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There aren’t many people, let alone investors, who wouldn’t have wanted to get into Tesla (TSLA) a decade ago or even a few years ago, while market analysts and the conventional wisdom was that they’ll be close to bankrupt and not be able to sell the amount of electric vehicles they are selling today.
I believe that Lordstown Motors (NASDAQ:RIDE) is one of those candidates for 2022. There certainly are hurdles the company will face, most notably the established presence of companies like Tesla and other automobile companies, some of which have opened their first manufacturing plant over 100 years ago.
But given the fact that the company has reached a deal with Foxconn (OTCPK:FXCOF) to help with raising capital for mass production of their flagship light pickup truck the Endurance – the prospects of the company meeting their already slimmed down delivery estimates is relatively high, and thus I believe the company’s potential is vast relative to its current valuation.
What’s The Deal?
The premise here is quite simple. Market experts expect the electric pickup truck market to sell around 25,000 vehicles in 2022, dominated by the likes of the Ford (F) F-150 Lightning. But by 2030, the same market analysis calls for there being a demand for about 1 million electric pickup trucks, a 40-fold increase over the span of about 8 years.
My belief is that with the help of Foxconn, as well as them focusing solely on the pickup truck model without venturing into places unknown – they’ll be able to ‘pick up’ quite a decent market share of that 1 million vehicle demand as they ramp up production.
Expectations Are Conservative, Valuation More So
Right now, the company expects to deliver about 500 vehicles in 2022, significantly down from their initial expectations when announced back in June of 2021. This is a result of supply chain issues which have plagued all automobile manufacturers as a result of ports closing throughout the COVID-19 pandemic. Analysts and company projections are calling for 2,500 deliveries in 2023, followed by around 10,000 in 2024.
With a starting price of $52,500 per car, which is on the conservative side since most people who are spending that much on a pickup truck are likely going to go for upgrades, as we’ve seen with Tesla cars and others. This brings the following revenue projections for the next 3 years, where I assume a $2,500 reduction in price each year to account for efficiency, as stated by the company:
| Year | Deliveries | Unit Cost | Exp. Revenue |
| 2022 | 500 | $52,500 | $26.3 million |
| 2023 | 2500 | $50,000 | $125 million |
| 2024 | 10000 | $47,500 | $475 million |
(Source: Company expectations / Author calculations)
For the following years, assuming an ~8% market share through 2030 means that the company will have the potential to deliver just shy of 80,000 vehicles a year in 2030, which with an average price of around $50,000 comes out to about $4.5 billion in revenue per year. This is assuming the company does not launch any other vehicles throughout that time period, an assessment which I believe is silly but for the purpose of this investment thesis I will assume.
Before heading in to discuss valuation, which is the reason we’re all here today, it’s worth noting that these expectations and assessments are not without risk, and significant risks at that, given how crowded the electric vehicle market is.
Reasons To Worry
There are several reasons to worry about the prospects of success, most notably from competitive pressures like I mentioned earlier in the article from established automobile manufacturers who are already introducing new all-electric vehicles – including Ford with their F-150 Lightning which is the closest rival to the company’s purposed Endurance light pickup truck.
The second reason to worry is cash. The company started off strong with around $630 million after its IPO but then has been using that cash to ramp up hiring and manufacturing plans and now only holds $204 million in cash. This can potentially be enough for them to get started as we await money coming from potential pre-orders and other investment in the company but there is a risk that they won’t be able to effectively scale up production, even if demand if high.
There’s a third, albeit less significant risk associated with geopolitical pressures which has been proven in the past to be important: tax credits. From administration to administration in the United States, the $7,500 tax credit for electric vehicles have been in and out of style and although this credit never stopped those who went for either the expensive Tesla cars or the more economical cheap versions, they do have an impact on the transition to all-electric vehicles for those contemplating a new vehicle purchase, given the higher cost. With an elimination of a $7,500 tax credit, the pickup truck categories can be hurt quite significantly, especially with the lower-cost F-150 Lightning and what’s sure to be additional makes and model on the market by that point in time in 2025, 2029 or beyond.
Valuation Presents Immense Opportunity
The beauty of my belief in the company is that it’s, for now, solely based on the Endurance sales and not on any future vehicles they may launch with or without Foxconn, which means the likelihood of them outperforming these 2030 expectations are quite high, giving us room for error if sales of the Endurance alone fall short.
Most automobile companies like Ford are currently trading at around a 0.3x multiple of price to sales. I’m using price to sales multiples since it’s difficult to determine what the company’s profit structure will look like moving forward given the complexities of ownership with Foxconn.
Although currently the company’s price/sales ratio is high, around 4x for 2023, the exponential growth is justifying such a high valuation, given the comparative growth relative to companies like Ford. However, the company is currently trading at around 0.1x price to sales once it reaches the $4.5 billion in sales sometime before 2030.
This means that, in a conservative estimate, the company has the potential to be fairly valued at around 3x its current valuation, or around $6.00 per share.
Conclusion: Risky, But Worth It
There certainly are much higher risks associated with Lordstown Motors than traditional automobile companies, as well as the overall. But given that they are only now beginning to ramp up production with the new Foxconn deal, it’s evident that their current price is not justified and should be trading quite a bit higher.
With a 300% potential return over the next 8 years, I believe that Lordstown Motors will easily outperform other established automobile manufacturers as well as the overall market, which is why I am highly bullish on the company’s long-term prospects.
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