Shares of Hyliion Holdings (HYLN -2.03%) closed 12% lower on Monday after an analyst downgrade. The stock is trading below $7 a share -- 88% off the high price of more than $55 it hit in September of last year.

Let's take a closer look at Hyliion to understand whether the stock's steep fall presents a buying opportunity.

Hyliion's offerings to reduce heavy-vehicle emissions

Battery-powered cars are becoming increasingly popular thanks to reduced costs and improved battery efficiency. However, lithium-ion batteries tend to be bulky for heavy vehicles that require more power. This currently makes them unsuitable for heavy vehicles. Hyliion hopes to offer a solution to this problem.

The company offers electric powertrains whose batteries can be recharged using natural gas. These powertrains can be retrofitted into existing diesel-powered engines, so using them doesn't require a customer to replace an entire existing fleet. Carbon emissions can be further reduced if renewable natural gas is used as the input fuel. What's more, Hyliion's powertrains can potentially be recharged using other fuels, including hydrogen.

Hyliion has entered into an agreement with Dana (DAN -4.83%) to get all the components and parts for its powertrains.

Electric vehicles charging station on a background of trucks.

Image source: Getty Images.

While all the above sounds good, Hyliion faces several challenges. One of the biggest is getting customers to adopt its powertrains; another is competition. Let's see next why these factors are crucial for Hyliion's success.

Hyliion's key risks

The first major risk that Hyliion faces is that trucking customers may be unwilling to use powertrains that recharge using natural gas. Several factors may potentially limit the adoption of such powertrains, including improvements in the fuel economy of internal combustion engines, prices of gasoline and diesel, availability of compressed natural gas refueling stations, and government regulations.

For perspective, consider that renewable natural gas seller Clean Energy Fuels (CLNE -4.58%) has been struggling with falling revenue. The company noted in an August filing that the "market for our vehicle fuels is a relatively new and developing market, and has experienced slow, volatile or unpredictable growth in many sectors."

Moreover, governmental support for electric vehicles has impeded the development of gas filling station networks, further restricting the growth of vehicles powered by natural gas. This situation is a clear warning sign for Hyliion, which hopes to build a business selling electric powertrains that recharge using natural gas.

The second key challenge for Hyliion is the intense competition in the sector. Tesla (TSLA -2.44%) plans to launch a battery-powered commercial electric truck while Nikola (NKLA 2.84%) plans to launch a fuel cell electric truck in the coming years.

Moreover, Cummins, Daimler, Volkswagen's Navistar, Volvo, Hyzon, and many other commercial vehicle manufacturers plan to bring Class 8 commercial battery or fuel cell electric vehicles to the market. Most of these players have greater financial resources and more experience than Hyliion and so are better placed to succeed in this competitive segment.

Finally, the company also faces competition from diesel-powered ICE manufacturers.

Restricted growth opportunities

Hyliion's Hypertruck ERX system -- for which it expects to begin commercial deliveries in 2022 -- is designed to be fuel agnostic. That means it can potentially use hydrogen or other fuels to recharge. However, its initial systems are designed to run on natural gas. For the reasons discussed above, the market for such powertrains could be very limited.

Competition in the battery and fuel cell electric vehicle segment is intense. Hyliion's Hypertruck ERX system is still in the development stage. The potential demand for Hyliion's powertrains with hydrogen-powered batteries remains to be seen. The company hasn't yet announced when these will be launched.

Overall, despite the fall, Hyliion stock doesn't look like an enticing buy to me.