ZEV - Sell Lightning eMotors As Shares Surge Despite Worsening Fundamentals
Summary
- EV stocks charged back to life in January.
- While some of the stronger stocks in the industry might be turning the corner, a lot of EV firms are still in deep trouble.
- Lightning eMotors has weak operational results and its latest business update was discouraging.
- I believe traders should be looking to sell struggling speculative firms, such as Lightning eMotors, after this large rally.
- Lightning eMotors shares were up another 15% on Wednesday, making for an excellent opportunity to sell.
Lightning eMotors ( ZEV ) is a company in the electric vehicle industry. It has a wide-ranging business plan. It aims to design and manufacture zero-emission vehicles including both battery and fuel cell electric. It also offers charging infrastructure solutions. It aims to have products ranging from passenger and cargo vehicles through to work trucks and city buses.
Despite the broad range of business activity, Lightning eMotors has failed to generate much commercial traction. Fiscal year 2021 saw revenues of $21 million, and 2022 isn't going to end up being all the much higher.
Meanwhile, like many other SPACs and electric vehicles companies, Lightning eMotors is running large losses. Analysts project that the company will lose $1.01 per share in 2023, which is slightly unnerving given that the company's stock closed Wednesday at $1.00. It's generally not a great sign when a company is projected to lose its entire market cap in a single year.
And, if anything, Lightning's outlook is getting worse following its most recent business update in January.
A Massive Revenue Miss
Lightning Motors released a frankly awful business update earlier in January. Here's the details from Seeking Alpha:
Lightning eMotors on Tuesday [January 10] said Q4 revenue was expected to be about $4M on sales of 31 vehicles and powertrain units, significantly lower than expectations.
The company own's expectations for Q4 revenue [had] ranged from $13M to $18M on sales of 100 to 130 units.
It really doesn't get much worse than this, as far as operational updates go. The company sold just 31 units against prior midpoint guidance of 115. Meanwhile, revenues of $4 million are approximately 75% shy of prior guidance. You'd expect to see shares near fresh 52-week lows following such a fiasco. Instead, ZEV shares have tripled over the past month.
It's that kind of market again, apparently, where stocks can triple in a short span despite awful fundamental news:
Needless to say, I think anyone that owns ZEV shares should be thankful for this unexpected run-up over the past month and move to the sidelines.
What explains the awful operational results from Lightning eMotors? In part, it blamed Romeo Power -- now a division of Nikola ( NKLA ) -- for not following through on a planned battery supply agreement. That's all fine and well, sometimes companies won't or can't execute on planned deals.
That said, if a big chunk of your forecasted revenues are reliant on Nikola meeting expectations, your business plan might be on flimsy footing. Nikola, after all, is the electric vehicle company most well-known for rolling a prototype vehicle down a hill. Nikola's founder, Trevor Milton, was convicted of fraud in October. It's not ideal when a significant piece of Lightning's business was apparently reliant on another struggling EV firm to deliver.
Turning to profits, things are looking bleak on that front for Lightning eMotors. The company, since going public, has never once generated a positive gross margin. In fact, it's never even been particularly close to breakeven:
As a reminder, gross margin is simply the difference between how much it costs you to manufacture a product and how much you sell it for. Lightning eMotors, as of the most recent quarter, is now losing 40% on every sale just putting the products together. That counts no other overhead, interest, taxes, or any of that. Just on the raw cost of goods, Lightning eMotors is way under water.
In theory, Lightning was supposed to be ramping up sales and reaching positive gross margins once it utilized its capacity better. Instead, Lightning's sales are declining and losses are widening. There's very little good to say about this operational update or Lightning's recent business results more generally.
Balance Sheet & Other Bigger Picture Factors
Until recently, bulls could point to a reasonably strong balance sheet as a sign of strength. However, the company has gone through more than half of its cash pile since 2021. It has also been diluting shareholders .
For example, it converted some of its debt into stock at an effective price of around a dollar per share. Given that a lot more debt remains, we could see significant additional dilution on that front. On top of that, Lightning has a $50 million equity sale agreement in place, and I'd expect that they may use it going forward given the recent sharp rally in the share price.
Additionally, in December, the company received a non-compliance warning from the New York Stock Exchange due to its stock price falling under the $1 threshold. As of this writing, ZEV stock is currently right up at the $1 threshold. However, given the company's weakening balance sheet and large operating losses, it wouldn't be surprising if the stock dips back below that line, eventually leading to a reverse stock split.
There's one more data point worth considering about Lightning eMotors. It came public via a GigCapital SPAC deal. GigCapital has, to date, completed four SPAC deals , respectively, including:
All of these have performed poorly. Kaleyra and Lightning are both down about 90%, UpHealth is down 97%, and Bigbear.ai is off about 65% despite the recent speculative excitement in artificial intelligence stocks.
Some of these other GigCapital deal companies, like UpHealth, also saw their operational results fall short of their initial SPAC projections. I'd note this to point out that while SPACs as a group have fallen, some SPAC sponsors have built better reputations than others. GigCapital -- Lightning's sponsor -- has to-date delivered what I would consider to be a rather lackluster track record.
What Would Change My Mind About Lightning eMotors?
I have a bearish outlook on ZEV stock. To change my mind, I'd need to see one of two things. One, Lightning eMotors would need to find more and ideally better caliber of suppliers and customers. It's not surprising that Lightning is running into trouble when it relies on companies like Nikola as counterparties. Lightning will need to work with more reliable suppliers and stabilize its sales process with more dependable customers to turn the corner.
The other factor would be if Lightning can find some sort of new financing. Lightning has about $70 million of long-term debt. On the cash side, Lightning had $202 million of cash back in June 2021, but that has now fallen to $96 million as of last quarter. Given the current pace of operating losses, Lightning seems likely to tip into a net debt situation in the near-term, and it may struggle to keep operations going if it can't start generating more revenues or obtain additional financing within a reasonable time period.
ZEV Stock Verdict
Lightning eMotors stock recently traded for as low as 29 cents per share.
Given the disastrous business update in January, I fail to see why shares are trading higher at all. In my view, the entire rally in ZEV stock is due to speculators bidding up both heavily shorted stocks and companies in the electric vehicle industry. ZEV shares surged another 15% on Wednesday, which seems in-line with the general speculative froth we've started to see in other high beta stocks lately.
However, given Lightning's weak revenue picture, negative gross margins, and shrinking cash position, it's hard to find much of anything positive with this company specifically. As soon as this rally in electric vehicles stocks peters out, I expect ZEV stock to be trading much lower than it is today.
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Sell Lightning eMotors As Shares Surge Despite Worsening Fundamentals