MVST - Microvast Holdings: A Second Take

Summary

• The stock of EV battery concern Microvast Holdings has slid badly since our recommendation to avoid the shares in March.
• However, revenue growth is expected to pick up markedly in FY2023. Has the equity now slid into the 'buy zone'?
• An updated investment analysis follows in the paragraphs below.

"If you give up what you want most for what you think you should want more, you'll end up miserable ." - Brandon Sanderson, The Hero of Ages

We provided our first take on Microvast Holdings ( MVST ) in March 2022. We concluded that article with this view on the stock:

If the company's battery technology development and production ramp up plans are successful, Microvast could be a huge winner given the projected growth of the electric vehicle market over the next decade after solid growth over the previous decade. However, it seems too soon to bet on that scenario.

Caution was indeed warranted in retrospect as the shares have shed much value since that piece. With the stock at much lower levels and revenue growth projected to accelerate substantially in 2023, is it now time to buy the dip? An updated analysis follows below.

Company Overview:

Houston-based Microvast Holdings is focused on the development and manufacture of battery solutions for mobile and stationary applications. The company provides a broad portfolio of fast-charging lithium-ion battery solutions, with different chemistries, performance characteristics, and price points across a diverse customer base.

The stock debuted on the market in 2021 after Microvast announced a merger with Tuscan Holdings. This raised over $700 million in proceeds. Currently, the stock trades below two bucks a share with an approximate market cap of $525 million.

Third Quarter Results:

On November 10th, Microvast posted its third quarter numbers . The company incurred a GAAP loss of 12 cents a share during the quarter as revenues grew just less than five percent on a year-over-year basis to $38.6 million. Sales in Europe were down 30%, due to the current challenges/conflict on the continent. Profits were seven cents a share better than expectation, even as revenues missed by some $14 million.

Order backlog increased nearly 167% on a year-over-year basis to $140.6 million. This was led by strong demand from China. Management stated it expected capital expenditures to come in between $90 million and $120 million for FY2022 and overall revenue growth to be up 35% to 40% over FY2021.

Analyst Commentary & Balance Sheet:

Only two analyst firms have chimed in around MVST over the past year. In early April, Morgan Stanley maintained their Underweight rating on the stock and lowered their price target by two bucks a share to $4 on the shares. Oppenheimer last reiterated its Buy rating and $8 price target on Microvast in mid-August.

Approximately six percent of the outstanding float of the stock is currently held short. The CFO and COO bought nearly $1.4 million worth of stock in aggregate in mid-June, when the shares traded in the mid $2s. There has been no insider activity in this equity since that time.

After posting a net loss of $36.5 million for the third quarter, Microvast Holdings had approximately $295 million worth of cash and marketable securities on its balance sheet against just north of $80 million in long-term debt. The company expects to close FY2022 with approximately $250 million in cash and marketable securities.

It should be noted that the company was recently selected by the U.S. Department of Energy in collaboration with General Motors ( GM ) to receive a $200 million grant as part of the first set of projects funded by the recent ' infrastructure ' bill. This obviously is a nice ' win ' for Microvast and will fund support the construction of a new separator manufacturing facility.

Microvast is collaborating with GM to develop new separator technology that can improve electrical vehicle safety, charging, and battery life. The company also secured just over $110 million of project financing during the third quarter, which will help it ramp up capacity to meet its growing order backlog. GM is also just the latest of the company's notable partners.

Verdict:

The one analyst firm that has posted projections for Microvast has the company losing roughly 30 cents a share in FY2022 as sales rise just over 30% to $200 million. Losses are projected to rise 50% in FY2023, even as revenues more than double to $427 million.

Obviously, this is hardly a consensus, given one analyst firm is all that has offered up predictions for the year ahead. That said, Microvast seems to remind me of the quip about the retailer ' that loses money on every sale but makes its up volume ' except losses are predicted to increase in FY2023 even as sales more than double.

The industry and Microvast have clearly benefited from taxpayer largesse in 2022 thanks to both the trillion-dollar-plus infrastructure legislation and The Inflation Reduction Act. Unfortunately, like the U.S. government, Microvast is currently hemorrhaging money. In addition, raw material costs elevated the level as a result of supply chain disruptions as well as global inflation. Management expects that will continue to be the case in 2023 and possibly through 2024.

The company certainly has big aspirations and is targeting large and growing markets. However, until management greatly reduces its quarterly cash burn, I will continue to monitor this story but will avoid investing in the stock.

"The purpose of life is not to be happy-but to matter, to be productive, to be useful, to have it make some difference that you lived at all. " - Leo Rosten

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