Electric vehicles hold promise as the future of transportation, but they're not yet ready to replace gas-powered vehicles. As they're expensive to build, we're not ready to have an EV in every driveway, despite the plans by some automakers to completely phase out their fossil fuel-powered cars over the next decade or so.

EV start-up Arrival (ARVL 150.00%) promised to be a different kind of electric car company. It said its vehicles would be affordable because its manufacturing model would be decentralized, using existing warehouses and factories to house less capital-intensive "microfactories." By bringing production closer to customers, it would help accelerate the mass adoption of EVs globally.

Reality, though, is a potent tonic, and already Arrival is pushing back its timeline for when a vehicle might roll off its assembly lines. Shares of the EV start-up have lost three-quarters of their value since it went public via a merger with a special purpose acquisition company (SPAC) in March, so let's see if it's worth taking a chance on Arrival and betting its blueprint for low-cost EVs is workable.

Electric vehicle plugged into charging station.

Image source: Getty Images.

The business of EVs

Arrival is focusing on the commercial transportation market of buses, delivery vans, and cars (especially for ride-hailing services) as a way to quickly scale up globally. It says it has developed five vehicle platforms for the different segments, and was initially intending to launch the Arrival Bus in the second quarter of 2022 and the Arrival van in the third quarter.

That has been delayed. After its third-quarter earnings report Arrival says its timetable is dependent upon its access to capital, because the amount it can acquire will determine whether it's working with tens of microfactories or hundreds of them. It also said "previous long-term forecasts from the merger should no longer be relied upon."

It withdrew its long-term guidance and now expects revenue to begin flowing in the second half of 2022, but it "expects significantly lower vehicle volumes and revenue in 2022" and won't reach full capacity until early 2023.

The question investors should have is about Arrival's capability to meet its new deadlines with the amount of capital available to it. It just diluted shareholders with two new stock and debt offerings, and that may still impose limits on how many microfactories it can eventually get up and running. More dilutive offerings may eventually be needed.

Rendering of the Arrival Bus.

Image source: Arrival.

Time to back up words with deeds

Penny stocks often talk a good game. They have big plans and industry-altering ideas, but never seem to have enough capital to bring them to fruition. Instead, investors see their stake in the business diminished over and over as insiders float more stock while cashing out their own stakes. It's the game plan pump-and-dump schemes are built on.

Arrival doesn't necessarily seem to be that sort of play, even if it follows some of the pages in the playbook. It has some important strategic partnerships in the industry, including with Hyundai Motor and Kia Motors; signed a memorandum of understanding with Uber for the development of the Arrival Car; and signed a vehicle sales agreement with UPS for an initial order of 10,000 electric vans and an option to purchase 10,000 more.

Of course, the deal is subject to cancellation at any time, and if Arrival continually delays production, UPS could back out of the agreement.

Arrival is also becoming more vertically integrated. It's bringing more of its battery production in-house, recently announcing a collaboration with Li-Cycle Holdings (LICY -8.22%) to produce lithium-ion batteries and avoid the supply chain constraints plaguing much of the industry.

Arrival will be refitting an existing warehouse in Charlotte, N.C., investing $11.5 million to build a battery module assembly plant in order to start production in the third quarter of 2022. 

Betting on a dream

Arrival is lot like vaporware at the moment, a product that's promoted but is not yet available because it's still just a concept, and an investment that still entails a lot of risk. Its deals are built around it being able to actually produce its vehicles, which it hasn't proved it's capable of doing at scale. In turn, that is tied to its financing capabilities, which may be constrained going forward.

It has resorted to much more conservative guidance, which is appropriate, but the diminished outlook means those grand growth projections are now much smaller in scope. Arrival, though, maintains that its low-cost operations will still allow it to generate positive gross profit despite the lower product volumes.

It's difficult to recommend Arrival stock as a buy based on a promise. I certainly wouldn't sink a lot of money into Arrival, but if it can turn its idea for a revolutionary way of approaching the manufacture of EVs into reality, maybe Arrival's stock might be worth a small corner of the most speculative portion of your portfolio.