Lordstown Motors - Risk/Reward to the Max

Matthew Chapter 7 verses 13-14 state, "Enter through the narrow gate. For wide is the gate and broad is the road that leads to destruction, and many enter through it. But small is the gate and narrow the road that leads to life, and only a few find it."

Today, I find myself thinking more and more about this verse. It's hard to think about the subject of eternity and heaven and hell, but they are real. God's Word clearly tells me that it is much more difficult to get to heaven as the cares of this world look to trip me up. Jesus also tells me to pick up my cross and in order to find my life, I must lose it. I find that every day is a challenge to follow and serve God. What I do every day must be scrutinized against God's word.

I really though this Bible verse would be a great transition for a write-up on Lordstown Motors (RIDE). The premise is simple, Lordstown is on the cusp of a major risk/reward set up and one way or another, the outcome will equate to leading to life or destruction.

Lordstown has been on quite the ride the past couple of weeks. I'll keep this fairly short as there's been a lot of analysis and review on the events that have occurred. But it is important to continue to create transparency regarding the misinformation and manipulation that has been occurring lately. And to consider the risk/reward proposition.

First, Lordstown reported its Q1 2021 earnings back on May 24th. The Stock Price, SP was above $11 going into the report and dropped back towards $8 immediately afterward. From this low, the SP rallied aggressively to nearly $16 on Tuesday of this past week. Before the market closed, the SP collapsed back towards $9, only to reverse course finishing the week at $11.40.

The correlation with the discussion between Lordstown management back in May and the recent manipulation through public news sources this past week are telling and the core driver of the SP volatility. Essentially, Lordstown management provided full transparency regarding the company's need to raise more capital and the impacts associated with Start of Production, SOP, targets for 2021 and next year.

However, in a deceptive move, news publications took management's statements and created sensational headlines that Lordstown would be unable to continue operations through the year, equating to bankruptcy being a probable scenario. This was timely orchestrated as Lordstown filed its 10-Q statement including a going concern section. Ironically, the next day, it was reported that Lordstown management was in discussions with potential options to raise more capital, which helped the SP get back above $11.

During the May 24th report, management made two clear statements. First, that the company would need to raise more capital to continue operating mid- and long-term. And second, that they were in negotiations to raise more capital including government loans and potential strategic partnerships. Once the updated quarterly filing was filed through the SEC, the following language was added:

The Company had cash and cash equivalents of approximately $587.0 million and an accumulated deficit of $259.7 million at March 31, 2021 and a net loss of $125.2 million for the quarter ended March 31, 2021. Since inception, the Company has been developing its flagship vehicle, the Endurance, an electric full-size pickup truck. The Company’s ability to continue as a going concern is dependent on its ability to complete the development of its electric vehicles, obtain regulatory approval, begin commercial scale production and launch the sale of such vehicles. The Company believes that its current level of cash and cash equivalents are not sufficient to fund commercial scale production and the launch of sale of such vehicles. These conditions raise substantial doubt regarding our ability to continue as a going concern for a period of at least one year from the date of issuance of these unaudited condensed consolidated financial statements.
To alleviate these conditions, management is currently evaluating various funding alternatives and may seek to raise additional funds through the issuance of equity, mezzanine or debt securities, through arrangements with strategic partners or through obtaining credit from government or financial institutions. As we seek additional sources of financing, there can be no assurance that such financing would be available to us on favorable terms or at all. Our ability to obtain additional financing in the debt and equity capital markets is subject to several factors, including market and economic conditions, our performance and investor sentiment with respect to us and our industry.

The key language here is looking well into next year from an operational perspective, and clearly offers management's strategies to alleviate any scenario where bankruptcy is the end result. While this information may be striking reading it in the 10-Q, it is completely redundant from the earnings report discussion in May, and of course, a substantial majority of investors likely did not listen or review this information.

These events continue to set Lordstown motors up for an extreme risk/reward opportunity. For those closely following the company, this has been the case since the Hindenburg Research short report and analyst negative commentary led to an extreme collapse from the February peak above $30 all the way down to just below $7.

Potential catalysts are on the short-term horizon. Lordstown will be hosting what it is calling Lordstown Week from June 21st through the 25th, where the company will be opening up its production plant to the media, customers, institutional investors, analysts, and the public to tour, test drive the Endurance, and get an entire perspective of the company, its core product, and operations. This is already a highly anticipated event that will allow for greater transparency. There will likely be many questions regarding updates for capital needs, but the focus will clearly be on perception and feedback for the Endurance and its performance.

As part of Lordstown Week, it is expected that the company will also reveal its electric camper product, among other potential product concepts. A positive reception to the Endurance and further product concepts will serve as an important catalyst during and afterward.

Clearly, raising more capital is necessary and will be huge upon successful completion. The company is in the process of potentially obtaining a government loan through the U.S. Department of Energy Advanced Technology Vehicles Manufacturing program. It's not entirely clear as to the amount, but it will likely be somewhere from $250 to $500 million if successful. It is my opinion that the company will likely need $750 million to $1 billion to get through the next 24 months. Regardless, any amount through a government loan will be very positive.

Lordstown is also speaking with potential strategic partners that could provide further capital through an equity stake. The company already has an investment stake from General Motors (GM), and is working with Camping World as well. If Lordstown is positioned to produce a successful pick-up truck earlier than most, GM may switch gears and further get in on the action, or other partners could be wooed. It is to this point that increasing orders for the Endurance may be an added trigger to get a new strategic partnership including the placing of capital needs.

Naysayers believe that Lordstown is in a fragile situation. This stems from the fact that companies like Ford Motor Company (F) and GM, among other traditional OEMs are looking to significantly ramp up electric vehicle production. As part of this, there is strong political will and competitive pressure to see Lordstown fail. Ford has made this clear with their marketing expose, while GM's commitment with Lordstown is no indication that the company will not compete directly. Unfortunately, the U.S. government today is not fully supportive of all electric vehicle companies succeeding. Politics is playing an increasing role in dictating outcomes, especially as the U.S. government will never forgive President Trump's attempt to decentralize the government's power, and President Trump was a supporter of Lordstown, as an American company in a state that he formerly won.

The clear risks for those thinking Lordstown is a poor investment option are the same catalysts that will propel the SP higher if the company can succeed. It's not that complicated, either Lordstown raises more capital and begins production in the fall, or the company sees further delays towards any progress and ultimately is unable to bring a product to market.

I don't typically get engaged in this type of risk/reward profile. But when it comes to the future and potential from the transition to electric vehicles, as an aggressive growth investor, U.S.-based newer entrants is where my focus is. I am not interested in any exposure to Chinese electric vehicle OEMs as none of the information provided by these companies is reliable, nor is the quality of product comparable to any U.S. company. I am not interested in investing in any U.S. or European traditional OEMs either as irrespective of the electric vehicle transition, I am of the opinion that none will see any sustainable financial improvement from prior years. And lastly, I am only interested in market makers and takers when it comes to aggressive growth opportunities and therefore, I am long companies like Lordstown and Lucid Motors (CCIV) and will be considering Rivian's public offering as well.

Despite no focus on this, traditional OEMs have plenty of risk from an investment perspective to transition all their makes/models to electric vehicles, while counter-balancing the cannibalization of existing vehicle technologies. Like many other sectors/industries, emerging growth plays with laser focus tend to have a stronger ability to navigate opportunities versus legacy peers. I recognize that the automotive industry is complicated and a big industry to disrupt. But these companies are also very bloated and do not have the top electric vehicle talent working for them at all corporate levels.

The next few months will be critical in determining Lordstown's success or failure as there isn't going to be any in-between. The optimistic scenario assumes that Lordstown raises the required capital and begins production later this year in the fall. I'm assuming that irrespective of this scenario that Lordstown will only produce a max of 1,000 Endurance trucks. Next year, I'm lowering production estimates to 25,000 for the optimistic scenario. I also am lowering the Average Selling Price, ASP, from the $52,500 initially to $50,000 next year. Assuming Revenue of around $1.3 billion off of 25,000 units and a modest 2% Operating Cash Flow, OCF margin, I am looking at a fair valuation of 5 times Revenue and 250 times OCF per share equating to a Stock Price, SP of around $32.

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