Why RMO Stock Is the Quintessential Post-SPAC Stock

6 mins read
Why RMO Stock Is the Quintessential Post-SPAC Stock

It is good news and bad news that those who invest in publicly traded stocks have access to early-stage, unprofitable companies like Romeo Power (NYSE:RMO). RMO stock itself highlights both edges of the proverbial sword.

Source: Nick Starichenko/InvestorPlace.com

The good news ostensibly is that individual investors can own quality growth stories, even early in their lifecycles. There’s no specific reason why those companies must be only available to institutional investors and venture capital firms.

The bad news is that such access can be dangerous. There’s a reason venture investing is difficult: It’s insanely high-risk and high-reward.

For every tantalizing story about the massive returns of a Facebook (NASDAQ:FB) or an Alibaba (NYSE:BABA), there are literally hundreds of VC investments that wind up worth exactly $0. Those wipeouts occur regularly to those who conduct far more due diligence and obtain far more information than most individual investors have access to.

The SPAC (special purpose acquisition company) trend only amplifies this difference. SPACs have brought many intriguing growth stories — including Romeo Power — to the market. But it’s clear from my personal experience, as well as the trading in names like Nikola (NASDAQ:NKLA) and Churchill Capital IV (NYSE:CCIV),  that at least some investors don’t completely understand how SPACs work.

Romeo Power isn’t a SPAC anymore; its merger closed at the end of December. But Romeo still highlights the promise and peril of investing in early-stage companies in general and SPAC merger targets in particular.

The Advantages and Disadvantages of a SPAC

There is one major distinction between a SPAC merger and a more traditional initial public offering: forward-looking projections.

For companies that are carrying out IPOs, those projections can’t be included in the prospectus, and they cannot be released until 40 days after the IPO.

But those prohibitions don’t apply to SPAC mergers . That’s an obvious advantage for early-stage companies like Romeo Power.

After all, if Romeo Power couldn’t issue projections, it’s likely investors would have little interest in the stock. For the nine months ending Sept. 30, Romeo Power generated just $4.3 million of revenue, while its operating loss was some $19 million.

Obviously, those numbers alone don’t make RMO stock a sell. But they can’t make the case for the stock either. Without projections, the ability of Romeo Power to quantify its potential would be limited.

Even with the merger closed, those projections look either spectacular or ridiculously aggressive, depending on investors’ views. Romeo  says that it expects it revenue to go from $5 million in 2020 to $710 million in 2023 to $1.46 billion two years after that.

That doesn’t even include the company’s joint venture with BorgWarner (NYSE:BWA). The JV is supposed to go from $0 of sales in 2020 to over $700 million by 2025.

Risk, Reward, and RMO Stock

The opportunity for companies selling commercial EV batteries is huge. But we’re still talking about the combined revenue of Romeo and its JV going from $5 million to over $2 billion in five years.

Is that possible? Yes. But it doesn’t seem likely. Individual investors can’t really double-check those projections. We’re going on faith, and it’s mostly blind faith.

But there’s good news. Like most SPAC stocks, RMO stock isn’t pricing in those projections. At $13, including the impact of warrants and excluding net cash, the stock is worth less than $1.5 billion. That’s a little over four times Romeo Power’s EBITDA (earnings before interest, taxes, depreciation and amortization) projection for 2025.

If Romeo Power actually hits that EBITDA target, RMO stock probably would rise something close to tenfold. That’s because a valuation of 40 times EBITDA, for a leading battery supplier to commercial electric vehicles, hardly seems out of line.

The Key Question

So we get to the core question here for Romeo and so many other stocks: who’s right? Perhaps more accurately, who’s less wrong? After all, if Romeo Power misses its 2025 targets by a bit, RMO stock would be one of the market’s biggest winners over the next four years.

But if Romeo gets beaten by its competition and its growth never really materializes, then its current market capitalization of $1.6 billion can head toward or all the way to $0 in a hurry.

And, again, it’s exceedingly difficult for an individual investor to pick either side of the argument which much certainty.

The possibility of multi-bagger returns if a firm’s management is right can make a stock worth investing in for some. Conversely, the fact that the shares already reflect a portion of the company’s projections is a giant red flag to others.

It will be years before either side is proven right. In the meantime, tread cautiously with RMO stock and with other SPACs as well.

On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.