Editor’s Note: This article is part of Joanna’s best trades — a weekly feature dedicated to making money within a specific space. Joanna’s picks for this week are: Autoliv (NYSE:VAT) and Romeo Power (NYSE:RMO) as the top electric vehicle (EV) suppliers to trade this week.
I’m a green investor – from cars to crypto, fuel cells and even cannabis. But do you want to know what the real why I’m crushing on electric vehicle (EV) stock lately? It’s not the cool designs (especially when we talk about the panel openings on the Lucid Air, which are way too wide).
Usually EV stocks are the place to be right now as they are the best quick money transfers. Metaphorically speaking, trading in the EV sector is the equivalent of big game hunting: aiming for a slow-moving target at a great distance.
Source: Joanna Makris
From the OEMs to the charging and battery technologies, to subsystems such as lidar (light detection and range) and artificial intelligence (AI), the EV sector has three characteristics that make it ideal for long/short trading:
Predictable story. Thematic investing tells a straight forward story and anticipates hockey stick growth with little or no competition in fact. Herd mentality. Retail trading behavior is well understood. Bull-and-bear visions are widely communicated on social networking platforms in an effort to form large trading blocs. momentum. When a lot of retail money chases an industry, stocks derail from their fundamentals and valuations no longer reflect intrinsic value. It’s a bubble.
In the short term, informed investors can trade around retail-driven momentum and earnings. But there is also a good long-term investment opportunity in this space – solid, long-term companies with profit and revenue growth. Understanding these characteristics (and separating the story from the stock) is the starting point for more informed long/short trades. Here’s a start.
Today I’m diving into the EV suppliers – the “parts” companies that make up a less crowded segment of the EV ecosystem. First I will explain why you should buy Autoliv (NYSE:VAT) stock. After that, I’ll take an even deeper dive into one of the auto parts you really should be selling right now.
EV Vendor Stocks to Buy: Autoliv (ALV) Stock
A good house in a bad street
With a market cap of just under $8 billion, Autoliv, headquartered in Stockholm, Sweden, specializes in automotive passive safety components – airbag protection systems, seat belts and steering wheel products. In 2018, ALV spun off its growing electronics segment, Veoneer (NYSE:VNE), which makes active safety systems (e.g. lasers, cameras and artificial intelligence for autonomous driving). Autoliv consolidated its market share after a massive product return at Japanese airbag manufacturer takata, which was forced to recall millions of cars worldwide in 2015. However, despite the market share gains, the auto industry has collapsed (declining consumer demand, trade and tariff issues and the rise in EVs), with a 2-3% decline in global light vehicle production this year.
Chip problems are a short-term disruption, but this too shall pass
More recently, Autoliv has been negatively impacted by semiconductor chip shortages, which have been even more disruptive to component suppliers than OEMs. As a result, Autoliv’s stock has suffered from rising raw material costs, which has put pressure on revenues and earnings. Not surprisingly, the company reported a weak second quarter (June) and lowered its full-year outlook. The F2021 sales forecast calls for 20-22% year-on-year growth (versus a previous forecast of 23%).
Autoliv isn’t out of the woods yet. But the most important thing for investors to focus on is that this is all temporary. The overall picture of the chip shortage is improve. Even if Autoliv experiences some cost disruption in the third quarter, there are indications that the turning point will come sometime in the second half of this year. Meanwhile, this is a fundamentally sound business with real profit power.
Derivative game on global auto-recovery… and Tesla
ALV shares have been pulled since the company’s earnings report and are currently trading at a very reasonable 7.5x EBITDA. That is in line with their historical average over five years. From a valuation perspective, the stock is a great way to play into the global auto recovery. It’s also a derivative game On Tesla (NASDAQ:TSLA), which is (and is growing) an important customer. What’s more, unlike other EV stocks, which are priced for perfection, a lackluster quarter has already been “baked in” here. That now makes it an excellent starting point for improving the supply chain in the coming months.
Shares of EV Vendors to Sell: Romeo Power (RMO) Stock
The future looks bright…
Founded in 2016 and headquartered in Los Angeles, California, Romeo Power (NYSE:RMO) makes energy-dense lithium-ion (Li-ion) battery modules and packages for large-scale commercial electric vehicles (EVs). The company focuses on the short and heavy long-haul transport markets.
From a technological and addressable market perspective, there is a lot to like about Romeo. The company claims that its flagship model Hermes Li-ion has the highest energy density on the market, at least 30% higher than competitors. If it’s legit, it’s a big deal: that implies greater transport range and better acceleration than its competitors.
Remember the No. 2 characteristic of EV stock I talked about earlier – predictable story?
Well, the EV battery room promises hockey stick growth. The addressable market for commercial vehicle electrification is: estimated at about $665 billion. Several forecasts suggest that demand is expected to increase from 80x to 100x by the end of 2030. That presents a huge market for both EV manufacturers and power solution providers. And there’s EV behemoth Tesla, whose CEO Elon Musk notes that by 2030 the market will need a battery capacity of 10 TWh for electric vehicles and an additional 10 TWh for energy storage.
That is quite a lot. For anyone doing the math, these numbers suggest global battery production for electric transportation alone should grow 100x from current levels.
Impressive partnerships … but little turnover revenue
Now for the bad news. Like many EV component companies, RMO’s revenues aren’t much to brag about right now. While the company claims more than $500 million in contracted revenue, lessons from the saga are on Lordstown Motors (NASDAQ:TO DRIVE) deserve caution. To its credit, Romeo has announced partnerships with big names such as auto parts supplier BorgWarner (NYSE:BWA) and industrial group Republic services (NYSE:RSG). RSG is investigating the conversion of electric garbage trucks with RMO’s battery technology. The problem is, none of these relationships have translated into revenue.
Like many EV companies, Romeo’s growth forecasts also look like a hockey stick. They range from a modest $9 million last year to an estimated $1.65 billion by 2025. Side note: that’s a CAGR of 1.063% over the next 5 years. In theory, Romeo’s focus on commercial trucking would be ideal for target audiences such as electric semi-truck manufacturers Nikola (NASDAQ:NKLA), workhorse (NASDAQ:WKHS) and Hyliion (NYSE:SHELF), among other things. Sadly none of these EV truck makers got it meaningful traction.
Highly discounted valuation reflects legitimate questions
At about $7, RMO is trading at a 30% discount off the $10 IPO price for the $10 Special Acquisition Company (SPAC). At 1x 2023 sales, RMO is also trading at a big discount over its EV peers, but it is important to realize that sector valuations are very distorted at the moment. (See EV Attribute No. 3).
Most players in the EV space are still generating minimal or mostly negative EBITDA. They do this while trading at unwarranted price-to-sell multiples. For instance, ChargePoint (NYSE:CHPT), which offers EV charging station services, is trading at a whopping 11x forward sales. (Footnote: CHPT is on my list of stocks to sell; shares have fallen 18% since my sell recommendation, versus a 5% gain for the S&P 500 over the same period). Despite the apparently discounted valuation, Romeo’s disappointing earnings results and legitimate concerns about the company’s market potential are good reasons to sit on the sidelines for now.
I’d consider making the name more constructive (as a long-term story) in a further pullout.
Reader’s question of the week: Lidar: What is the tea?
From the article “Chat by the fire: It’s time to meet Lidar’s biggest rule breaker”
“I see more and more lidar companies claiming that they are the smallest, cheapest and have the best specs. But why is no one talking about Microvision’s (NASDAQ:mvis) A sample Lidar currently being tested? Their solid-state Lidar is believed to be best-in-class and is based on their groundbreaking MEMS-based technology. What do you think?”
Indeed, Microvision (NASDAQ:mvis) is once again red hot, up 163% year-to-date. I admit it was a bumpy ride, as I’ve been a follower (and shareholder again and again) for a long time. Since I last wrote about Microvision in April, the company has completed its long-range Lidar sensor A-sample hardware. Sumit Sharma, CEO of Microvision, has indicated that the company may be for sale. And with a $20-$23 million burn rate eating up cash, it’s hard to tell if Microvision has enough cash in the bank to get its A-sample into full production mode. The company will also need to find a legitimate strategic partner. That said, it’s definitely worth revisiting to get a better understanding of what’s going on here.
Sumit, let’s talk. Stay tuned.
Your comments and feedback are always welcome. Let’s continue the discussion. Email me at firstname.lastname@example.org.
At the date of publication, Joanna Makris had no (direct or indirect) positions in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to the InvestorPlace.com Publication Guidelines.
Joanna Makris is a market analyst at InvestorPlace.com. Joanna is a strategic thinker and fundamental investor in public equities. She has more than 20 years of experience on Wall Street in various segments of the technology, media and telecom sectors at several global investment banks, including Mizuho Securities and Canaccord Genuity.
Click here to follow her top trades of the week, where she sheds light on market psychology and momentum, while using her in-depth knowledge of fundamental analysis to deliver event-driven trading strategies.
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