PTRA - Proterra: 3 Reasons I Am Staying Away

2023-05-30 08:31:34 ET

Summary

• Proterra is a leading American automotive and energy storage company that designs and manufactures zero-emission electric transit vehicles and EV technology solutions for commercial applications.
• The company faces challenges such as negative gross margin, heightened competition, and dwindling resources.
• While investors may be tempted to bottom fish and roll the dice at 1/10th the SPAC-valuation, I believe an elevated probability of bankruptcy warrants caution.
• Until the company can at least generate positive gross margin, there is no reason to get involved.

I came across Proterra Inc. stock ( PTRA ) while looking for companies trading at less than 20% of its valuation from 2 years ago. Typically, stocks that are trading more than 80% lower on a 2 year basis have most of their bad news 'discounted' by the market. If the company can effect an operational turnaround, investors who buy near the bottom can reap handsome rewards.

Unfortunately, after reviewing Proterra's business fundamentals and resources, I have come to the conclusion that the company is unlikely to survive in its current form and effect a turnaround. Simply put, every dollar of revenue generated by Proterra loses the company 8 cents in gross margin, without even looking at corporate expenses. With less than $300 million in cash and short-term investments left, I do not believe the company has the resources to reach profitability. I recommend bottom fishers to look elsewhere until the company can string together a few good quarters.

Company Overview

Proterra Inc. is an American automotive company with a mission to disrupt the commercial vehicle market with zero-emission vehicles and battery technologies. The company designs and manufactures battery electric transit buses and battery systems for other OEMs of heavy-duty fleets like commercial trucks and excavators.

Typical Performance Of A 2021 SPAC

Proterra came to the public markets during the 'SPAC-bubble' in early 2021 by merging with ArcLight Clean Transition Corp. ("ACTC") in a well received deal that valued Proterra at a $1.6 billion valuation. Early investors included Chamath Palihapitiya and major funds like Fidelity and Franklin Templeton.

In fact, the ACTC SPAC more than doubled when the deal was initially announced in January 2021 and traded to an intraday high of $31 / share before the deal was even consummated in June 2021 (Figure 2).

However, since Proterra's SPAC transaction finalized in June 2021 , the stock has been in a non-stop downtrend, culminating with an epic 54% plunge on March 15th 2023 after the company reported weak Q4/2022 earnings and 2023 guidance.

While investors may be tempted to 'bottom fish' and try to accumulate shares trading at less than 1/10th of their peak valuation, I am more cautious and believe a turnaround may not be achievable for a number of reasons.

1) Every Product Is Sold At A Loss

First, despite the company's marketing presentation touting its ability to lower manufacturing costs (Figure 3), we can see from the company's Q1/2023 earnings report that reality is that Proterra is still operating in negative gross margin territory (Figure 4).

In fact, product gross margin of -13.0% in Q1/23 was actually worse than -5.5% in Q1/22 and overall gross margin of -8.3% was also worse YoY. Clearly, the company has not made any headway towards its goal of 25% gross margin by 2025 that it promised investors in early 2021 (Figure 5).

At the current gross margin of -8.3%, every dollar of revenue loses the company 8 cents, putting aside corporate costs like sales, marketing, R&D, and management expenses.

I don't believe there is any reason for investors to be involved in Proterra until the company can at least generate positive gross margin.

2) Sales Ramp Not Materializing

Part of the margin problem for Proterra is that the rapid product adoption that the company projected when it went public has so far failed to materialize, so Proterra is left with elevated unit production costs. For example, when it went public, Proterra was forecasting 2022 revenues of $439 million and 2023 revenues of $838 million (Figure 6).

However, actual 2022 revenues was only $309 million and the company's guidance for 2023 revenues was a disappointing range of $450 - $500 million (vs. consensus estimates of $534 million), which led to the large 1-day decline in March.

At the current pace of growth, Proterra is unlikely to achieve its $2.6 billion revenue and 20% gross margin estimate for 2025.

Valuation A Fraction Of SPAC Bubble Peak

Investors may be tempted to roll the dice with Proterra, as the company currently has only a $256 million market cap with a $161 million Enterprise Value, down almost 90% from the SPAC valuation of $1.6 billion (Figure 7).

However, as we discussed above, with negative gross margins and a slower than expected sales ramp, Proterra may be running out of time to realize its potential.

3) Dwindling Resources Suggest Bankruptcy A Possibility

Despite raising close to $650 million in cash from the SPAC transaction ($415 million in PIPE investment from institutional investors plus over $200 million from the ACTC SPAC), Proterra has burnt through more than half of its cash, with less than $300 million in combined cash and short-term investments as of March 31, 2023 (Figure 8).

In the last twelve months, the company has burnt through $237 million in operating cash flows, meaning the current cash and short-term investment balance of $296.2 million may only last Proterra a little over a year at the current burn rate (Figure 9).

Altman Z Score Suggest High Probability Of Bankruptcy

In fact, Proterra's Altman Z Score , a measure of bankruptcy probability, is currently at -2.91, indicating the company is distressed (any Z Score less than 1.8 is considered distressed) with a high probability of bankruptcy in the next two years.

Conclusion

Proterra is an automaker with a laudable mission to disrupt existing commercial vehicles with all-electric drivetrains and batteries. The company came to the public markets during the 2021 SPAC boom with investments from Daimler Trucks, Franklin Templeton, Chamath Palihapitiya and Fidelity Management.

While investors may be tempted to roll the dice with the company trading at 1/10th of the SPAC valuation, I think caution is warranted. Almost 2 years after coming public, Proterra is still generating negative gross margins, with sales growth still far from what the company initially envisioned. With a dwindling balance sheet, I fear Proterra may not be able to reach profitability before it runs out of cash.

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