On the surface, Lordstown Motors Corp. (NASDAQ:RIDE) looks like a play on the electric-vehicle industry that is slowly emerging in the United States. But it is premature to buy shares of RIDE stock until investors can get a clear picture on early demand for the company’s pickup trucks.’
Yep, that’s a major red flag. The existence of a red flag is too bad. The prospect of resurrecting a shuttered auto plant in Ohio is a story that cheers even cynical Uncle Hank.
However, that’s emotion talking. Emotion and investing really don’t mix, no matter the appeal of the tale being told. This is especially true when the tale involves a company’s credibility.
A Look at RIDE Stock
Lordstown Motors recently became a public company thanks to its reverse merger with DiamondPeak Holdings, a special purpose acquisition company.
The goal of the company is to produce and sell the Endurance, an all-wheel drive pickup powered by electricity. As with better known Tesla (NASDAQ:TSLA) vehicles, the electricity is provided by on-board batteries. Investors attracted to sustainability like that platform.
They like the fact that unlike internal-combustion engines, electric vehicles don’t belch pollutants as they operate.
Lordstown Motors has ties to another electric-vehicle firm, Workhorse (NASDAQ:WKHS), and gained rights to use its designs to build the Endurance. One key link between the companies is that some of Lordstown Motors’ top executives also led Workhorse, including founder Steve Burns.
RIDE stock has a 52-week range of $9.50 per share to $31.80. The stock emerged from the SPAC merger at about $18 and dipped to $13 earlier in November. Currently, the stock is trading around $26.
The company’s market capitalization is about $4.3 billion.
Questions About Demand for the Endurance
As I mentioned before, demand for a product is crucial. After all, who would want to buy shares of a company making stuff that no one was willing to buy?
It does not matter if the company stock is affordable – maybe that’s why the stock is affordable. Moreover, it does not matter if the product is perfectly made. Without buyers, that well-made inventory will rot in a warehouse.
Estimating demand for a new company’s product is a basic yet critical factor for a potential investor. At best, the new company has a limited track record for investors to review: leadership, prototypes and early orders.
Early orders thus is a key metric.
Investors in Tesla, for instance, were told by the company how many customers put down deposits to order vehicles. Even before the Model 3 was being made, investors were given good numbers on how many folks paid to reserve their pre-orders. Strong demand as measured by these early orders reassured investors and potential car buyers.
Coining a New Phrase
Unfortunately, this is not the case with Lordstown Motors and the Endurance truck.
Lately, the company has tweaked the wording of its statements regarding demand for the trucks it proposes to build. And the revised wording, while possibly more accurate, is certainly far from reassuring.
In the auto world, it is generally accepted that a “pre-order” is a contract to purchase that includes a financial commitment from the customer. You know, a payment of money to have some skin in the game. This is a widespread practice across our economy, from agreements to rent an apartment, contracts to buy a home or even order furniture for that home.
So last August, when Lordstown Motors said it held almost 40,000 pre-orders worth $40 billion, most investors understandably believed these were honest-to-goodness real-life automotive pre-orders.
The difference is we’re discussing Lordstown Motors. In their world, a pre-order is a letter and no deposit. Recently, Lordstown Motors has taken to describing these pre-orders as “non-binding production reservations.” This change in the wording is significant, and investors in RIDE stock ignore this at their own peril.
Citing the new language, my InvestorPlace colleague Thomas Yeung wrote recently, “Perhaps their lawyers finally wised up to the threat of SEC enforcement.”
The Bottom Line on RIDE Stock
When I last wrote about Lordstown Motors in October, I described it as a suitable play for risk-tolerant investors. However, in the wake of this pre-order shell game, investors should avoid the company. There are much better alternatives.
Put another way, if you want to waste your money with a shell game, visit a carnival. If you’re lucky, there will be a Ferris wheel.
On the date of publication, Larry Sullivan did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Larry Sullivan is a veteran journalist in Florida who has covered banking and finance for several years. He is a former investing editor at U.S. News & World Report in Washington D.C.