After Canoo reported fourth quarter 2021 results on Feb. 28, shares fell 8% to new all-time lows at under $5/share. Although the post-merger SPAC rebounded this week on broader sector rotation in EV stocks, I believe there is still significant risk with Canoo, as its high cash burn, lack of of production and the loss of key executives raised many questions. around the company’s long-term prospects. Last July, I published an article on Canoo that highlighted the noticeable cash burn that management faced until production began, as well as the questionable strategic shift that followed the Hyndaui debacle. The stock has fallen more than 30% since then, which can be attributed to a broader market sell-off, a loss of momentum in the EV sector and some uninspiring news from Canoo’s management.
The latest quarterly report released last month didn’t instill a ton of confidence, and I wanted to provide an update that highlights the unknowns that still remain for Canoo. Time is running out, and if management fails to secure a large contract or quickly begin large-scale production to reassure investors, there could be downward pressure on its stock price. Until then, it’s hard not to stay bearish in my view, and I’ve reduced my price target from $5/share to $2.75/share. My new target price reflects a 5x sales multiple on estimated revenue of $132 million for 2022 (slightly above the average S&P 500 P/S multiple to reflect Canoo’s higher potential growth) and assumes 239 million shares outstanding. I did not use any earnings multiple given the lack of publicly available information on future operating expenses and net profit margins.
Canoo’s cash burn remains high
After completing its merger with SPAC Hennessy Capital IV. in December 2020, Canoo managed to raise nearly $900 million at a valuation of $2.4 billion. The electric vehicle start-up expected to deliver vehicles by mid-2022 and won praise for its partnership with Hyundai (which later fell through). Since then, Canoo has continued to spend much of its cash each quarter as the company expands its operations, including a major wave of hiring and new production plants. Figure 1 shows the rapid decline of its cash in a single year.
Figure 1: Canoo Quarterly Cash Decline
Since the finalization of its merger in December 2020, here is the detail of the quarterly change in cash:
Q1 2021: -61 million dollars
Q2 2021: -78 million dollars
Q3 2021: -$147 million
Q4 2021: -$190 million
With only $225 million in cash available at the end of 2021 (likely less than two months into 2022), it’s hardly an argument at this point that Canoo will need to raise additional funds by the end of this year to continue to operate. The big question is whether they can get a big contract or start producing at scale to convince investors to pay a premium now. The likelihood of this happening in the next four to five months? Difficult decision. As a fundamental investor, I see a few issues here:
1) Significant competition – there are a ton of EV companies competing for a relatively small demographic (for now).
2) No clear path to profitability yet – the company has announced two strategic shifts in the past two years with few details on its all-in costs and potential long-term net profit margins.
3) Rising costs due to inflationary pressures – February CPI data released this week came in at 7.9%, its highest level in forty years.
When Canoo launched its new strategy last year, management did not anticipate the significant increase in costs it would face. CEO Tony Aquila commented on the recent changes and said they would not pass costs on to customers, which could further impact Canoo’s future margins.
Figure 2: CEO Comments on Higher Projected Costs
While Canoo may face some headwinds from higher costs over the next few years, there are other concerns. High production targets with limited cash to meet these targets. Some of these details were discussed on the call, and CEO Tony Aquila made the following comment regarding future deliveries:
Figure 3: Production targets for 2022 and 2023
17,000 to 23,000 deliveries over the next twenty-two months is an extremely ambitious goal for a company that is still in gamma testing. Assuming Canoo doesn’t need to raise additional funds, producing units will cost between $9,500 and $13,000 per unit (including a $15 million price tag from Oklahoma Governor Kevin Stitt ). This could be difficult given all the upfront expenses associated with production, including salaries, the cost of its manufacturing plants, research, marketing, delivery cost, etc. While it is too difficult to forecast the exact spend per vehicle, it does not seem feasible Canoo can meet these delivery targets by the end of 2023 with its current cash position.
In addition to worries about its cash position, investors have noticed another negative trend: departures from the company. Canoo last month lost other key executives, including Mike de Jung, an early design-focused employee, Steven Offutt, head of powertrain and battery manufacturing engineering, and Richard Walker, who led software controls. This follows the SEC investigation last year and the shock departure of CEO Ulrich Kranz, who left to join Apple. Additionally, there have been three other key departures in 2021, including the CFO and the CTO. Since then, Tony Aquila as CEO and took the reins of a strategic shift in mid-2021. Historically speaking, the loss of these many key people may indicate that management has lost confidence in the company. While no one can be certain what happens behind closed doors, the frequent departures of high-level executives at Canoo over the past year don’t give investors much confidence in the company’s future prospects. .
It is difficult to justify investing in Canoo until management can provide more clarity on its planned production expenditures coupled with its lack of vehicle deliveries to start the year due to various forces beyond its control. will. As a shareholder, there is significant risk of dilution by the end of 2022 if nothing new is announced as Canoo continues to burn through its remaining $225 million. That being said, all it takes is one big announcement (especially in the electric vehicle sector) to send a stock flying. Additionally, investors should also consider the cost of betting against the Canoo. Shorting Canoo is currently at a high cost of borrowing, indicating this is a crowded trade with a limited supply of stocks. If an investor wants to short Canoo, the borrowing fee would cost around 30% on an annualized basis. There is clearly strong demand from institutional investors to bet against Canoo’s future success, and so far that appears to be working as shares have fallen almost 50% since its merger was completed. At the moment, it seems there are simply too many headwinds for Canoo to overcome. I recommend investors look elsewhere for their next investment.