Electrameccanica Stock Is Overheated After This Massive Run-Up

Electrameccanica Vehicles (NASDAQ:SOLO) which is up 307.59% in the last six months may just be riding the EV wave. Still, whether SOLO stock has what it takes remains to be seen.

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Tesla (NASDAQ:TSLA) has a market cap of $578.21 billion at the moment, translating to shares trading at 253.15 forward non-GAAP price-to-earnings. And it’s just not Elon Musk’s billion-dollar baby that’s having a field day.

I’ve covered SOLO stock a few times. Suffice it to say, I believe it’s a unique concept in an overcrowded EV space. A Canadian designer and manufacturer, its flagship vehicle is the purpose-built, single-seat EV called the SOLO. The novel coronavirus pandemic makes it an interesting play in my book, largely because it’s a single-seater.

People are trying their best to avoid traveling in crowded places. They also do not want to travel in vehicles that have a lot of passengers. That’s why you see bookings for ride-hailing giants like Uber (NYSE:UBER) and LYFT (NASDAQ:LYFT) nosediving.

However, since I last wrote on SOLO stock, the EV maker has rewarded investors handsomely. After rising so substantially, I believe it’s time to let this stock cool off a bit before buying in again.

A Closer Look at SOLO Stock

My fellow InvestorPlace colleagues have outlined several risks surrounding the company and its business model. I concur with their assessments and also feel that the stock’s enormous rise in the last month doesn’t match the company’s fundamental strength.

With profitability still miles away and uncertain demand for its products, SOLO stock trades at unrealistic levels. So, without further ado, let’s look at some of the reasons why you should let Electrameccanica fly solo for a while.

One of the principal reasons why SOLO stock skyrocketed this last month is because of its better-than-expected earnings report and the Tesla-led automotive revolution. However, like all financial bubbles, EV stocks are bound to burst sooner rather than later.

Nio’s (NYSE:NIO) recent history shows the risks of investing in electric-vehicle stocks. In March, the company issued a warning that it may not continue as a going concern. Luckily, the Chinese government bailed it out.

This is not alien territory for the EV space. Henrik Fisker’s first EV company, Fisker Automotive, filed for bankruptcy in 2012. He is back, heading Fisker (NYSE:FSR), which went public in a SPAC reverse merger with Spartan Energy Acquisition. Tesla has also flirted with bankruptcy twice after going public in 2003. long story short, there have been many also-rans in this space, and since the market is still growing, there will be plenty of hiccups in between.

Interesting Concept but Uptake Is up in the Air

That brings us to SOLO stock. As I said, the company is unique in terms of concept. I can understand why people are excited. In the coming months, the SOLO EV will finally hit the consumer market.

Plus, even though the company does not compare with the bigger fish in the sector, it did deliver a decent quarter after a while. Sales came in at 330,000 CAD, an increase of 65% year over year. With deliveries coming in next year, estimates are for revenues of $16.73 million for fiscal 2021, a 4,361.11% increase.

Those projections might seem aggressive, but it’s not unimaginable that the company manages a healthy amount of sales next year.

But certain question marks exist regarding the future of the business. Firstly, if you buy a SOLO, you cannot take advantage of up to $7,500 in credit, usually reserved for a four-wheeled electric vehicle. That’s because the vehicle is categorized as a motorcycle by the federal government.

And while I admit that it’s an interesting concept, time will tell if SOLO takes off in the U.S., where trucks and SUVs rule the roost. America’s obsession with big cars is legendary. Granted, it’s such a large market that you are bound to find a niche segment to exploit.

Its Time You Check Out

After the stock has more than doubled in the past month, I no longer consider SOLO stock as a value play. At a market cap of $506.89 million, you could argue that it’s cheaper than some of the bigger names out there like Tesla and NIO. But while these companies are overvalued, they are reporting steller delivery numbers and have an enviable production capacity.

SOLO sports a novel concept, and I’m glad people made money off their investment. But I always appreciate fundamental strength over momentum trading.

Electrameccanica will start deliveries of its SOLO single-seat three-wheeler in the next few months, and at $18,500, it’s certainly attractively priced. But time will tell if it can create a niche to exploit.

As I mentioned earlier, Americans prefer their sedans, SUVs, and trucks on the large side. Plus, shares have returned 198.1% year-to-date. How much more can they climb?

SOLO stock is a sell for me.

On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.