combustion engine vehicles do not. Some consumers waiting for EVs from the big names might realize this, and might consider purchasing EVs from companies getting less attention and promising shorter wait times. This could give Lordstown a much-needed demand spike, and a chance to flex its production muscles.

Should either of these scenarios occur, the thesis would indeed be at risk. However, I am not certain such fortuitous circumstances will come to pass anytime soon.

Conclusion

In short, I believe that since Lordstown is facing severe production and demand problems, poor finances, and increasing competitive pressures, the company should be avoided by long-term, long-focused investors at this time. As such, I would call RIDE a sell.