Canoo (GOEV 19.70%) stock has traveled a hard road since going public through a merger with a special purpose acquisition company late in 2020. The electric vehicle (EV) company still exists in a pre-revenue state, and its share price is down roughly 97% from its high as of this writing.
Should investors be betting on this underdog EV player, or stay far away due to the risk that the stock will continue to fall from current levels? Read on for bullish and bearish scenarios that could determine what lies ahead for the stock and an assessment of whether it's a worthwhile investment at today's prices.
Bull case: Valuation could rebound as deliveries begin
With the stock having already suffered brutal sell-offs, it might not take much good news to send the company's share price significantly above current levels. Canoo expects that it will be able to produce 20,000 vehicles this year. At the same time, it anticipates being able to reduce its operating expenses by between 25% and 30% thanks to reducing its employee headcount, cutting down on professional fees, and trimming IT infrastructure spending.
Given that Canoo remained in a pre-revenue state in the first quarter and had yet to deliver vehicles, it's easy to see why many are skeptical about the company. But the EV specialist indicated that it would begin delivering vehicles in the current quarter, and the high degree of bearish sentiment surrounding the stock might open the door for strong recovery trading if the business can demonstrate even small signs of staying power.
By largely focusing on the business market, Canoo is focusing on a more specialized market and may be able to sidestep some of the competition in the EV industry. According to management, the business is seeing solid demand and making progress on unit economics. Next year, the company thinks it could produce 40,000 vehicles. And in 2025, it expects to begin posting a positive gross margin.
The company says that it's close to being able to announce new orders from a Fortune 100 company and a Fortune 500 company, and it has confirmed contracts to deliver vehicles to customers including Walmart, Kingbee, and NASA. Canoo estimates it now has orders for vehicles totaling $2.8 billion in sales value.
With the EV specialist's market cap currently at roughly $315 million, it's valued at less than 11.5% of its stated order book value. The stock is undoubtedly a gamble, but there's an outside shot it pays off big for risk-tolerant investors.
Bear case: Liquidity problems, continued dilution, and tough competition
All corners of the EV industry are becoming increasingly competitive, and there are reasons to doubt Canoo's ability to gain a significant foothold in the market or shift into profitability. Even entrenched leaders in the space are facing demand issues right now, and Canoo is trying to begin deliveries and ramp up production at a time when industry-specific and macroeconomic factors are working against it.
Following rapid interest rate hikes, borrowing money has become much more expensive, and Canoo is going to need large capital injections if it wants to scale up its vehicle production. Unfortunately, the company ended last quarter with a tiny cash position.
Factoring in the exercise of stock warrants and sale of convertible debt notes, which can be exchanged for stock, the company had around $70 million in cash at the end of the period. To put that in perspective, the company posted operating losses of roughly $67 million in the quarter and $400 million last year. Even if Canoo can begin posting a positive gross margin in 2025, it will likely still be posting large operating and net income losses.
GOEV Shares Outstanding data by YCharts
In order to raise funds, the company will likely continue to rely on issuing new shares. But with its stock trading in the neighborhood of its lifetime low, current shareholders will have to be substantially diluted if the company is going to raise substantial capital. Profitability remains years away even in a best-case scenario, and there's a high risk the business will struggle to remain solvent.
Is Canoo stock a smart buy?
Canoo should be thought of as a gamble rather than an investment. Its odds of delivering strong returns for long-term shareholders aren't good, and there's a significant chance the company won't be in business by the end of the decade. While the stock may be able to climb above current levels or even deliver explosive growth if Canoo proves to have longevity, the risk-reward profile here is simply too slanted to make shares a worthwhile portfolio addition for most investors.
