Why Romeo Power Missed Wall Street Estimates -- and Why It's a Warning for SPAC Investors

Romeo Power (RMO), a start-up making battery packs for electric trucks and buses, said in a preliminary earnings release that it generated $9 million in revenue in 2020 and that it expects revenue of between $18 million and $40 million in 2021. 

Both of those numbers fell short of Wall Street's expectations. Crucially, they also fell short (far short, in the case of 2021 expectations) of the projections made by Romeo Power in November, ahead of the merger with a special-purpose acquisition company (SPAC) that took it public in late December. 

Romeo Power had told investors to expect huge revenue growth

Like many of the new electric-vehicle-related companies, Romeo Power went public via a merger with a SPAC, in this case RMG Acquisition. Going public via a SPAC merger offers an advantage to the company: It's allowed to present projected future financial results to investors, something that's not permitted in a traditional initial public offering. 

In a presentation to investors in November, Romeo and RMG Acquisition made some projections that already look, shall we say, rather optimistic. Among them:

• $11 million in revenue in 2020 (remember, this was in November)
• $140 million in revenue in 2021
• $412 million in revenue and a positive 10% gross profit margin in 2022
• $1.65 billion in revenue and a 32% gross profit margin in 2025

That's the kind of growth that investors in small companies love to see. But it was just a projection. The company missed its own 2020 revenue projection by $2 million, or 18% -- a big miss from the guidance it provided halfway through the fourth quarter. And even at the high end of its new revenue guidance range for 2021 ($40 million), it's far short of the $140 million it projected in its investor deck. 

There's a reason that companies aren't allowed to show projected future financial results to investors in traditional IPOs, namely that it's easy to give inflated, unrealistic numbers. 

Is that what happened here?

In December, Romeo Power announced a $234 million deal to supply battery packs to electric-bus maker Lion Electric. Image source: Lion Electric.

What Romeo Power said about its reduced guidance for 2021

The company didn't hold a conference call for analysts and journalists after it released its earnings result, presumably because it was "preliminary." But in a statement, it blamed a shortage of battery cells for its sharply reduced revenue guidance: "Regarding our 2021 outlook, we expect that our near term production and revenues will be constrained by the shortage in supply of battery cells. As the electric vehicle industry has experienced massive acceleration in recent months, the demand for raw materials and cells has outpaced supply."

But, it said, it doesn't expect these "short-term cell constraints" to lead customers to cancel orders. Those orders include a $234 million contract with Canadian electric-bus start-up Lion Electric, itself preparing to go public via a merger with SPAC Northern Genesis Acquisition (NGA). 

The takeaway for investors: SPAC deals have added risks

It's possible that a shortage of cells really is holding Romeo Power back in the short term and that it will continue to execute on its plan and succeed over the next several years. But it's also possible that it set investors' expectations too high -- and that it won't be able to deliver on the growth it promised in November. 

Investors in other newly public electric-vehicle stocks should take this as a warning. 

Romeo Power's 2020 earnings: The raw numbers

Data source: Romeo Power. 

As of December 31, 2020, Romeo Power had $292.4 million in cash and equivalents available and $1.1 million in long-term debt.