Shares of Romeo Power (NYSE: RMO) dropped over 11% after the company delivered a disappointing earnings report. The company was already projecting slower revenue growth due to the global chip shortage. However, investors seem to be alarmed by the extent to which the company missed.
The company reported negative earnings per share of 20 cents. That was 33% worse than the negative 15 cents per share that analysts had forecast. The top line was even worse. Romeo posted revenue of $926,000 which was well short of the forecasted $3.1 million. However, as RMO stock drifts further into the penny stock range, it looks like an investment that could reward opportunistic, risk-tolerant investors.
What is the Bullish Case for Romeo Stock?
Romeo Power is attempting to develop an innovative electric battery design for commercial vehicles, specifically Class 1 to Class 8 commercial trucks. According to Romeo Power, the company’s lithium-ion battery offers important benefits. For example, it is promising 25% energy density. This would mean vehicles would have to be recharged less often. When you consider that the nation’s charging infrastructure is still in it is infancy, this would be a benefit to fleet operators.
The second benefit of Romeo Power’s battery design is that the company says it will be hold optimal temperatures even in extreme climates. One of the limitations of current EV batteries is that they are ill-suited for the extreme heat or extreme cold that grips parts of the nation at different times of the year.
The company also gave investors more positive developments in its earnings report. First, it has a long-term supply agreement in place. Second, it continues to make progress to secure long-term cell supply commitment with several potential partners, including partners in the United States.
And the company announced that the company’s modules and battery packs have now eclipsed 750,000 miles of road testing.
Why is RMO Stock Dropping?
The short answer is concern about the prices of lithium. On the same day that Romeo Power reported earnings, the National Bureau of Statistics showed that the country’s output grew 6.4% year-over-year, far short of expectations.
China not only controls most of the world’s lithium supply but also is one of the largest consumers of lithium. So a slowdown in growth is causing concern that lithium stocks, in general, may be poor investments.
And when you consider that Romeo Power came to market via a SPAC and is in the volatile EV sector there are many reasons why risk-averse investors would pass on RMO stock.
RMO Stock Will Require Patience
For much of the last 12 months, many retail investors have jumped on (and sometimes off) the bandwagon of low-priced equities. That was the case with Romeo Power stock at the beginning of 2021. I liked the stock when it fell below $20 earlier this year, but I thought it didn’t have the revenue to justify the price.
As a penny stock, I believe RMO stock has a far more compelling story. But investors will need to have patience. After all, penny stocks are usually penny stocks for a reason. And that reason adds a risk premium. There’s no guarantee that commercial truck fleet operators will be as bullish about Romeo Power as I may be. And that means it could take some time for RMO stock to pay off.
But at less than $7 per share, RMO stock looks like it has more upside than downside. And analysts seem to agree. The opinion of four analysts is that the stock has an upside of over 90%. One analyst has lowered his price target for the stock from $15 to $12, but that is still more than 145% over the current stock price.
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