Arrival (NASDAQ: ARVL) shares first appeared on my radar a couple of months ago. In March, the electric vehicle (EV) manufacturer went public through the merger with a special purpose acquisition company (SPAC). I noticed the stock a few months later when digging into EV technologies.
While the company is listed in the US, it’s based in the UK. It’s also setting up one of its two initial factories over here.
Like peer NIO, Arrival is approaching EVs with a different mindset. NIO introduced interchangeable battery packs to extend vehicle range, and Arrival is trying to reduce production costs with so-called micro-factories.
These factories require less upfront capital investment, which means the company has lower capital demands than its peers. Indeed, setting up a vehicle manufacturing facility can be incredibly expensive. And the costs of the facility can make it difficult for a producer to earn a sustainable profit.
For example, Tesla has only just reached profitability as it’s been spending billions on new factories to reduce costs and increase output. Its gigafactory in Nevada cost $5bn, and a facility in Europe will cost another €4bn. Tesla can afford this. Most of its smaller competitors can’t.
Amazingly, Arrival reckons its facilities will cost around $40m. That could give the company a tremendous competitive advantage in the EV arms race.
The company has streamlined the entire production process. To reduce costs, there’s no stamping or welding in the production process. Vehicles are made out of a composite material, which can be coloured to remove the need for painting. The vehicles are also lighter.
Unlike many other early-stage companies, Arrival already has customers. It has received non-binding orders and letters of intent for 59,000 vehicles. Based on these targets, management reckons the company can generate $1bn of sales by 2022. With a low cost of production, profits could follow quickly.
The outlook for Arrival shares
All of the above suggests to me that Arrival shares do offer something many stocks in the space don’t. The company seems to have a cost edge over the rest of the market, implying the firm could become profitable before many of its peers.
Having said all of the above, the business will have to overcome some significant challenges during the next few years. For a start, competition is growing in the EV market. Fighting off deep-pocketed competitors like Tesla isn’t going to be easy.
As such, I think investors like me should take the company’s sales targets with a pinch of salt. There are also funding concerns to consider. Until the group’s earning cash, it’ll have to rely on the kindness of strangers (investors) to support production and capital spending.
Despite these risks, I think the firm’s technology is exciting. That’s why I’d buy Arrival shares for my portfolio today as a speculative growth investment. This should allow me to profit from any upside and limit losses in the worst-case scenario.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended NIO Inc. and Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.