Shareholders in Romeo Power (NYSE:RMO) are finding out that electric vehicle (EV) fatigue is a real thing. On the heels of weaker-than-expected revenue shares of RMO stock are plunging nearly 20% in mid-day trading. And shares have plunged 55% since the beginning of the year.
The juice has gone out of EV stocks in 2021. The long-term story still holds up. But investors are beginning to understand that the short-term reality of EV’s will take some time. The challenge for investors is that the EV sector has gotten extremely crowded as many companies rushed to go public last year.
However, I believe when you sort out the stocks that have real potential, Romeo Power will be near the top of the list. And with the stock below $10, it may present a great buying opportunity for the risk-tolerant investor who is looking for a long-term bet on the EV sector.
A SPAC For Everyone
Investors will remember 2020 for many reasons. It was the year when remote work became as essential as e-commerce. It will also be known as the year of the special purpose acquisition company (SPAC). A SPAC is simply a different way for a company to go public typically via a reverse merger.
This is not a new concept, but in 2020 the number of SPACs exploded. And one difficulty for investors was simply keeping up with the sheer number of new offerings. This was particularly true in the EV sector which saw several companies avail themselves of SPAC companies to go public.
And as the saying goes, if you wanted to find a prince among the SPAC stocks, you were going to have to kiss a lot of frogs. But earlier this year, I learned about Romeo Power. I liked what I heard; not because I think it’s a short-term winner, but for its long-term story.
The Better Mousetrap Argument
Romeo Power is not a manufacturer of electric vehicles. Rather the company is in the battery development sector. This is a segment that has been strongly correlated with the broader EV sector. There’s a reason for this. Just like internal combustion cars need oil and gas; EVs will need a long-lasting, safe battery.
This has proven to be easier said than done. Romeo Power is has a solution that targets three of the common obstacles to EV battery adoption. The first of these is energy density which determines how far a vehicle will go on a single charge. According to Romeo Power, its solution will deliver a battery with a 25% energy density advantage.
The second obstacle is to develop a battery that can hold up in all temperature conditions. Batteries have to be able to hold up in extreme climates. Romeo Power is working to deliver a battery that will allow the battery to maintain an optimum operating temperature.
And the third obstacle is safety which Romeo addresses via a rigorous manufacturing process that puts safety at a premium.
Furthermore, Romeo Power is focusing on commercial vehicles including long-haul buses and garbage trucks. This is a key market with companies expected to renew their interest in electrifying their fleets as the pandemic eases.
Revenue May Have to Wait
The challenge that Romeo faces is one of supply and demand. In fact, the main reason the company’s stock is slumping is that it announced drastically lower revenue guidance for the coming year.
In an earlier investor presentation, the company delivered a forecast of $140 million of revenue in 2021. But in the company’s earnings report, that was lowered to between $18 and $40 million. On the one hand, even the low end of that range is double the revenue of 2020. But if falls far short of the $140 million that was forecast.
Was Romeo Power being intentionally misleading? It’s hard to say, but this is a concern about companies that go public via a SPAC. There is less of a paper trail for investors to follow. However, in this case, I think Romeo Power says the revenue shortfall will be due to lack of battery cells. If that’s the case investors are likely to view the current dip in RMO stock as a buying opportunity.
The Bottom Line on RMO Stock
I think of myself as an investor rather than a trader. That’s not meant to disparage traders; they are just two different disciplines. Right now, the short-term setup for RMO stock doesn’t look particularly bullish; although it does appear to be a little oversold.
But if you’re an investor that buys into the better mousetrap theory than Romeo Power looks like a stock that you can buy now and continue to add to your position as the company begins to live up to its potential. Only three analysts currently issue ratings for Romeo Power. However, two give the stock a buy rating and the overall price target is $20 suggesting a much higher upside.
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