What happened
In the year or so since the stock market hit its peak on Jan. 3, 2022, shares of electric vehicle (EV) company Canoo (GOEV 19.30%) have tumbled roughly 85%, according to data from S&P Global Market Intelligence.
The last year of trading has been brutal for EV stocks generally, with high inflation, rising interest rates, and fears that a recession is on the horizon prompting severe valuation contraction for most companies in the space.
Image source: Canoo.
So what
Rising interest rates have crushed the valuations of growth stocks over the past year. Investors have generally become less willing to embrace companies with highly forward-looking valuations, and Canoo's business remains in a nascent state that makes its future performance difficult to predict. Recessionary periods also tend to be hard on the auto industry, and young EV companies could face particularly strong headwinds in the event of a prolonged economic downturn.
Canoo is rapidly burning through cash, having recorded a net loss of $407.5 million across the first three quarters of 2022. At the end of the third quarter, the company had $6.8 million in cash and equivalents, plus access to $200 million in generatable cash through an approved at-the-market share offering program.
With the company's balance sheet in a relatively weak state, there's a significant chance that it will need to sell new shares in order to raise funds, thereby diluting existing shareholders. Alternatively, it could pursue new loans -- but that's a less-than-attractive proposition in today's higher-interest-rate environment.
Now what
The company has scored some notable wins recently. In October, it announced that it had signed an agreement to deliver 3,000 vehicles to fleet management company Zeeba and had inked a deal to deliver 9,300 vehicles to van-rental specialist Kingbee.
Canoo says that it currently has more than $2 billion in vehicle orders booked, including $750 million in binding orders. With orders ramping up, it looks like the EV specialist will have avenues to avoid bankruptcy in the ultra-near term, but liquidity remains a pressing concern.
Canoo's stock price will likely also continue to be heavily impacted by the Federal Reserve's approach to fiscal policy. If the Fed opts for smaller interest rate hikes or pauses those increases altogether, that would open a path for the EV manufacturer's share price to rebound. But if the Fed sees the need to continue increasing interest rates rapidly in order to combat inflation, it's likely that Canoo's valuation will remain under pressure.
While last year's big sell-off has potentially positioned the stock for a dramatic rebound in 2023, Canoo continues to look like a high-risk, high-reward investment.
