GOEV - Canoo: Things To Note Ahead Of The Q4 Results

2023-03-13 18:28:13 ET

Summary

• Canoo plans to publish its Q4 results on the 14th of March.
• We pick out a few important themes that may dominate Q4 results.
• We touch upon the good and bad facets of the GOEV stock which make it a HOLD.

Mobility technology firm Canoo ( GOEV ) intends to publish its Q4 results early this week (3/14). Here are a few considerations that may be useful for investors ahead of the event.

Things To Note

• The main Q4 headline number to watch out for is a negative GAAP EPS of -$0.35 (Q4-21:-$0.6).
• Whilst Canoo’s earnings calls have been supported by interim CFOs in the past, it's the first time one will likely see a full-time CFO attend the event. It wouldn’t be unreasonable to hope for more nuance and financial disclosures on account of this.
• Investors should look out for growth in the order book pipeline, between Q2 and Q3, although it is questionable if the magnitude of expansion will be better than what was seen in Q3. For the uninitiated, Canoo saw its order book pipeline surge by $1bn to cross the $2bn mark. One would also hope for a boost in the level of contracted commitments (just for reference, only 37.5% of that pipeline belongs to stage 2 refundable reservations and stage 3 contractual commitments). In unit terms, the contractual commitments had surged from 5500 units in Q2 to 18000 units in Q3.
• Canoo management will likely talk up their ability to bring through a lower OPEX cadence in H2 (in Q4 they had planned to incur $70-90m of OPEX, excluding stock-based compensation), but investors should note that consensus believes that the EBITDA outlook will actually worsen sequentially over the next 4 quarters, including Q4-22 where it is expected to come in at -$86m (~6% higher than what was seen in Q3-22).

• Canoo has previously received negative press for its fidelity towards stock-based compensation (SBC), but in Q3, it did well to bring it lower than $20m ($19.53m to be specific). More downward pressure on this front will be taken well although investors shouldn’t expect a YoY decline given that last year, in Q4, it was already relatively low at $18.6m.

• Canoo management has been attempting to tilt its spending mix from OPEX to more CAPEX, and you will see this reflected in Q4 as well. In Q3, the company spent $23m on CAPEX, but this is poised to come in within the $30-$40m range in Q4.
• Canoo’s financial sustainability is a chief cause of concern, and management may likely be pushed to provide more details on how they plan to fund their ambitions. Just for some perspective, the level of cash outflow taken up by operating activities had surged by 83% (as of 9M-22) to hit $330m . Besides the company is also on the cusp of entering phase 2 of its manufacturing roadmap (the goal is to hit a production run-rate of 20000 units by the end of 2023) which will necessitate even more CAPEX intensity (as of 9M-22 CAPEX stood at $89m). Despite all these mammoth commitments, the cash on Canoo’s books stands at a paltry sum of less than $7m (does not include restrictive cash of ~13.7m)!
• In April last year, Canoo signed a contract with NASA to deliver multiple crew-transportation customized LV (Lifestyle vehicle) vehicles in 2023. Given that the delivery deadline is less than 3 months away, management will likely touch upon the progress made here.
• Management will also likely cover the battery module supply contract it signed with the Defense Innovation Unit last month. This follows the LTV contract it had successfully fulfilled in December-2022 with the US army. If Canoo can continue to procure more contracts and enhance its reputation in the defense segment, this could serve as a fitting stamp of validation for its IP to gain more widespread adoption across other end markets.

Closing Thoughts - Is GOEV Stock a BUY, SELL or HOLD?

Investors fishing for beaten-down opportunities in the broad EV value chain may well have Canoo as one of the prime candidates. This is exemplified by a record-low relative strength ratio, juxtaposing Canoo against its peers from the self-driving and EV space (the ETF- IDRV).

If we switch gears to GOEV’s standalone chart, we can see that themes of weakness are very much present, but it’s also not unreasonable to question if things have gone too far.

From Nov-2022 to Feb-2023 it looked like the stock was attempting to build a base within the $1-$1.5 range. However, this went out of the window as soon as the company announced its decision to sell shares to raise funds in early Feb. Since then the stock has been in a downtrend and is currently at record lows. Meanwhile, the 14-period RSI (Relative Strength Index) too has dropped to the oversold territory.

Given GOEV’s elevated short interest (15.69%), a few investors may be enthused by the prospect of a short squeeze, if the Q4 results go well but I would urge some caution.

Firstly, consider that the days-to-cover ratio is no longer that attractive (historically the days-to-cover has been over 7 days) and is currently at just 1.75x days the lowest it's been since July last year. Since the short-sellers can cover their position in less than 2 days, it’s difficult to envisage a sustained uptrend in the stock on account of a short squeeze.

I also have concerns over Canoo’s increasing volatility profile and its heightened sensitivity to the benchmark, which diminishes its allure as a prospective portfolio stock. GOEV's daily standard deviation quotient has increased over time and is currently uncomfortably steep at close to 7%.

Meanwhile, as risk aversion in the broader markets picks up steam, and impacts the benchmark, Canoo may likely take a bigger hit, given an elevated beta of nearly 3x!

Investors should also note that even if Canoo comes out with outstanding Q4 results, there isn’t much scope for an upward shift in Wall Street positioning, as things are already overly bullish. Just for some perspective, 75% of the sell-side analysts who cover GOEV already have a ‘Buy’ or ‘Outperform’ rating, with an enormous average price target of $5.25, implying over 800% upside; at this juncture, that looks like quite a stretch; if anything, the overriding risk here is towards a downward revision of those ratings and the associated price targets!

All things considered, the GOEV stock is a HOLD.

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