Market Commentary: Analysts Claim 500% Upside In EV Maker

Electric vehicle manufacturer, Canoo, has had a rough run lately. Over the past year it has slid from about $4.61 per share to $0.56 per share, essentially wiping out committed shareholders. But analysts consensus estimates suggest the company has over 500% upside to $3.56 per share to reach fair value.

Are the bears right or the bulls?

Key Points

  • Canoo is an electric vehicle manufacturer that has had a rough year, where the stock price has fallen from $4.61 to $0.56 per share.
  • Still, the analysts consensus is for the share price to rise by as much as 500%.
  • But the company is burning through cash and is not expected to turn a profit in the coming year.

Canoo: The Bull Thesis

Canoo is a virtual case study in how to invest well, and poorly. You see, Canoo had a compelling story. EVs are set to increasingly take market share from gasoline-powered vehicles over the next decade.

And as the Tesla horse bolted from the gates to a massive market capitalization, investors sought other EV auto manufacturers who could generate potentially massive returns.

Overlay a compelling industry narrative with the forecasted production of 20k vehicles from Canoo this year and twice that next year, and you end up with an enticing story. Real deliveries on the horizon and a sold-off stock that has a high analyst target has combined to whet the appetite of those sitting on the sidelines looking to deploy cash.

Plus, the more you look for bright spots, the better things look. Costs have been slashed, and the financial metric of price-to-future-sales looks downright silly. What’s not to like?

Well, before taking the plunge, a few concerns need to be addressed to explain why the share price sold off so dramatically in the past year.

What Went Wrong?

To understand how dangerous investing is when buying into a glossy narrative, we need to look under the hood at the financials to see what went wrong.

First, the oxygen and life blood of a business, cash has been on a fast-paced, downward descent. In 2020, the company had $702 million on the books. A year later it fell to $224 million. By 2022, that number had plunged to just $36 million.

It’s no surprise cash has been eviscerated because profit margins are horrendous due to lack of revenues in past years. Over that same period, operating income has increasingly turned negative from -$76 million in 2020 to -$346 million in 2021 and -$485 million in 2022. A $485 million operating loss in a year with about $37 million in cash on the books is nothing short of a financial nightmare scenario.

Worse still, nobody is expecting the company to turn a profit in the coming year so what will happen if the company burns through its cash pile? Is a secondary offering needed that will dilute existing shareholders?

Time to Buy Canoo?

Canoo is a casino bet at best now. Yes, the few analysts covering the stock have a consensus bet that would translate into a Vegas style win if correct. But the company is truly trading as a penny stock under $1 per share, and the odds of it crashing to $0 are significant.

For those who like the slots and are okay losing it all to win big, Canoo shares offers perhaps more excitement than the momentary thrill of pulling the handle on a Vegas slot machine. But to buy into it would require having the same expectation of winning in Sin City: very low, if any.