Romeo Power (NYSE:RMO), the LA-based electric battery maker for trucks closed its reverse merger at the end of December and has fallen ever since then. RMO stock is down 44% year-to-date and has dropped 13% in the last month.
Apparently, nobody likes it, even though it is in the EV space that the market favors. But that makes it attractive from a value standpoint, and RMO stock is a bargain.
Valuing RMO Stock
The SPAC merger (special purpose acquisition company) transaction was done at a value of 1.3 times enterprise value-to-revenue. But that was at $10 per share. Wednesday it hit $13.49, or 34.9% higher.
Therefore, RMO stock inherently trades today at 35% higher than 1.3 times EV-to-revenue. That puts it a valuation of just 1.75 times EV-to-revenue.
Romeo Power plans on announcing its Q4 and 2020 full-year earnings on March 30. Until then we have to rely on its presentation slides for most financial information.
For example, based on page 44 of the slide deck, Romeo Power will end up with $341 million in cash on its balance sheet. This is from a mixture of the blank check SPAC company cash held in trust for the reverse merger as well as the cash from the PIPE (private investment in public equity) deal.
As a result, the proforma enterprise value is $1.8 billion in market cap less $341 million in cash, or $1.459 billion. This is based on 133.4 million shares outstanding on page 44 of the slide deck.
But Romeo Power expects to make $229 million in revenue by 2023 and $547 million by 2024 (see page 43 of the deck). That makes its EV-to-sales multiple just 6.3 times in 2023 and 2.67 times in 2024.
By contrast, Ballard Power (NASDAQ:BLDP) is forecast to make $392 million in revenue by 2024 — less than Romeo Power — and yet it has a $7.3 billion market value. Compare that to RMO stock, which has a $1.459 billion market cap.
Moreover, Quantumscape (NYSE:QS), another electric battery company is not expected to make more than $285 million in revenue until 2026. However, it has a market value of $20.9 billion. That gives it a price-to-sales ratio of 79 times.
Therefore, even if we were to double RMO’s target value to $2.92 billion or $27.00 per share, it would still be undervalued. But this leaves it with a margin of safety.
What Analysts Say About Romeo Power
Cowen analyst Gabe Daoud has initiated coverage on RMO stock with an “outperform” recommendation and an $18 price target. That represents a potential gain of over 30% from today.
The analyst says that Romeo is downstream focused, with a focus on battery module and pack production for commercial vehicles. He contrasts that with QS which is upstream focused and on producing solid-state batteries for wide-scale applications in all EVs. He expects both companies to scale their production over the next several years, “enabling the electrification of vehicles to accelerate.”
In addition, he indicated that the company will be very profitable:
“Romeo should benefit from software-like margins, 50%+, on the roll-out of its Brain Machine Interface (BMI) offering which enables fleet managers to lower their total cost of ownership by optimizing battery usage.”
What To Do With RMO Stock
RMO stock is clearly worth more than its price today. Compared to Quantumscape and other peers, it is way too cheap. My initial value is that it is worth $27 per share, and the only Wall Street analyst covering it says it’s worth $18 per share.
Therefore, most investors might consider taking a stake in the company at these prices if they are interested in the electric vehicle sector and don’t mind the lack of profits. Moreover, as I pointed out above, RO stock is below its previous peak prices.
Look for RMO stock to double over the next two or three years. That would give investors a potential annual ROI of 25.9% over three years. That is a good return for most investors.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.