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Proterra: A Good Long-Term Hold for a Climate-Change Portfolio

By Kenneth Rapoza – Aug 31, 2021 at 11:07AM

Key Points

  • Proterra is the only pure-play company building powertrains, batteries, and chargers for buses and other large electric vehicles.
  • The potential market for large and industrial EVs is significant, and expected to grow quickly in the coming years.
  • With plenty of cash raised from its recent IPO, Proterra is shrinking its net losses and aiming for positive free cash flow in the next few years.

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If you think EV auto stocks are big, wait until public and commercial transport gets electrified next.

Proterra (PTRA -1.99%) is often known as "the Al Gore bus company." But while it's true that the former vice-president is an investor, Proterra makes drivetrains, high-voltage batteries, and charging stations for electric vehicles, with bus manufacturers among its clients. Electric cars get all the press, but the entire transportation industry – from cars to merchant marine vessels – is talking about alternatives to fossil fuel power. If you believe the government is going to back climate change policies and electric vehicles, then Proterra could be in the right place at the right time. 

A bus-sized market opportunity

Most investors interested in EVs focus on passenger cars, because many electrical systems and components for power-heavy commercial vehicles struggle to replace diesel engines. Effective electric powertrains for commercial vehicles cost a lot to develop. But governments from various countries are taking initiatives to electrify their public transportation to reduce CO2 emissions, with Europe taking the lead in the West. As of now, only a few commercial vehicle manufacturers have introduced electric buses, most of them in Europe and China -- but that's beginning to change, giving Proterra a significant opportunity.

Electric power trains for trucks and buses can be hard to develop; you need specialists focused on these systems to do it right. A well-built electric power train can cut a vehicle's weight, so that it requires less power to get around. That's the opportunity for Proterra, as the only pure-play specialist in electric powertrains for large vehicles. 

Proterra's rivals in this space include the huge conglomerate Cummins  (CMI -0.76%), which has partnered with Blue Bird (BLBD 0.76%) to electrify the latter company's school buses. It has the money and the know-how, but unlike Proterra, electric drivetrains and battery packs are just two of the many products it offers. And Cummins doesn't make and sell its own EV charging stations like Proterra does, giving it fewer ways to capitalize on and profit from the larger move toward heavy-duty EVs.

Fellow large competitor Navistar  (NAV) is just getting into the school bus segment as well, but Proterra may have an edge in anticipating Navistar's moves: Proterra CEO Jack Allen was formerly Navistar's COO. Like Cummins, Navistar has its finger in a lot of proverbial pies, making it a less appealing investment for anyone who wants to capitalize purely on the shift toward electrifying larger vehicles. That would be like buying Ford solely because of its Mach-E Mustang and new Lightning pick-up truck, instead of investing in Tesla.

Overall, the vehicle electrification market is projected to be worth $144.65 billion by 2027, registering a CAGR of 12.52% through the 2021-2027 period, according to some analysts. The market was valued at $74.25 billion in 2020.

Proterra's most important partners and newest buyers

As it attempts to build better drivetrains for electric vehicles, Proterra's working hard to line up the suppliers and clients it'll need to succeed. 

Every EV company needs to make sure it can obtain enough batteries, and Proterra has LG Chem as a key partner. The two have been working together on batteries since 2016, and the relationship seems to be working out. On Aug. 11, Proterra announced a long-term battery-cell supply deal with LG Chem's LG Energy Solutions.

On the client side, Proterra's most famous customer is Daimler (DAI -0.37%), owner of Thomas Built Buses. Proterra supplies Thomas Built with power trains and batteries. The Optimal EV airport-to-hotel transportation company also signed a deal with Proterra last summer for batteries and charging stations, and many Australian-owned BusTech airport buses are powered by Proterra batteries. The Komatsu Excavator relies on a Proterra batteries, while privately held Taylor Machine Works signed a contract with Proterra to make a container lifter and a forklift in July.

If Proterra can keep producing, and if buyers are happy with the product, pro-EV policies worldwide could give Proterra lots of juice. 

What do Proterra's financials look like?

Proterra published its second-quarter earnings on Aug. 11, highlighting record revenue of $59 million, up 39% from Q2 2020. Heavy reinvestments keep gross margins small -- roughly 2% in Q2.

The company has three divisions:

  • Proterra Transit, focused on powertrains, delivered 54 EV buses to 15 customers, including six new customers.
  • Proterra Powered delivered batteries to 30 clients, not counting the Proterra Transit division. These batteries are going to support drivetrains made by other suppliers.
  • Proterra Energy installed 4 additional megawatts of charging solutions for 16 customers across both transit and school bus segments and now have over 55 MW of charging stations in the market.

For the six months ended June 30, 2021, Proterra generated $113 million in revenue versus $95.2 million in the same period in 2020 . It  reaffirmed 2021 guidance for total revenue of $246 million this year, for an annual growth rate of 25% over 2020. It is worth remembering that almost no one was buying buses last year.

This expansion is helping the company's net loss per share to steadily shrink. Funding raised in its June IPO has helped the company increase its cash position nearly fivefold since December. Nonetheless, Proterra remains deeply cash flow-negative, as  investments and up-front costs rise in tandem with demand across its segments.

Still, Proterra says it has the money to keep investing in innovation and production. With an unrestricted cash and short-term investment balance of $762 million as of June 30, 2021, "we believe we are amply capitalized to fund our growth opportunities until we achieve our goal of positive free cash flow in a few years," the company said in its latest quarterly letter.

The EV industry stands at the dawn of a new transportation era. Where battery-powered cars lead, EV buses, trucks, and forklifts seem sure to follow. If you don't have any EVs in your portfolio, or are looking for something other than Tesla, Proterra looks worth the risks. 

Fool contributor Kenneth Rapoza holds no financial position in any company mentioned above. The Motley Fool owns shares of and recommends Tesla. The Motley Fool recommends Cummins. The Motley Fool has a disclosure policy.

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