Canoo (GOEV) — A Race to Build Factory in Record Time
It seems investors have finally had enough of upstart automakers, especially those that are still pre-revenue or underperforming revenue expectations. Inflation and oil are both hitting record highs, driving consumer sentiment to new lows, and that is taking a toll on companies who struggle to prove fundamental value. Pre-revenue automakers like Lordstown and Faraday, as well as new-production companies like Rivian and Lucid (whose deliveries are effectively immaterial to full year 2022 earnings) are taking especially bad hits in recent weeks since the supply chain crunch continues due to the Ukraine war and sanctions on imported car parts from Russia.
Where does Canoo fit in?
Lesser known EV startup Canoo Motors ($GOEV) reached its stock price zenith last December at almost $13/share, celebrating its SPAC merger, and has been trending downwards since, with selling pressure washing out at end of January, leaving the stock hovering between $5–6 per share. As with all EV companies, a little news goes a long way, so it surprised this author that the recently announced $15 million funding from Oklahoma to build their primary factory didn’t result in a meaningful bump from investors. Perhaps this new funding is inconsequential? Let’s find out.
Canoo’s journey began over ten years ago, but has changed tack multiple times throughout its existence and lost strategic leadership on multiple occasions. These aren’t good signs, however their latest focus on the “Lifestyle Vehicle,” which is actually more aimed at commercial use, gave them a better use-case as a vendor to local and state governments. Charging infrastructure is easier to implement for a fleet, and selling to governments should provide early quality feedback to the company before selling to retail customers. Canoo in fact secured 2,000 state government pre-orders from Arkansas and Oklahoma, the two states it intends to build factories, offices, and R&D centers. The company also has 15,000 reservation holders, however these are only $100 deposits and are refundable at any time.
Assumptions
The home of main operations for Canoo will be in Fayetteville, Arkansas, a corporate office hub alongside a small assembly facility for low volume production. Nearby Bentonville (same town as Walmart) will be home to their “advanced R&D center.” Canoo’s first vehicles (ETA Q4 2022) are due to be produced in Fayetteville, but the low volume target is worrisome. Their larger factory was committed to Oklahoma, replacing a contract vendor that had been retained in the Netherlands. At the same time last December, the company made an ambitious announcement by pulling ahead its production guidance from 500–1000 vehicles up to 3k-6k vehicles. Like the recent Oklahoma investment, this announcement also seemed to have no effect on share price. Perhaps investors don’t believe a brand new factory could be up and running before a contract builder? Or maybe the difference between the high end of previous guidance and the low end of updated guidance is just too small to be significant. If we meet somewhere in the middle, realistically, and assume Canoo’s real 2022 objective is to produce the 2,000 vehicles promised to AR and OK, those vehicles will be substantially marked down below retail MSRP (expected $34,500) to the $30,000 range. If they can achieve this unit volume, that means a best case scenario of 60 million USD in Q4.
Real World Deductions
Practically speaking, this too seems optimistic. On Feb 23rd, 2022 it was reported that the company had just broken ground at the Mid-America Industrial Park for the AR low-volume facility, “clearing trees and moving dirt,” according to a local news source. As we have seen with Tesla, Rivian, and others, setting up a factory is normally a multi year process. From the time of groundbreaking to the day tires touch the ground off the assembly line, by most estimates even a small scale facility takes well over a year of construction (and a most of a vehicle lifecycle to payoff tooling costs**), which leads this author to believe that any cars produced in 2022 will only be hand-built prototypes for compliance testing. We know the final vehicle is still undergoing further iterative design based on the fact that no final options sheet or configurator exists yet online for Lifestyle reservation holders, which is also evidence that the company has not yet completed NHTSA crash testing or EPA testing on its first model.
Financials
Investors have smelled blood in the water already, with the short interest at an exorbitant 22% of float. It wouldn’t be the first time shorts have been burned on positive EV news however, so what is the likelihood of reaching a significant production milestone with the company’s current financials?
At the end of Q4, Canoo had cash of $225 million and surprisingly low debt commitments paid off in full ($7M) in 2021. Unfortunately, the company had $702M on hand at the end of 2020 and as is always the case in capital intensive automaking, costs ramp exponentially right before production, often right at the time the money drys up. Canoo really did go on a spending spree, loading up on in-progress construction costs, totaling a negative $475M cash flow for the year ended. Take a look at the last four quarters of cash outflows.
Raised $900Million @ 2.4Billion valuation in December 2020
Q1 2021: ($61 million)
Q2 2021: ($78 million)
Q3 2021: ($147 million)
Q4 2021: ($190 million)
Highlights are $175M in cap-ex vs $137M (2020) and $8M (2019). Major income statement expenses of $195M SGA and $246M for R&D are just the beginning of the cost ramp, as the company has outstanding commitments to build two factories simultaneously, plus the aforementioned office and R&D centers.
The cash flow analysis showed the company would be hard pressed to make it even a third of the way through the year without fundraising additional capital, and this assumption proved correct. Canoo was already forced to raise funds this year to generate the $500 Million or more needed to get through the rest of the year, based on current cash flows. The 10K points out an additional 100M shares (total of 339M) are already in play at the date of its publishing. Assuming the new shares have so far transacted at an average of $5, the urgent fundraising has already occurred and the $500M needed to avert disaster will be on the balance sheet for the Q1 earnings call.
Interestingly, but unsurprisingly, SEC filings show the company has already received authorization to float yet another 100M additional common shares (up to 449M, near full dilution). Investors should keep a close eye on the rate of cash burn and question if any level of capital expenditure will be sufficient to ready the first factory on a piece of land that is just now being cleared.
Projections
Recent research from a Seeking Alpha author suggested a $2.75/share target based on a 5x sales multiple on 2022 estimated revenue of 132M USD (this earlier report assumed 239M shares outstanding, reported year end 2022). As we have noted, the maximum revenue that is likely in 2022 is closer to $60M, and before the recent share sales that would have given us a $1.25/share estimate. However already to date we have 339M shares in the public float per 10k disclosure, and using the same charitable 5x sales multiple and the updated float (which may still be insufficient capital) that brings our target calculation. down to only $0.88 per share.
Summary
If this story continues we should expect to see well over $250M eaten up in Q1 alone. With groundbreaking in AR having just begun, Canoo would have to build the fastest factory in the history of automaking, from scratch to finish in less than 8 months. That is less time than it takes to retool most existing factories for a new model. Allowing for the fact that the AR facility is designed for low-volume, we won’t discount that it is possible, but it looks highly unlikely. Canoo has made claims that the total value of OK and AR incentives is over $400million***, but if that is the case, why not disclose the full extent of the benefits? In reality, this number is simply a calculation based on future tax incentives and improved land valuations, and unfortunately forward value and easily transferable assets don’t mean much if the company doesn’t stay in business. It seems fanciful to think that not one, but two greenfield production sites could possibly be completed before the money is long gone. The biggest risk with shorting the stock is the high cost of borrow, at 27% interest. Timing will be everything — we recommend paying close attention to the SEC filings and waiting for full dilution to occur, and for 2022 cash flow patterns to appear before entering any position.
Notes/other observations
*A curious note: the company has opted to recognize the full value (as opposed to partial value) of tax carryforwards to offset future taxable income. By recording $185M from accrued losses and deferred tax assets “due to the uncertainty of the ultimate realization of the future benefits of those assets” (source 10K), this sounds very much like a vote of no confidence in their own future production.
**For comparison purposes, Nissan has sold less than 8,000 350/370Z’s per year (or. <2,000/quarter) in the US since the mid 2000’s, a relatively well-known and common sports car that has its own factory in Japan. Even this small volume car takes over five years to recoup tooling costs.
***The Oklahoma agreement has some detail that may also be of interest to readers. There are two facets to the deal: A jobs component, and an investment capital component. Canoo can collect $5M once they document a total of 85 jobs (out of a promised 700) by 2024. This should be a relatively easy milestone, especially considering there is a guide book for misleading state legislatures for funding based on employee numbers… just ask the people of Buffalo who paid for a Tesla plant. The next $3M Canoo would be eligible to collect comes after they spend $48M and completes 10% of their factory. In order to collect the full $10M, Canoo must spend $450M by July 2026, or the terms of the deal are completely refundable to the state. With such strict payback terms, it’s no wonder the $15M Oklahoma announcement didn’t charm investors out of their chairs.
