Insights

Why Lordstown Motors Tanked 23.7% in June

What happened

Shares of Lordstown Motors (NASDAQ: RIDE) dipped 23.7% in June, according to data from S&P Global Market Intelligence. The pre-revenue electric-vehicle maker saw its share price dip along with the broad market, nervousness around unprofitable companies, and the continued popping of the electric-vehicle bubble. As of this writing, shares of Lordstown Motors are down 85.5% in the past year.

So what

There wasn’t any big direct news that came from Lordstown Motors this month, but investors decided to sell off shares anyway. One factor was probably the dip in the Nasdaq 100 Index, which was down almost 10% last month. On top of that, many investors are worried about unprofitable technology companies right now, especially with the Federal Reserve raising interest rates. Lordstown Motors isn’t generating any revenue, let alone positive cash flow, so it could be harder for the company to raise more money with tighter financial conditions across the corporate world.

Image source: Getty Images.

Another factor hitting Lordstown Motors stock is the popping of the electric-vehicle bubble. Many companies like Lordstown went public over the past few years to hop on the electric-vehicle trend, even if they didn’t have viable business models. Now, with the companies not producing what they said they would, things have gone south. Electric Last Mile Solutions, which just went public recently, is already filing for bankruptcy protection. Given that Lordstown doesn’t generate revenue right now and misrepresented the number of pre-orders it had to shareholders, causing its CEO to resign in shame, investors are likely to be nervous about the potential for bankruptcy at more of these electric-vehicle companies.

Also, there are fears that a consumer-based recession will hit the U.S. economy. If people are spending less money on nonessential items, that could mean lower demand for high-end electric vehicles of the kind Lordstown Motors plans to produce. Once its cars finally start coming down the line in the next year or so, it could prove to be terrible timing.

Now what

No matter how far it falls, it’s best to stay far away from Lordstown Motors stock. The company has only $200 million in cash on its balance sheet, with no revenue. Burning almost $100 million a quarter, management is going to have to raise cash soon.

With no operating history and a low stock price, the company will require either high-interest-rate debt or a heavily dilutive stock offering. Both choices will be terrible for creating shareholder value over the long term and is the key reason investors should avoid Lordstown stock right now.

Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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