Canoo: An Educated Bet (NASDAQ:GOEV)

Thesis

Canoo (NASDAQ: NASDAQ:GOEV) designs and produces iconic electric vehicles. Its modular electric platform allows for full customizability of the vehicle. Lately, with the downturn in the market and rising interest rates, fears of a potential bankruptcy of the EV maker have intensified and the stock has lost over 85% of its value YTD. These fears do not seem misplaced, as the firm currently (Q3 2022) has only $6.8 million in cash and cash equivalents.

It is thus strongly dependent on securing a new financial lifeline in the near future. All is not doom and gloom however as the firm boasts a decently looking order book with household names such as Walmart interested and has a low P/B ratio of just 1.6. Even more important, the CEO has recently bought a lot of shares in the company, indicating that management is convinced that Canoo will stay in business. I think Canoo might be an educated gamble worth taking, but I’m not fully confident in its survival. Givings its high upside, but large (short-term) uncertainty, I assign it a Hold rating.

Q3 results show intensified cash burn

Canoo has been spending a lot of money lately, in order to ramp up production as soon as possible, as the EPS of -$2.22 (TTM) show. The company’s cash and cash equivalent position has dwindled from $224.7 million in Q3 2021 to just under $7 million in Q3 2022. Total assets have also decreased, from $523 million in Q3 2021 to $445 million in Q3 2022. Liabilities, nevertheless, have risen from $179 million in Q3 2021 to $217 million in Q3 2022.

The quick ratio, which reflects if a company is likely to meet its financial obligations in the short term, has fallen to an all-time low of 0.05. This all underlines the financial distress the company finds itself in. Canoo is however priced accordingly with all the financial troubles it finds itself in. It trades at an attractive P/B ratio of just 1.6, as it has a book value of $0.76 a share. This is an extremely low P/B ratio for a company with such growth potential as Canoo. Thus Mr. Market seems quite convinced that the company will not pull through to profitability. In my opinion it shows the large upside to be had if, and only if, a new financial lifeline will be found and Canoo will progress towards delivering its vehicles to its first customers.

Large uncertainty: Acute need for cash

Canoo’s survival is, thus, strongly dependent on securing new financial means in the short term. In its quarterly report the company notes that there is ‘a clear path to secure funding of $500 million’. However, this is not yet a done deal, posing additional uncertainty for investors. There has been no further communicaiton on the financial lifeline since. As Canoo reckons it will spend $100 million up to $140 million in Q4 of 2022 on operating expenses and capital expenditures, excluding stock based compensation, the dire financial situation is most evident.

Even if it secures a new financial lifeline, the EV maker will burn through additional funding in one year at this pace of spending. Especially with rising interest rates, its financial troubles are magnified. In my opinion this leads to a gamble element in investing in Canoo, something that makes me uncomfortable as a value investor. The odds are however definitely shifting in favor of the bulls instead of the bears, as I will further dive into.

Strong demand for Canoo’s EVs

Next to the extra funding that is needed, Canoo will also need to deliver its first vehicles as soon as possible. The company does fortunately boast a strong demand for its electric vehicles. Kingbee and Zeeba have placed binding orders for a total of 12,300 units with an option to add another 11,750 units and both Wal-Mart and the US-army have also expressed interest in the EV makers iconic vehicles, the former to purchase 4,500 vehicles and the latter for analysis and demonstration.

Recently, the first delivery of vehicles for analysis and demonstration has been made to the US army. The total order book of the EV maker boasts $2 billion in orders, of which $750 million binding. Production can commence in 2023, as Tony Aquila, Canoo’s CEO, has stated that production will ramp-up in 2023 and scaled production will start. This, in addition to the financial lifeline I already discussed, could pull the company through its recent financial troubles and launch it into profitability. It is however difficult to judge if this will actually pan out as Tony Aquila makes it out to be.

High insider buying: clear sign of confidence

I love to see skin in the game from the decision makers at hand and Tony Aquila has been doing exactly that. As is shown in the figure below, Tony Aquila has been buying a lot of shares in the company recently. The figure below shows insider buying for november of this year, but the CEO has been buying more shares in december (150,000). That begs the question: should we do the same? Insider buying is a strong indicator for management’s trust in the company being undervalued and in its positive future. All in all, this makes me positive about Canoo making it to the large-scale production phase.

Valuation: should we buy too?

A company such as Canoo is difficult to value, as there is too much uncertainty to do a regular analysis, such as DCF. Wall Street targets demonstrate this, varying from $1 to $10, averaging around $5.25. Taking the average of Wall Street’s estimates, $5.25, we can deduct that there is around a 77% probability of failing ($0 in the near future) in Canoo’s current share price. This seems overly pessimistic, especially with Tony Aquila’s insider buying signalling that there is a clear path to new funding.

I do, however, believe that there is still too much uncertainty to make an informed value-driven decision on investing or not in Canoo. Selling the stock, on the other hand, seems too rash to me as well, as the CEO’s insider buying indicates the odds may be shifting in the investor’s favor. The odds of this gamble do however seem to be on the bulls’ side. This is why I assign it a Hold rating.

Conclusion

The EV maker finds itself in great financial need as it has almost completely run out of cash and cash equivalents. It is therefore strongly dependent on securing additional funding in the short term, which the company states it has a clear path to. Strong insider buying confirms the CEO’s conviction that the firm will secure a new financial lifeline. Next to this, Canoo boasts a strong order book with $750 million in binding orders on a total of $2 billion.

The stock price of the firm reflects its precarious financial situation, as it is down 85% YTD. This has led to an extremely discounted P/B ratio of just 1.6, which is very rare for a growth company such as Canoo. Taking into account its high potential upside, but real financial trouble, this stock is not for the faint of heart. I assign it a Hold rating.