Canoo Stock: Saved From The Brink By Walmart (NASDAQ:GOEV)

Canoo’s (NASDAQ:GOEV) vehicles with their sleek and futuristic look have been described as space-age and a refreshing departure from established design consensus. This helped differentiate Canoo from a rush of EV companies that also went public via SPACs and contributed to investor enthusiasm for its common shares.

However, it has failed to be translated into meaningful sales with the company still pre-revenue and fast burning through its dwindling cash reserves more than 2 years since it went public. Canoo’s financial health and operational standing have since taken consecutive hits over the last few months with shares hitting new lows recently.

The company has since announced a deal to supply Walmart (WMT) with at least 4,500 of its Lifestyle Delivery vehicles. This represents a transformational change of fortunes and provides clear revenue visibility for fiscal 2023 and beyond. Further, Autonomy, an EV subscription startup, included Canoo in a list of 17 other automakers in a $1.2 billion purchase order. The company has also been selected by the US army to supply its Multi-Purpose Delivery Vehicle for analysis and demonstration. The scope for this to be transformed into a purchase order cements a great turnaround when aggregated with the broader operational momentum the company has garnered over the last few months.

Canoo x Walmart

The deal with Walmart will provide a material boost for struggling Canoo and would be even more transformational if Walmart activates its option to buy a further 5,500 vehicles for 10,000 in total. Canoo expects to start making deliveries to Walmart from the first quarter of 2023 in a deal that will also see Walmart issued with a warrant to purchase up to an aggregate of 61.1 million shares at an exercise price of $2.15 per share.

As part of the agreement, Canoo will not sell any of its vehicles to Amazon (AMZN) as production is also outsourced to an unspecified third-party contractor. This is a change from previous plans to assemble the Lifestyle Vehicle at its Bentonville, Arkansas factory. For Walmart, the Lifestyle Delivery Vehicle will allow for last-mile deliveries and will support its growing eCommerce business with 90% of the U.S. population within 10 miles of its stores. Whilst a significant operational win for Canoo, the management pivot to use a third-party contractor likely puts Bentonville, Arkansas-based Walmart in an awkward position as production being located in Walmart’s home state of Arkansas was touted in the company’s news release about the deal.

The main overhang that remains is whether the company has enough capital to see it through the next few quarters of growth. Indeed, Canoo last reported earnings for its fiscal 2022 second quarter which saw operating expenses come in at $173.5 million, up from $104.3 million in the year-ago quarter. Net loss at $164.4 million was also up from a year-ago figure of $112.6 million. The company ended the quarter with $36.5 million in cash and equivalents which is anemic against cash burn from operations that stood at $117.2 million during the quarter. Hence, the company has started to activate dilutive fundraising options to remain a going concern. The warrant deal with Walmart amounts to more than 20% of all the outstanding shares and should help the company raise enough money to get through to 2023. Further, Canoo has partnered with Yorkville Advisors to sell up to $250 million of its shares.

At the crux of the liquidity problem is that Canoo is still pre-revenue. The start of deliveries early next year should bring in critical revenues and further stave off the threat of bankruptcy. The recently signed Inflation Reduction Act also provides a material boost with a $7,500 credit to be provided for the sale of domestically produced EVs. With Canoo terminating its initial vehicle manufacturing deal with Netherland’s VDL Nedcar, it seized the opportunity to outsource production to a Detroit-based manufacturer.

Canoo Faced The Long List Of Defunct Automobile Manufacturers

Canoo looks like it will be able to navigate the next few months until deliveries to Walmart begins. Critically, this provides a source of revenue against zero for the last two years and should be celebrated by bulls because it’s a big win. The deal provides revenue clarity and could be worth $170 million with each Lifestyle Vehicle priced at $34,750.

Bears would be right that Canoo still faces an uphill battle and remains vulnerable with a fundraising effort launched on the back of a collapsed stock price. The company is at a crossroads and at the most perilous point in its history. Fundamentally, the Walmart deal has revived hopes of it having a future. It’s a strong vote of confidence in the company’s management and product range. Walmart would undoubtedly have been presented with a range of other options. I’m not a buyer here though as the dilutive equity raises will likely contribute to a low stock price into 2023.