The success of Tesla Inc (NASDAQ:TSLA) sparked a rush of electric vehicle makers. One that received a lot of buzz was Lordstown Motors Corp (NASDAQ:RIDE), which went public through a 2020 SPAC merger. However, the excitement was short-lived as the company failed to secure an important government contract and release a working vehicle.
With the stock dropped below its initial offering price, is Lordstown Motors stock a buy?
It’s not a simple matter of pricing – the company gained the attention of the U.S. Securities and Exchange Commission, Department of Justice, and some U.S. Senators. Its Endurance full-sized pickup truck still hasn’t reached production, and the company is accused of making misleading claims about its preorder volume.
But Lordstown isn’t alone. EV companies like Nikola and Canoo are both under investigation by the DOJ and SEC, respectively. And it has the investment of major auto manufacturer General Motors Company (NYSE:GM).
Can Lordstown Motors turn things around for investors?
Lordstown Motors: Bird’s Eye View
Lordstown Motors designs and manufactures electric vehicles. The company was founded in 2018 by former Workhorse Group CEO Steve Burns and by March 2020 paid Workhorse $12 million and a 10 percent equity stake for licensing rights for its W-15 pickup truck. By the end of that year, Lordstown went public through a SPAC merger with DiamondPeak Holdings.
The company’s value was established at $1.6 billion upon going public. GM provided a production facility, and the future looked bright.
Its flagship vehicle is the Lordstown Endurance, an all-wheel-drive (AWD), all-electric pickup truck was expected to be released by late 2020.
But the past year’s economic woes pumped the brakes on these plans, and RIDE soon found itself the subject of regulatory scrutiny.
By June 13, 2021, Burns stepped down as CEO and from the board of directors. CFO Julio Rodriguez also resigned as the company dropped below its IPO price in the face of controversy. It started with a March 2021 report from short-selling investment firm Hindenberg Research hinting at misleading numbers and failed prototype development.
Lordstown Motors Financials Are Concerning
DiamondPeak Holdings raised $250 million from institutional investors like BlackRock by the time it merged with Lordstown. GM invested around $75 million, and approximately $500 million was raised by Goldman Sachs for the acquisition. By January 2021, Burns reported 100,000 serious orders for the company’s Endurance truck.
In the first quarter of 2021, the company’s net income was a disappointing -$125.21 million loss. The company still holds over $550 million in cash on hand, but its operating income of $106.21 million for the quarter means its runway is relatively short.
To make matters worse, regulators and legislators are starting to zero in on Lordstown due to production delays and a perceived inability to fulfill its business commitments. The team responded by renewing its commitment to turning Ohio into an EV hub, a path that earned it the GM investment in the first place.
Does GM Own Lordstown Motors?
General Motors (GM) has a relatively small stake in Lordstown Motors, owning 7.5 million shares of the beleaguered startup. The company spent $75 million on this investment, which some analysts believe may not even last through to the end of the year.
However, GM may not lose too much from a Lordstown bankruptcy. It sold a 6.2 million-square-foot assembly plant facility to Lordstown in 2019, which is a major part of its stake. If Lordstown were to go bankrupt, there’s a good chance GM could repossess the factory in the liquidation.
Even losing its entire investment won’t hurt the car giant too much, but it could hurt retail investors.
Why Did Lordstown Motors Stock Fall?
Despite having all the pieces seemingly in place, things started falling apart by 2021.
Oshkosh Defense beat out Workhorse for a lucrative 10-year contract with the US Postal Service. Media buzz around the deal helped to prop up share prices over $30.00 per share for a short time, at which time many insiders unloaded their shares.
Over $11 million in stock sales took place heading through the beginning of 2021. Production delays stacked up, and rumblings began spreading that the company could be in financial trouble.
Analysts are scrutinizing whether the company can deliver on its commitments, and that has Wall Street pessimistic on the prospects for RIDE shares.
Is Lordstown Motors Stock A Buy?
Lordstown Motors is trading below its IPO price, and that offers a second chance for investors to get in at a low price. Of course, you may not want to take the opportunity if the company isn’t destined to survive and scale. And that’s what has investors so worried.
If you believe the company can complete its Endurance and ramp up production, it’s a steal at current levels. But it’s impossible to ignore the looming risks.
The Elephant In The Room: Cash Burn
Lordstown Motors is burning through cash with bad news coming out of its R&D department.
If it can’t produce a working vehicle by year end, there’s a good chance the delays won’t be accepted well by the general public nor the regulatory agencies watching the situation.
It’s not the only one – buzzy EV startup Nikola (NKLA) was also targeted by Hindenburg Research as a possible fraud. At this point, the battle for EV supremacy is looking more like a race to the bottom as even Tesla struggles to maintain its market cap.
Is Lordstown Motors Stock A Buy? The Bottom Line
Lordstown Motors built a buzz in 2020 with investments from car manufacturing giant GM and a deal in place to make an electric RV with Camping World. It was also in the running for a lucrative USPS contract to rebuild its fleet over the next decade. But by mid-2021, it seems like all of this fell through and the hype deflated.
The company is being investigated by the SEC, DOJ, and local politicians trying to determine if it’s a scam. That’s not a good sign, and the stock price is suffering because of it. At this point, investors are stuck in a “boom or bust” mode, in which the company either makes a big hit soon or dies trying. Invest with caution.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.