The Case for Caution with DiamondPeak Stock

Lordstown Motors, which is merging with special purpose acquisition company (SPAC) DiamondPeak Holdings (NASDAQ:DPHC), has a massive opportunity in front of it. If Lordstown can capitalize, DiamondPeak stock is a steal at a current price of $26.

Source: SevenMaps/ShitterStock.com

After all, it’s clear that investors are pricing in explosive growth for the electric vehicle industry. Lordstown’s plans to make electric pickup trucks, and to focus on the commercial market, make the company a potential beneficiary of that growth.

There’s a key word there, however: “plans.” Lordstown is essentially a startup, albeit a startup with a valuation (pro forma for the merger) over $4 billion. The company is unproven. Competition will be intense. Yet investors are pricing in quite a bit of success already.

It’s worth reiterating: DiamondPeak stock has upside if the company can execute. At the moment, however, that remains a reasonably large “if.”

The Case for DiamondPeak Stock

Tesla (NASDAQ:TSLA) unquestionably has opened consumer and investor minds to electric vehicles. Newer, smaller entrants like Lordstown are trying to take advantage.

After all, electric motors don’t make sense for just passenger cars. If anything, they might make more sense for commercial vehicles. Commercial vehicles often don’t need extended range. Maintenance expense usually is higher relative to passenger vehicles, which gives a cost of ownership edge to electric models.

There’s going to be demand for commercial EVs. In fact, there likely already is. And Lordstown believes it can be a leader in meeting that demand. Its Endurance pickup truck will have just four drivetrain parts (one on each wheel), against thousands for an ICE (internal combustion engine) truck. At $52,500 before a current $7,500 federal tax credit, pricing should be competitive. And the company is looking to launch next year, which could mean the Endurance is first to market.

It’s an attractive story. It’s why DiamondPeak stock has gained roughly 150% since the Lordstown merger was announced. But it’s not a perfect story.

What Goes Wrong

Lordstown still has a lot to prove. In fact, it has everything to prove. Again, this is basically a startup.

And it’s making some unique choices. The plan to use one motor per wheel has been “explored by other automakers,” all of which presumably went in a different direction. Lordstown is developing its own battery system, which too leaves it charting its own path (mostly; Samsung is supplying the actual batteries).

Those decisions will make Lordstown stand out in what will be a crowded field. Startup Rivian just raised $2.5 billion to back its own electric truck ambitions. Tesla, of course, has its Cybertruck. General Motors (NYSE:GM), whose shuttered factory Lordstown took over, has its own EV ambitions, including its own battery platform. Ford (NYSE:F) dominates the ICE category with its F-150, and is developing a battery-powered version of that popular model.

The question is if standing out will be a good thing. All four direct rivals have significantly more capital and are taking more traditional routes to market. Lordstown is trying to do an awful lot with less capital. That may prove to be a brilliant decision, but the risk to DiamondPeak stock going forward is that the rivals are correct, and Lordstown is wrong, rather than vice versa.

Aggressive Targets

To be sure, DiamondPeak stock isn’t yet pricing in the best-case scenario. In fact, it doesn’t appear to even price in Lordstown management’s projections.

Per the merger presentation, in 2024 Lordstown expects to sell 107,000 units. EBITDA (earnings before interest, taxes, depreciation and amortization) is expected to come in around $600 million. With minimal capital expenditures (an estimated $20 million), free cash flow could near $500 million.

Reasonable investors can argue about what that means for the Lordstown stock price, but that kind of cash flow could easily support a $20 billion market capitalization. That’s still less than 50x free cash flow for a company that would be closer to the beginning of its growth curve than the end. Bear in mind that Nio (NYSE:NIO), which has only a small slice of the Chinese EV market, already has a market cap near $30 billion.

But that seems like a hugely aggressive target. As the company notes, the 107K figure suggests 3.5% market share. But that’s not the share of the commercial fleet market but rather the entire pickup truck market.

Here, too, we see another risk. 3.5% of the entire market is far more substantial than it sounds. Again, competition will be stiff. Pickup truck customers, whether commercial or consumer, may be slower to adopt electric models than the company believes.

If Lordstown gets to that level, its stock is going to soar. But, once again, that seems like an awfully big “if.” And if Lordstown instead falls behind, well-heeled competitors will make it very difficult to catch up.

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

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.

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