Canoo: Differentiation Potential In EV Space, But Still A Show-Me Story
Summary
- Electric vehicle company Canoo went public through a SPAC deal with Hennessy Capital Acquisition Corp. IV but saw its share price decline significantly from recent highs.
- The company plans to enter multiple EV categories with a unique subscription-service and skateboard technology which may be key differentiators.
- Recent news have been scarce except headlines that Apple was in talks for its own EV plans. A big partnership like this would drive the stock significantly higher.
- Management has a proven track record in the car, manufacturing and EV industry at BMW, GM and Deutsche Bank.
- We are long with a speculative but small position following recent stock price declines.
Article thesis
Canoo (NASDAQ:GOEV) listed on the Nasdaq on December 22nd following its SPAC merger with Hennessy Capital Acquisition Corp IV. (HCAC). Canoo stock has pulled back significantly from its highs of $25 after the closing of the SPAC deal and now trades at ~$11 as of the closing from 5th March.
Data by YCharts
While the company has not made any revenue yet, we believe that the experienced management team and potential best-in class EV drive-train technology (skateboard) are key differentiating factors for the company.
Canoo has established a strategic partnership with car manufacturer Hyundai for its proprietary skateboard technology. However, there is no further transparency from management on the details around the partnership.
Besides engineering services, Canoo plans to manufacture different B2C EV types (lifestyle and sports) that will be brought to market via a subscription-only offering. Customers can access Canoo‘s cars by paying a monthly subscription that includes all maintenance fees, while offering a maximum flexibility with a minimum subscription duration of only 1 month. Canoo also recently announced details around its multi-purpose delivery vehicle, which will be part of its B2B offerings, by which the company aims to enter electrification of the large last-mile delivery vehicle space.
In our view, success for Canoo depends on closure of potential partnerships for both its engineering segment and the recently announced B2B delivery-vehicle, as well as the level of customer adoption for its subscription model once the first B2C cars hit the market.
This article provides a perspective on Canoo's technology and financial forecast up to 2025, and will discuss some of the risks and opportunities.
Canoo's offerings
Canoo's currently planned EVs include a lifestyle vehicle, a multi-purpose delivery vehicle and a sports vehicle, all set to be launched between Q2 2022 and 2025.
Source: Company presentation
All vehicles will be built on the basis of Canoo's proprietary skateboard technology which essentially is a flat, drivable rolling chassis that contains the electrical architecture. The vehicle body just needs to be assembled on top of the skateboard. Management calls this a "top hat design" approach, which is expected to simplify the manufacturing process and may reduce cost and time to market.
For the lifestyle vehicle, Canoo claims a 250-mile range per charge - in our view not very impressive. However, the fast recharge time (up to 80% in less than 30 minutes) may make up for that, and we believe that when battery technology improves further, Canoo should be able to upgrade its battery capacity. Further to note is the large 7-passenger seat capacity of the lifestyle vehicle, and the customizability of the top-hat.
Source: Company website
Just recently, Canoo announced further details on its Multi-Purpose Delivery Vehicle. The fact that Canoo is also entering this segment is especially interesting in light of the large last-mile delivery market which Canoo's management says to be a $51bn market by 2022.
Source: Company website
Many of the large companies in the space, including Amazon and UPS are commiting large investments into the electrification of their delivery fleets. This can be a big opportunity for Canoo as well. Availability of the delivery EV will begin in 2022 and large-scale production will commence in 2023. Canoo's delivery vehicle will also be built on the basis of the skateboard technology, which allows for maximum interior cargo space on a relatively small vehicle size which drives volume and energy efficiency.
Source: Company website
The Canoo delivery vehicle will be available in different sizes of 200 and 450 FT³ Cargo Volume and different height and payload specifications allowing for multiple use-cases, starting at a ~$33,000 price. Canoo plans to offer customers best-in-class total cost of ownership, cargo volume, and functionally-designed features. Canoo's model is said to have some advantages with respect to total cargo volume (30% more parcel volume vs. current options) and total cost of ownership compared to current delivery-vehicle solutions, possibly enabling up to
$50,000 to $80,000 improvement on return on capital over six to seven years, depending on the use case, as compared to other top selling delivery vehicles (Source).
Let's now look at the skateboard technology, which we believe is one of the key differentiators for Canoo. The skateboard is a fully integrated drivable rolling chassis where the powertrain, battery technology, and electrical architecture is incorporated. It enables a variety of vehicle configurations, and faster manufacturing as the car body assembly with the skateboard only requires minimal adaptation depending on the use-case. According to management it is the
Flattest and lowest profile skateboard in the industry [and] enables minimized footprint, maximized interior volume and highly modular configurations, while cutting development costs (Source).
According to management the skateboard technology is the first true steer-by-wire solution that will come to market, which is differentiated from competitor offerings:
This differentiation is important since the steering mechanics are not required and allow the interior of the vehicle to be relatively larger even at similar or smaller car sizes. The steer-by-wire technology allows for a much more flexible positioning of the steering wheel at nearly any position within the vehicle, which enhances interior space. Our research found some comparable technical solutions from AEV Robotics, REE Auto, and Rivian but none seems to be having any obvious edge over Canoo‘s solution (see comparison here and here). Competitor Arrival, which is set to go public via SPAC with CIIG Merger Corp. (CIIC), also has a comparable skateboard technology but is not enabling full steer-by-wire technology.
Canoo has established a partnership with Hyundai for its skateboard technology which validates the core technology offering. You can read more about the Hyundai partnership here. However, Canoo does not have any pre-ordered vehicles yet, while competitor Arrival already has a 10,000 vehicle order from UPS (Source), and earlier in 2020 Arrival also secured an investment from Hyundai (Source). This validates both company‘s technology offerings. We believe that the skateboard technology in general will see broader adoption in the EV space as it enables faster manufacturing and cost-saving potential. Interestingly, recent headlines reported that Canoo has also been in talks with Apple (AAPL) on a potential deal:
The two companies are reported to have discussed options ranging from an investment by Apple to a full acquisition. The much-discussed Canoo skateboard platform drew Apple's interest per sources (Source).
These headlines for potential partnerships are certainly exciting but in the end only constitute speculation for the moment.
Testing Canoo‘s revenue projections
Canoo says that it has a multi-phased approach to revenue generation that includes the partnering of its engineering services, the selling of its B2B delivery vehicle, as well as the subscriptions to its other vehicle types (lifestyle and sports). Since the closure of the SPAC deal it has been quiet around Canoo and no substantial news were reported, so we don‘t have any further insights into the revenue projections compared to the information from the SPAC filings.
Managament forecasts that the first revenue will not come from vehicle sales but from its engineering segment. Canoo projects $120 million in revenues for 2021 but provides little transparency on the financial details here. We can only speculate and assume that this is based largely on the Hyundai partnership plus the additional 7 pipeline projects that Canoo refers to in its investor presentation, including one with European Auto OEM (see below). There were also reports of Canoo partnering with auto manufacturer Magna which could indicate larger deals were already received for some of Canoo‘s vehicles and/or engineering services which now need to be scaled up.
Let’s take a look at Canoo’s Subscription Model: Management plans to offer access to its lifestyle and sports vehicles via a month-to-month subscription by which consumers get an all-inclusive experience that includes all costs (maintenance, insurance, vehicle charging) and requires no upfront or down-payments as is the case with conventional leasing.
Management says that it wants to reduce the burden of conventional car ownership, and claims that the subscription model also reduces total cost of revenue compared to a one-time vehicle sale.
Source: Company presentation
Management expects to achieve cost equivalence to a traditional lease model while offering much more fexibility and ease of use since the subscription fee contains all other hidden costs compared to a traditional lease where down payments, maintenance, registration, charging, a.o. may account for up to ~40% of additional cost.
Source: Company presentation
The unit economics of the subscription offering are important, and if we believe what management is saying, should generate higher margins vs. the traditional car sales model.
Canoo provides a breakdown of its financial projections in its investor presentation (see below). These projections are difficult to assess as the company is yet to launch a commercial product, and provides almost no transparency into the financials. Nevertheless, we are using these projections to build our own model.
Source: company presentation
Engineering & B2B Services Revenue: as per management's forecast, first revenues are expected to come in by 2021 from the engineering segment with $120 million in projected revenue. That revenue figure should hopefully be based on a rock-solid view into Canoo’s current Hyundai partnership plus the 7 projects in the pipeline. Canoo says that revenue from this segment is expected to grow at a CAGR of 39% between 2021 and 2025 and should reach >$500 million by 2025.
While we believe the engineering business can become a major revenue driver for Canoo we are a little more conservative with respect to the growth estimates. It is important to mention here too, that this revenue segment will also include the B2B offerings which mostly include the sale of the delivery vehicle. You can see that from the cumulative fleet volume for subscription in the figure above were the B2B delivery vehicle is not included.
In our own model we separate the engineering from the pure B2B (delivery EV sales) revenue.
Let’s start with the B2B segment. Based on the pricing that was announced for the delivery vehicle starting at $33,000 and assuming management's forecasted volumes of 35,000 cumulated delivery vehicles by 2025 are valid estimates, we get to revenues of $660 million by 2025. We have calculated a downside and best-case scenario to reflect for the uncertainty around actual unit volumes and average selling price.
Source: author's calculations
Our model adjusts for the average selling price of the vehicle, and we take an average selling price of $25,000 per vehicle in our downside scenario which reflects the pricing of other Class 1 EV delivery vehicles, i.e. the one from Canoo’s competitor Electric Last Mile (see below). The best-case scenario assumes an average selling price of $38,500 per vehicle which is calculated as the average price from the $33,000 initial proposed pricing for the first Canoo delivery vehicle and the currently highest priced class 2 delivery vehicle on the market with a $44,000 price tag (see below).
Source: Forum Merger
Canoo‘s starting price of $33,000 fits relatively well into the price range of currently and soon-to-be available offerings from the same cargo class 2 with >200 and up to 450 FT³ Cargo Volume at a price range between $30,000 and $44,000. The pricing is however slightly above the price tag for the current Class 1 commercial vehicles, but class 1 delivery vehicles have smaller cargo volumes.
In our calculations, we also take into account overall unit volumes sold for Canoo‘s delivery vehicle: in the downside scenario we assume fewer overall units sold at a cumulative 17,500 units by 2025 (vs. 35,000 per management forecast) based on slower upstart of manufacturing capacity. The best-case scenario assumes a cumulative delivery vehicle fleet of 75,000 units by 2025 based on faster manufacturing set-up and a potential larger partnership deal that would result in a ramp-up of production.
Canoo forecasts a cumulative 35,000 delivery-vehicles being sold by 2025 and an additional 50,000 units for 2026. We believe this is an ambitious but attainable target, as the US delivery vehicle market alone is expected to reach roughly 1 million units by 2025 (Source). The strong push into electrification of delivery-fleets is just getting started and most recently, UPS has made a 10,000 order for delivery vehicles from UK start-up Arrival, while Amazon (AMZN) has made a 100,000 unit order from Rivian (see here).
ELMS says that it already has a +30,000 unit pre-order volume for its Class 1 delivery EV which will be launched later in 2021. ELMS projects that units will rise to almost 200,000 units by 2025 (Source). This is more than double the estimated cumulative delivery vehicle fleet that we have used in our best-case scenario for Canoo and more than 5-fold the figure that Canoo's management is forecasting in their financial model by 2025.
If we take into account some of the most relevant metrics for purchasing decisions, including pricing and total cargo volume, Canoo seems well positioned to take a large enough here, especially since the Canoo delivery vehicle seems to offer some competitive advantages with respect to volume efficiency, payload, and is priced competitively.
Let’s now look at the engineering segment: we assume the $120 million in 2021 revenue that Canoo's management has forecasted is based on the Hyundai partnership plus the business under negotiation for the engineering segment. In the base case we use the average revenue CAGR from Canoo's forecast of 39% until 2025, while in the downside and the best-case we assume a CAGR of 25% and 50% respectively.
Source: author's calculations
Our model gets to ~$300 million in revenue in the downside and ~$450 million in the base-case by 2025 for the engineering segment. Currently, we are taking a more conservative view on those projections to reflect the lack of transparency around the financials of the Hyundai partnership, and projects under negotiation.
In total, this brings the potential combined revenue from the B2B and Engineering segments in our model close to ~$1.1bn in our base case and ~$540 million in the downside by 2025.
Let's now look at the subscription revenue segment:
Canoo plans to produce a cumulative lifestyle vehicle unit volume of 135,000 by 2025. The sports EV, which will also be part of the subscription offering, is expected to launch in 2025 with an initial 25,000 units and 50,000 units by 2026. In total that's a cumulative 160,000 EV units for 2025 that can be used for the subscription offering.
If we take the cumulative fleet volume units and assume the average subscription price per month is in the $600 to $700 range, with a roughly 9-month average subscription duration, we get to a revenue figure from subscriptions of >$900 million by 2025 in our base case (see model below).
The revenue estimates are largely affected by the assumptions on vehicle unit volumes, as well as duration and price of the subscription offering. In our model we have built a downside and best-case scenario to account for these uncertainties. For the EV unit volumes, we take a more conservative view and assume EV units will be lower than management’s forecast. With respect to the pricing of the subscription offering, this was recently discussed in another SA article and assumed to be in the $900 per month range.
In our model, we assume the $900 price tag to be a rather optimistic view of the willingness-to-pay threshold, especially since the subscription offering will be a relatively new experience of car ownership. We build our base scenario on a $650 price / month and the downside assumes a $450 / month pricing for the subscription offering. We have also taken a look at the current leasing rates for the Tesla Model 3 which comes in at a $631 price tag, with no downpayment (similar as for Canoo), and a minimum leasing duration of 36 months (note that Canoo‘s minimum subscription duration is only 1 month and thereby offers more flexibility).
Source: Tesla
For the average subscription duration we assume an average of 6, 9, and 12 months for the respective scenarios. The worst case reflects some of the uncertainty around consumer adoption of the subscription offering, and the best-case assumes full capacity utilization per unit for 11 months per year, while we take into account 1 month per year for maintenance where the vehicle would be out of service.
In our model, the volume unit forecast for both the B2C and B2B segment are important drivers of projected revenue. Since the unit volumes from Canoo's different segments are difficult to appraise, we are taking a look at the Global EV forecasts by vehicle types to assess the probability of Canoo’s estimates.
Deloitte and Bloomberg have published research reports on the Global EV markets and their projected unit developments in major regions. Deloitte highlights a CAGR of 29% over the next 10 years as total EV sales are expected to grow from 2.5 million units sold in 2020 to >11 million units sold in 2025, and roughly 10-fold to 31 million units by 2030 (see here).
Source: Deloitte
A Bloomberg report forecasts that the share of total Global EV car sales could reach roughly 10-11% share by 2025 and 28% by 2030, which would represent between 8 to 10 million units by 2025 and 25 million by 2030.
Source: Bloomberg
Another report from IEA sees global electric vehicle stock growing between 20% to 36% annually, reaching between 140 million to 245 million vehicles in 2030 – more than 30 times above today’s level on the upside (assuming government policy tailwinds). Strongest growth is expected for the light-duty vehicle segment where electric powertrain technologies, including Canoo’s offering, are most readily available. By 2030 it is assumed that the global electric vehicle stock (excluding two/three-wheelers) accounts for at least 7% of the global vehicle fleet if not more, up from about 1% of global car stock in 2019.
Source: IEA report
Canoo's lifestyle vehicle is projected at 135,000 cumulative units sold by 2025, plus an additional 25,000 sports type EVs starting in 2025. Assuming Canoo can double its production capacity by 2030 to ~300,000 that would represent ~0.025% of the Global EV PLDV (= passenger light-duty vehicle) stock by 2030 reflecting the most conservative scenario from IEA above. Obviously, China, Europe and other regions are still included in those estimates, so the pure US market that Canoo is going after in its initial launch is smaller.
While those estimates carry many uncertainties, we believe Canoo's projected unit volumes are attainable since we believe that Canoo has a possible technology advantage. The largest uncertainty will be the level of adoption for the subscription offering vs. the conventional ownership or leasing models. We see actual unit volumes to be lower vs. Canoo’s forecast and somewhere between the base- and downside case assumptions from our model.
Let's now look at the delivery vehicle segment and projected unit volumes. The global electric commercial vehicle market is expected to reach roughly 1 million units by 2025 (Source) and 2 million units by 2028, growing at a CAGR of >40%, mostly due to the strong growth of e-commerce (Source). In fact, many leading e-commerce and logistics companies have already started or announced to adopt EV solutions for their delivery fleets: UPS has made a 10,000 order for delivery vehicles from UK start-up Arrival (Source) and Amazon has made a 100,000 unit order from Rivian (Source).
IEA states that the market for EV LCV (= light commercial vehicles) will reach around ~16 million in stock unit volume by 2030 in the conservative scenario (Source).
Canoo projects unit volumes of 35,000 delivery vehicles by 2025 and 85,000 by 2026. Assuming the capacity can double to 170,000 units by 2030, this would represent a ~1% Global market share. Again, other regions are still included in those estimates, so the pure US market will be smaller. Still, we believe this represents a reasonable estimate for Canoo due to the potential technology advantage. Any larger partnership deal with the likes of Amazon, UPS, FedEx or other larger players in the e-commerce segment would probably result in a short-term upside to these assumptions.
Let's now close the loop and look at the combined revenue projection for Canoo based on our model. Overall, when adding the Engineering & B2B plus the Subscription Revenue segment together, we get to the following total revenue estimates for 2025:
Our base-case of ~$2bn revenue by 2025 compares to ~$2.3bn in revenue that Canoo's management is forecasting. Due to the large uncertainties around some of the underlying assumptions, especially with respect to unit volumes and lack of transparency on the details of revenue projections, we are taking a more conservative view and leave out the best-case scenario for our valuation estimate. We assume 2025 revenue to be in the middle of our base- and downside scenario. That would be be roughly $1.4bn in revenue by 2025.
Projected Valuation
At the closing price of ~$11 from March 5th Canoo trades at a ~$2.6 market capitalization based on 235.7 million shares outstanding. This brings the forward market cap / sales ratio to ~1.9 for 2025 based on our projected revenue of ~$1.4bn. We believe that the recent pullback in Canoo’s stock price puts shares in a relatively attractive price zone comopared to some of the other early-stage EV companies.
Management
Before we get to the conclusion, let’s also take a quick look at Canoo’s management: one key aspect of why we believe Canoo is more than a nice-looking idea on a PowerPoint presentation is its strong management team. Canoo's current CEO Ulrich Kranz is an automotive industry veteran with >30 years of executive experience at BMW (OTCPK:BMWYY) (Source).
The recently appointed Executive Chairman, Tony Aquila, is a serial entrepreneur who founded Solera Holdings Inc. which he brought public at a $1 billion IPO, followed by multiple acquisitions that finally resulted in Solera going private again at a $6.5bn valuation in 2016.
The CTO Peter Savagian also brings a multi-year experience from the car industry and served in various roles at General Motors for more than 10 years.
The CFO Mr. Balciunas served, amongst others, as VP Global Automotive Investment Banking at Deutsche Bank AG for roughly 10 years.
Risks
Canoo has yet to launch a commercially viable product, let alone generate any revenue. Unfortunately, the company does not provide any transparency around its revenue projections, especially for its partnership with Hyundai. Similarly, talks with Apple provide nice headlines but in the end don‘t result in any revenues. The largest risk is that Canoo's plans and the underlying financial forecast are simply too optimistic and management fails to close any partnerships for its engineering or B2B offerings. Similarly, its own lifestyle EVs might not get the required customer adoption, either due to production delays and/or lack of customer adoption of its subscription offering, which is a fairly new go-to-market strategy.
While we believe that the company will have sufficient cash to fund its operations in the short-term, the fact that Canoo is basically pursuing multiple projects in parallel will sooner or later result in further capital requirements and equity dilution via share offerings which would negatively impact the share price in the short-term. The business combination with HCAC brought in ~$600 million to Canoo’s balance sheet. While that is certainly a good start it will not be sufficient to fund costly manufacturing for a very long time. Investors should carefully watch how operating expenses develop once the company starts commercial production of its vehicles.
Source: Canoo
Another aspect to consider is that Canoo has a lot of competition from established and well-capitalized players like Tesla (TSLA), Ford (F), General Motors (GM) but also from EV start-ups like Fisker (FSR), Lordstown (RIDE), ELMS (FIII), Arrival (CIIC), Lucid (CCIV) and many others. The recent share price declines in many of those names show that even the much-hyped EV industry is not immune to significant downside pressure despite their bright future. These declines might continue to accelerate as rates in the US continue to rise and fears of inflation weigh on investor sentiment.
We believe the recent declines in the public EV names were a confirmation that valuations have simply gone up too far while uncertainties around capitalization and abilities for mass-production were simply neglected by investors over the past months. Canoo will ultimately need to raise further capital to compete and accelerate its production plans. Furthermore, the company needs to prove that it can get deals closed for the Engineering & B2B segment, including commitments for the delivery vehicle from larger companies in the e-commerce and transportation segment.
Conclusion
While all of the above estimates carry significant risks, the key takeaway for investors is that Canoo does not need to become the next Tesla or Ford to be a successful company and investment. This was recently highlighted by another SA article. We believe that even at more conservative targets derived from our model, Canoo is still positioned to benefit from the large-scale EV adoption and may generate above-average returns for patient investors on the basis of current valuations.
The reason to believe is two-fold: Canoo has a potential technology edge and its management is rock-solid which should open up multiple partnership avenues in the future.
Despite all the positives Canoo has yet to launch a commercially viable product, let alone generate any revenue. The fact that Canoo is an early-stage company, any investment should be viewed as speculative only, with the risk of complete loss if the company fails to deliver on its strategy. It is up to the individual investor to decide whether these risks are bearable. While Canoo’s stock price declined substantially from its highs, we have initiated a speculative and small (<1% of our portfolio) long position in the company as we await further updates from management.
This article was written by
Analyst’s Disclosure: I am/we are long GOEV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (20)
you will always have the option to buy.ESP
Yes very much so. But this does give investors the op to buy into this venture deal. They probably pushed hard on funding and could not get what they wanted so they Spaced...I own a small GOEV position - it is a speculative play for sure - But I like many features of this EV play...ESP
The patent of interest which was filed in Nov 2020 should be the one listed here: uspto.report/...Our desk research found at least some comparable patent applications for modular configurations and drivetrains from companies like Rivian, see overview on their filed patents here: uspto.report/... And also REE Automotive has a comparable drivetrain patent grant which can be found here: uspto.report/... Please note we are no patent attorneys and don‘t have a qualified legal background to assess patent protection in full detail.