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The ongoing volatility in U.S. stock markets has spelled serious trouble for many growth stocks, especially in the electric vehicle (EV) space. While the wider markets are still up substantially on a YTD basis, many startup EV companies have fallen steeply, and some are now trading at their all-time lows.
The SEC defines penny stocks as those shares that trade below $5. With a few exceptions, like Fisker (FSR), almost all the EV companies that went public through special purpose acquisition company (SPAC) mergers are now penny stocks.
The euphoria towards EV startups has clearly evaporated, and while most formerly high-flying names have faded into oblivion, some - like Lordstown Motors (RIDEQ) - have even gone bankrupt. The churn in the EV industry might continue for quite some time amid rising competition, price wars, and tough financial market conditions.
That said, even though some startup EV companies of the current group might not be around in a couple of years, I believe Lucid Motors (LCID) and Polestar (PSNY) are two penny EV stocks that risk-tolerant investors can consider. Here's why.
Lucid Motors Turned a Penny Stock
Yesterday, Lucid Motors stock fell to an all-time intraday low of $4.87 - and while it managed to close marginally above $5, it is now effectively an EV penny stock. The Peter Rawlinson-led company, which was once hailed as a “Tesla-killer,” went public in a hyped SPAC merger in 2021, which was the biggest such deal at that time.
Back then, not many would have imagined that Lucid Motors – whose market cap surpassed $90 billion at the peak – would ultimately join the ranks of EV penny stocks. However, a broad-based slump in startup EV stocks, and concerns over the demand for Lucid Motors cars specifically, have taken a toll on LCID.
Lucid Motors' market cap is just around $11.5 billion now, which is even below that of VinFast (VFS) – the Vietnam-based EV company that also opted for the SPAC merger route to go public in August.
To be sure, VinFast still looks like an overvalued EV stock, despite having fallen to all-time lows of its own - and in the past, I have noted that Lucid Motors, too, looks overvalued relative to some of the EV peers. However, with the stock now falling below $5, I believe Lucid Motors is worth a look for investors for the following reasons.
Why LCID Looks Like a High-Risk Buy
To begin with, Lucid Motors has a good product proposition. MotorTrend awarded the Car of the Year 2022 award to Lucid Air, and said, “The win affirms Lucid Air as the new EV benchmark, with the most advanced electric powertrain available today — technology wholly designed, developed, and manufactured in-house.”
Luxury carmaker Aston Martin has also partnered with Lucid to buy electric motors and batteries, which provides credence to Lucid Motors’ claim that it offers a world-class product.
Also, after two rounds of capital raise over the last year, Lucid had a total liquidity of $6.25 billion at the end of June. While the company might still need to raise more capital, it does not have any pressing need to do so anytime soon. Lucid Motors also has a literal “Saudi backstop,” and over the last year, the oil-rich nation’s sovereign wealth fund has plowed $3 billion into the company.
Lucid Motors has also opened its manufacturing facility in Saudi Arabia, and is set to launch its Gravity SUV next year. The company will unveil the model next month, which could be a short-term catalyst for the stock. Overall, I believe that LCID might still drop somewhat from these levels, but it is among the EV penny stocks that could be worth the risk.
Polestar Is an EV Penny Stock Worth Considering
While Lucid Motors has just entered into the penny stock category, Polestar has traded below $5 since early March. Notably, while Polestar also went public through a SPAC merger, it was a rare exception in that the company was already selling cars before going public - unlike other startup EV companies, which were yet to start selling cars at the time of their listings.
Polestar currently sells Polestar 2 and Polestar 3 models, and deliveries of the Polestar 4 SUV are set to begin in Q4. The company has delivered around 41,700 cars in the first nine months of 2023, and is optimistic about meeting its delivery target of between 60,000-70,000 vehicles for the year, with gross margin hitting 4%. Polestar hopes to eventually turn profitable in 2025, which (if achieved) would be a major milestone for the company.
One concern about Polestar is its weak balance sheet, and it might need to raise capital to fund the cash burn. However, the company is backed by Volvo (owned by Chinese automotive giant Geely), which also has a loan facility for Polestar, and might consider further supporting the company.
In terms of valuation, Polestar trades at a next 12-month (NTM) enterprise value-to-sales multiple of 1.93x and has a market cap of around $5.6 billion, which looks reasonable for the company.
All said, it's worth noting that penny stocks tend to be quite volatile, and only investors who can stomach the higher risk should consider investing in them. However, in the current EV spectrum, I believe Polestar and Lucid Motors are two penny names worth considering, and could be potential multi-baggers if they can execute well and deliver on the projections that they have made.
On the date of publication, Mohit Oberoi did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
