Electric vehicles (EVs) are an increasingly important part of the future when it comes to global transportation trends. However, you wouldn't guess that by looking at the stock performance of Canoo (GOEV +33.33%).
If you're an investor looking for bargain-basement stocks, this EV maker's low price might attract you to it. Here's five reasons you should tread carefully.
1. Canoo was not a normal IPO
Canoo came public via a merger with a special purpose acquisition company (SPAC) in late 2020. While that may seem like a long time ago, it is important to put this transaction into context. At the time, SPACs were a hot investment topic and companies were coming public at a rapid clip via this route. SPACs aren't new, but they were not nearly as common before this period.
OTC: GOEV
Key Data Points
Basically, investors fund a SPAC via a more traditional initial public offering (IPO), seeding it with cash with the expectation that the SPAC will find an attractive private company to buy. With just a few SPACs around, the chances of success probably aren't all that bad.
But with hundreds flooding the market, the batting average was bound to decline as SPACs had to move down the quality spectrum in order to find a company (any company) to buy. That's exactly what happened, and an increasing number of the SPAC mergers from that period are now resulting in bankruptcies.
Canoo's involvement in this little period of market exuberance is a good reason for investors to be extra cautious. Adding to this issue is that, at the time, the EV sector was also a hot topic among investors. In some ways, Canoo looks like Wall Street trying to cash in on two investment fads at one time.
2. Canoo has yet to make a profit
One of the problems with a rush to take private companies public is that they may not be ready because their businesses aren't mature enough. While it may seem like forever ago, at one point in Wall Street history companies preferred to wait until they were profitable before trying to sell shares to the public. That's not the case anymore, which materially increases the risk for investors. In the case of Canoo, over two years after the SPAC merger it has yet to turn a quarterly profit.
GOEV EPS Diluted (Quarterly) data by YCharts
Companies can't lose money forever. And if Canoo can't manage to get into the black sooner rather than later, its future could be shorter than you think.
3. Canoo isn't generating any revenue
You actually need revenue to produce earnings. And Canoo's income statement is shockingly devoid of revenue. Basically, it is trying to build out its business. When it comes to building large, complex products like EVs, that can be an expensive and time-consuming effort.
All of the costs, for things like technology and factories, have to be paid before there's any revenue. So don't expect any earnings here until the company actually generates revenue -- which won't happen until it has a product to sell.
4. Canoo is paying as it goes
While management is happy to highlight the positive milestones it has reached as it looks to get its business off the ground, there's a very real balance sheet issue to consider. At the end of the second quarter Canoo had just $5 million in cash. It expects to spend between $70 million and $100 million on capital investments in the second half of the year.
You don't have to be a mathematician to see that Canoo didn't have enough money to do that at the end of the second quarter.
GOEV Average Diluted Shares Outstanding (Quarterly) data by YCharts
That is why Canoo raised $56.2 million through convertible and stock sales in August. The capital raise was necessary, but it will likely end up diluting current shareholders. That's not a great outcome if you own the stock.
5. Management has to be positive
Very few companies are going to come out and tell you that the future is bleak. Far more common is that management acts as something of a corporate cheerleader, highlighting all of the good news and downplaying negatives. So you need to take most things management says about Canoo with a grain of salt.
And yet there's one place where the company is legally bound to be as honest as possible. In the company's second-quarter 2023 10Q filing with the SEC 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.
Basically, management is telling investors that there is a very real chance it will have to go through a corporate restructuring if, for any reason, it can't keep raising cash from investors. This is one time when you should take the company's word as gospel.
Maybe Canoo pulls it off
Canoo is a high-risk investment even after the stock has collapsed 97% from when it was brought public. The list of negatives is quite substantial and the bright future management is painting is largely based on outcomes that are in no way certain to come to pass.
If you are looking at this EV stock today, you need to be cautious. A lot has to go right if it is to survive the negatives in place today.
