Lordstown Motors May Only Be the First Domino to Fall in the EV Sector

Lordstown Motors (NASDAQ:RIDE) stock is becoming a cautionary tale for many investors in electric vehicle (EV) stocks.

RIDE stock is down almost 50% in 2021. And that was the case before the company announced that its “backlog” of pre-orders do not represent binding commitment.  

That announcement came on the heels of top executives leaving the company. The departure of chief executive officer Steve Burns and chief financial officer Julio Rodriguez resigned immediately.

No reasons were given for the resignations. However, the news was just the latest blow for a company that has faced a series of self-inflicted wounds.  

Many electric vehicle (EV) companies went public via a SPAC in 2020. SPACs are inherently risky because they aren’t subject to the same scrutiny as companies that go public via a traditional initial public offering (IPO).  

Lordstown Motors consistently made claims to reassure investors that they had a pipeline of pre-orders that would keep their manufacturing pipeline humming into 2022. But it turns out that many of these pre-orders weren’t binding commitments.

This is a concern I have voiced about many EV companies. However, in many cases, the companies have clearly acknowledged that its pre-orders are not binding.

The pre-order issue is one that investors must look at closely with other EV manufacturers who are using pre-orders as a way to entice investors.  

Trust Is a Fragile Thing  

I can’t say that the stock has no future. For example, look at Luckin Coffee (OTCMKTS:LKNCY).

In April 2020 the company admitted to fabricating orders. That was after denying doing the same just a few months earlier. 

For that, the stock was delisted for a period of time. When the company began trading again it has since filed for bankruptcy. Yet as the company is making plans to emerge from bankruptcy, LKNCY stock is up 130% in the past 12 months. 

Myself, along with several of my InvestorPlace colleagues pounded the table that Luckin would have to earn a lot of trust. So if RIDE stock bulls are looking for a template, they can look at Luckin.

However, that company had revenue prior to acknowledging its inflated sales. Lordstown Motors does not. And let’s face it: a cup of coffee is not the same as an electric vehicle. 

Plus, at this point, there is no danger of RIDE stock being delisted. However, trust is a fragile thing and it would appear that Lordsown faces the dubious task of building that back. Maybe a better comparison is with Nikola (NASDAQ:NKLA). 

Hitting the Reset Button 

Lordstown is telegraphing its next move. It will need to raise capital somehow, some way, and there could be further selling pressure on the stock if Burns (its largest shareholder) were to sell shares.  

But taking a deep breath, investors can now make their assessment of Lordstown Motors based on what it is and not what they may have wanted it to be.

I suppose it’s possible that RIDE stock may get caught up in a Reddit-fueled rally as short interest is over 30% of the stock’s float as of this writing.  

If that were to happen, it’s entirely possible that the company would be able to raise the money it needs without further diluting its stock. I’m not suggesting that should happen, but it’s a story that we’ve seen before.  

The Lesson of RIDE Stock 

Anyone that understands the phrase “a bird in hand…” understands that it means you actually have the thing that you need in hand.

The lesson of Lordstown Motors is one that every pre-revenue electric vehicle company is going to have to address. Pre-orders in many cases are not binding and that means all revenue projections made by those companies must be taken with a shaker full of salt.  

Or, since I started this article with an idiom, I’ll end with one as well.  

Fool me once, shame on you; fool me twice shame on me.  

On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines. 

Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.