Tesla (TSLA +3.10%) defied the odds and upended the auto sector, effectively proving that electric vehicles (EVs) were a viable product. Today, every major car company is working on EVs. But there are also a lot of upstart EV makers that want to follow in Tesla's tire tracks.
One of those startups is Canoo (GOEV +87.50%). How likely is this EV maker to succeed? The odds are against it and there are at least three reasons it probably won't.
1. Canoo lacks the products needed to really compete
At this point, Tesla has a whole lineup of autos to sell, from an SUV to a sedan, with a pickup truck in the works. It produced 440,000 vehicles in the first quarter of 2023, with deliveries of 422,000. While not exactly the largest automaker on the planet, it is clearly well-established.
Image source: Getty Images.
Canoo is hoping to produce 20,000 cars in all of 2023, with the goal of doubling that in 2024. But even if it does hit these production targets, it will still be just a fraction of the size of Tesla.
Meanwhile, it not only has to compete with Tesla, but also all of the other major automakers that are quickly ramping up their EV capacity. The EV niche is far more crowded than it was when Tesla started out, and that makes standing out today far more difficult.
2. Canoo is bleeding red ink
In the first quarter of 2023, Tesla produced revenue of $23.3 billion, up from $18.8 billion in the same quarter of the prior year (auto sales make up around 85% of the top line). Earnings per share came in at $0.73, down from $0.95, at least partly due to swiftly rising costs. But after a long period of red ink as it built its business up, Tesla is a very profitable company today.
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Key Data Points
Canoo's first quarter produced another gusher of red ink. It listed no revenue (zero!) and posted a per-share loss of $0.22.
There are some caveats. For example, the California-based company is basically still building its EV business, and you have to spend money to do that before you can start selling products to produce revenue. That is exactly what Tesla did, so the loss isn't exactly unexpected.
The loss was also down from a per-share loss of $0.54 in the first quarter of 2022. So in some respects, things are getting better. But the company still has a long way to go before it is sustainably profitable.
3. Canoo is running up against some deadlines
At this point, Tesla doesn't have nearly as much to prove as it did when it was a start-up like Canoo. In fact, as long as the company doesn't make a huge misstep, it looks like it is here to stay, with ample access to the capital markets to support long-term growth. The same thing can't be said of Canoo.
At the end of the first quarter of 2023, Canoo had $6.7 million in cash, down from $36.5 million in the year-ago period. That's a very material drop for a company that still has to spend huge sums of cash to build out its business.
That fact is highlighted in the company's 10-Q, in which it stated: "Our management has performed an analysis of our ability to continue as a going concern and has identified substantial doubt about our ability to continue as a going concern. If we are unable to obtain sufficient additional funding or do not have access to additional capital, we will be unable to execute our business plans and could be required to terminate or significantly curtail our operations."
Canoo could come up with the money it needs, but with the stock down more than 95% from its 2021 highs, selling more stock isn't an investor-friendly option. And with so little cash and the ongoing red ink, debt markets might not be too friendly, either.
The company is likely to have to pay dearly for any additional funding at this point, which will limit its earnings and growth potential. If it doesn't find that funding, meanwhile, there's a very real chance that Canoo will go out of business.
Canoo faces an uphill climb
Investors could argue that Canoo's vehicles are so wonderful that the company will be successful. Unfortunately, having a superior product doesn't guarantee success. (Betamax lost out to VHS, to cite a famous example.)
And even if the EV maker does get its production up and running as it hopes, it still has to compete within a very crowded EV field. Canoo putting a going-concern statement into its Securities and Exchange Commission filing is a very worrying sign that investors should not take likely.
At this point, it looks like Canoo will be lucky to survive, let alone take on an EV giant like Tesla. Only the most aggressive investors should even consider the stock, and even they should tread with extreme caution.
