Lion Electric: Could Common Shares See Upside As Electrification Accelerates?
Summary
- Lion Electric has seen its stock price cut by nearly 74% from its 52-week high.
- The manufacturer of zero-emission medium and heavy-duty vehicles stands to gain from the decarbonisation of transport.
- The common shares hold high upside potential if strong EV sentiment returns.
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Lion Electric (NYSE:LEV) was a strong graduate of 2021's class of EV companies that went public on the back of rabid investor enthusiasm for what still remains the future of transportation. The electric trucks and school bus manufacturer was growing its vehicle order book and had executed plans to build a new battery manufacturing plant and innovation centre in Quebec. The future was bright, especially as production capacity was being expanded by a new manufacturing facility in Illinois for its zero-emission medium and heavy-duty vehicles. This would have enabled the Canadian company to fully seize the opportunity posed by the decarbonisation of North American urban transportation.
The total addressable market has been placed at around $110 billion as at least 15 U.S. states have set a goal for 100% of medium and heavy-duty vehicle purchases to come from zero-emission vehicles. The new world of transport is still fast approaching and companies that facilitate it stand to gain immensely. This remains the core bullish thesis for EV stocks like Lion Electric. Hence, the collapse of the company's common shares has left a bitter taste for EV bulls who were certain they were investing in the future of transport.
The company is now down 73.5% from its 52-week high and is making new lows in recent trading. A new market zeitgeist characterised by fear and dread has taken hold. Hence, we now invest whilst under the shadow of an unwanted and unwelcome material shift in market sentiment towards stocks that were building the future. Bulls are now being hunted by the spectre of a recession, rising interest rates, inflation, stagflation, and a war in Europe. For now, it seems the great times are firmly in the rearview mirror, and the premium previously extended to companies like Lion Electric is a relic of a bygone era.
So what comes next?
The previous valuation was partially constructed around euphoric visions for the future of transportation. Investors were very much taken to the statement to invest in the future they wanted to see. Hence, Lion's previous high was somewhat detached from its core financials. This era has ended with the price of the commons now likely to be firmly fixed at the hips to the rate of revenue growth and future profits. The former is certain as Lion converts new orders to revenue and rides the growing decarbonisation wave. However, the latter is unlikely for a firm still in such an early stage of its journey.
Revenue Ramp Points To Growing Pace Of Transport Electrification
Lion's just released earnings for its fiscal 2022 first quarter saw revenue come in at $22.64 million, a material 263% increase from the comparable year-ago period. This was driven by the delivery of 84 vehicles during the quarter as the company's order book swelled to reach 286 trucks and 2,136 buses with a total order value of $600 million. LionEnergy, the division that builds out charging stations for customers, also saw its order book hit $3 million. Both these have set the pace for the direction of future revenue as Lion brings more production capacity online to fulfil orders.
The company continues to make progress in building what management has described as the largest all-electric medium and heavy-duty manufacturing facility in the United States with production expected to start in the second half of this year. Fundamentally, this should allow Lion to take advantage of the US Government's 'Made in America' executive order that requires public spending to be more concentrated on American made products.
Gross loss during the quarter came in at $0.9 million, down by half when compared to the gross loss of $1.8 million in the comparable year-ago quarter. However, adjusted EBITDA was negative at $11.3 million, an increase from a negative EBITDA of $5.9 million in Q1 2021. The company ended the quarter with $155.5 million in cash and access to a committed revolving credit facility of $200 million. With Lion currently trading on a $1.18 billion market cap, the forward price to sales multiple assuming revenue for fiscal 2022 comes in at $100 million stands at 11.8x. But this is more than cut in half for fiscal 2023 when the revenue ramp is considered.
The Commons Are Down But Certainly Not Out
The all-electric transport future Lion is building remains on track despite the short-term malaise being experienced by its common shares. Long-suffering Lion bulls are hoping this future brings back the exuberant sentiment that once painted the shares of Lion and its EV peers. The electric jungle that Lion sought to dominate still grows larger each quarter as all industry participants look to ride the tailwinds of its growth over the next decade. The immensity of which will see a total rewiring of society along net-zero lines.
The next few months, perhaps the next year will likely remain difficult as the market continues to de-emphasize unprofitable but fast-growing companies. But investors need to stand ready to ignore the noise and focus on holding their position in companies driving the undeniable future direction of urban transportation. Risk is currently off, but this will likely revert at some point in the near future once the salient threats posed to the markets have calmed. Hence, whilst the common shares might be down, I would not count the company as being out.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of LEV either through stock ownership, options, or other derivatives. 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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