Equity investing is not easy and can be time consuming if you want to build your own portfolio with solid individual stocks. While Warren Buffett has been an advocate of index investing for the layman, it is impossible to ignore the possibility of generating market-beating returns by curating and owning a portfolio of high-quality growth stocks.
However, investing in growth companies is easier said than done. Due to high valuations, these companies are volatile and grossly underperform the broader markets in a bear run. For example, while Amazon’s (AMZN) stock has returned a staggering 190,000% since it went public back in May 1997, investors would have not made any money between December 1999 and October 2009 if they invested in the e-commerce giant before the dot com bubble.
Investors need to identify companies that have a strong product portfolio, a repeat customer base, a strong management team, and rapidly expanding markets in order to benefit from sustainable returns in the long-term.
Right now, companies part of the fast-growing electric vehicle (EV) space have come to the forefront of investors’ attention. The shift to clean energy is inevitable, which makes EV stocks attractive from a long-term perspective.
In the last year, several EV stocks including Tesla (TSLA) and NIO (NIO) crushed the broader market as investor sentiment remained strongly bullish. Let’s take a look at Romeo Power (RMO) another EV-based company to see if the stock will follow in their footsteps and soar in 2021.
Romeo Power is valued at a market cap of $2.3 billion
Romeo Power went public as a special purpose acquisition company (SPAC) in October 2020 at a price of $10.50. It touched a record high of $38.90 in December 2020 before losing over 50% in market value to currently trade at $16,89 per share and the stock is currently valued at a market cap of $2.3 billion.
Romeo Power was founded by a team that previously worked in highly innovative companies such as SpaceX and Tesla. RMO doesn’t manufacture EVs, but rather its goal is to make the best EV battery packs in the world, targeting the commercial vehicle market.
One study, by consulting company Roland Berger, states that Romeo’s battery packs are industry-leading in terms of GED (gravimetric energy density). The GED measures how much energy a system contains compared to its mass.
Romeo Systems now has over half a billion dollars in contracted future revenue and another $2.2 billion in advanced negotiations. The addressable market in this space is $225 billion for commercial vehicles in the U.S. and Europe. For the global market, the TAM stands at a vast $665 billion, indicating enough growth drivers for the company.
Romeo Power has to tick multiple boxes and win investor confidence
Romeo Power stock could outpace its EV peers in 2021 if it manages to meet or beat Wall Street consensus estimates. However, analysts expect the company to grow sales from just $10 million in 2020 to $139.65 million in 2021, a year over year growth of 1,300%.
Any miss in revenue or guidance will send the stock lower and there is a good chance for this to happen given the disruptive nature of the EV space as well as a rise in competition. A reason to remain wary of the stock at this price is its widening losses. While Wall Street expects a robust uptick in sales for 2021, Romeo’s loss per share is expected to rise from $0.31 in 2020 to $0.44 this year.
This company is in its infancy and has the possibility of becoming a great EV stock. However, at its current price, Romeo is a high risk/reward investment. So we recommend you exercise caution if you’re looking to invest in RMO.
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RMO shares were trading at $16.98 per share on Friday afternoon, down $0.73 (-4.12%). Year-to-date, RMO has declined -24.50%, versus a 4.66% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...
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