Electric vehicles (EV) are an increasingly important part of the auto sector. Given the push toward more stringent fuel standards and government incentives for purchasing EVs, it seems like that trend is set to continue. And yet Canoo (GOEV 2.59%) has been a terrible stock for investors to own. Here's how bad it has been and how bad it could get.
Oh, the pain
If you had invested $10,000 in Canoo's stock one year ago, it would be worth just $1,850 today. That's a decline of more than 80%. No investor wants to live through a loss like that. But some math will help show just how bad this really is.
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Imagine a stock you own drops 50%. That would take a $10,000 investment down to $5,000. In order to get back to breakeven, the stock would need to double. That sets up the picture for Canoo, which is down roughly 80%. So $10,000 has turned into about $2,000. To get back to breakeven, the stock would need to increase fivefold. That's a tall order for any stock to achieve, let alone in a time period as short as the year it took Canoo to lose 80% of its value.
For most investors, it might be best to capture the losses and part ways with Canoo if they've taken that big a hit. One key reason for this is that Canoo has warned that it might not make it.
Going concern
Companies have to assess their businesses on a regular basis, basically taking stock of whether or not they are viable over the long term. For most companies most of the time, the answer is an easy "yes," and management moves on.
But for financially weak companies, the answer is sometimes "no." In those situations, the company has to issue what's known as a going concern notice. No company wants to issue a going concern notice because it is, basically, an admission that the business has serious problems.
In Canoo's first-quarter Security and Exchange Commission (SEC) filing, 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.
Since that point, Canoo has raised some capital via a convertible bond offering -- but not a huge amount. It will likely need more if it hopes to keep going over the long term. Notably, the convertible has protective covenants (including a huge increase in interest rates if there is a default situation) that could quickly push the company over the edge if it runs into additional financial problems. So while management is working to raise cash, investors should take the going concern warning seriously.
Here's the interesting thing: A key headline in the company's Q1 earnings release stated that, "Targeting Gross Margin positive in 2025." Gross margin is the difference between revenues and the cost of goods sold. It doesn't even take into consideration selling, general, and administrative costs, or interest expenses. So Canoo is expecting to bleed red ink for at least another couple of years. But at the same time, it is warning that it could run out of money in less than a year. That's not a compelling risk/reward picture.
Move on
The best product doesn't always win in the market. That's not to suggest that Canoo has the best product, but management's main pitch to investors is that its technology is special in some way. According to the company, it "has developed breakthrough electric vehicles that are reinventing the automotive landscape ... ." If it keeps losing money and doesn't have access to the cash it needs to keep going, the massive price decline over the past year could go all the way to zero regardless of how exciting its products are. All but the most aggressive investors will probably want to avoid the shares.
