Is Canoo Stock a buy it now?
Canouit is (GOEV -7.16%) the stock soared 53% on July 12 after the electric delivery vehicle maker announced a new deal with walmart (WMT 0.98%).
Walmart has agreed to purchase 4,500 Lifestyle Delivery Vehicles (LDVs) from Canoo, which are expected to arrive next year, with an option to purchase a total of 10,000 vehicles. Walmart also received a warrant that gives it an option to buy 61.16 million shares of Canoo, more than one-fifth of the company’s outstanding shares, at an exercise price of 2. $15 per share.
As part of this agreement, Canoo promised Walmart that it would not supply any vehicles to Amazon. Canoo is also legally required to notify Walmart in writing of any other acquisition offers within 72 hours.
This partnership with Walmart sounds promising, but it’s not exclusive. Walmart also has similar electric vehicle deals with Cummins, NicholasFreightliner and Daimler — so does this deal actually make Canoo’s battered stock a buy?
A brief history of Canoo
Canoo was founded in 2017 by German BankStefan Krause’s former CFO and BMWUlrich Kranz, senior executive of Ulrich Kranz. Both men previously worked at the electric vehicle maker Faraday’s future. Canoo released its first prototype van in late 2019, then partnered with hyundai develop an EV platform in early 2020.
Kranz took over as permanent CEO of Canoo after Krause left in July 2020, and he agreed to take the company public through a merger with special purpose acquisition company (SPAC) Hennessy. Capital Acquisition Corp. IV two months later. Canoo board member Tony Aquila was named the company’s new CEO last March.
Shares of Hennessy initially soared to a record high of $22 on December 10, 2020 – nearly two weeks before the merger closed on December 22 – but its price had fallen to just $8.52 on the first day as a merged company. . As of this writing, shares of Canoo are trading at around $3.50 per share.
Revisiting the wild promises of Canoo
SPACs are different from IPOs because they are allowed to present long-term revenue and profit estimates ahead of their pending mergers. Critics say the loophole encourages companies that barely generate revenue to make overly optimistic forecasts to attract more investors.
That’s why many EV manufacturers that haven’t produced a single utility vehicle have gone public by merging with SPACs. In an August 2020 investor presentation, Canoo claimed it could grow its annual revenue from $120 million in 2021 to $4.13 billion in 2026, representing an annual growth rate compound (CAGR) of 103%. It also expected its gross profit to grow from $25 million in 2021 to $1.18 billion in 2026, representing a CAGR of 116%.
Canoo expected its adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) to remain negative through 2023. But in 2024, it expected to generate positive adjusted EBITDA of $188 million, which could then reach $522 million in 2025 and $964 million in 2026.
Why did Canoo start to sink?
But in 2021, Canoo actually generated $0 in revenue with an adjusted EBITDA loss of $338 million. It had produced 39 prototype vehicles by the end of the first quarter of 2022, but it has yet to ship a single utility vehicle. Its partnership with Hyundai also abruptly evaporated in early 2021 after Canoo stopped offering its engineering services to other automakers.
Canoo still failed to generate revenue in the first quarter of 2022 and recorded another adjusted EBITDA loss of $117 million. In its SPAC presentation, Canoo told investors it could generate $329 million in revenue in 2022 with an adjusted EBITDA loss of $249 million.
Canoo also predicted it could build 3,000 to 6,000 utility vehicles this year, but it’s still a long way from starting mass production. It also only had $105 million in cash and cash equivalents at the end of the first quarter — so it might just run out of cash before a single vehicle rolls off the production line.
Canoo can still tap into a $250m capital line with Yorkshire Advisors, which would allow him to trade his shares for more money. It recently secured $50 million in additional funding from CEO Tony Aquila’s associates, and its modest 0.7 debt-to-equity ratio could give it some headroom for further debt offerings. However, it will still be difficult for Canoo, which is haemorrhaging cash every quarter, to secure more funds at favorable rates in this tough market.
Walmart deal doesn’t make Canoo a buy
Canoo’s bold promises prompted the Securities and Exchange Commission (SEC) to launch an investigation into the company last year. It also faces a class action lawsuit over its long-term bullish projections and the abrupt shutdown of the engineering services division – which had been touted as a major revenue stream ahead of its SPAC-backed debut.
Canoo’s deal with Walmart indicates there’s still plenty of pent-up demand for its vehicles, but it doesn’t look like it can actually fill all of those orders. Canoo is also just one egg in Walmart’s growing basket of electric vehicle makers – and it could easily crack open before it ships a single vehicle.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Leo Sun holds positions at Amazon. The Motley Fool holds positions and recommends Amazon. The Motley Fool recommends BMW and Cummins. The Motley Fool has a Disclosure Policy.