GOEV Grabs Reddit Attention: Is it Worth Taking a Chance On?

Canoo GOEV has been caught up in a Reddit-fueled frenzy. Shares of the electric vehicle (EV) startup popped around 22% on Friday, with the stock being among the top 10 most discussed ones on the Reddit forum. As with the case with most meme stocks, the sharp share price rally was divorced from fundamental strength or positive news catalysts and was primarily driven by the hype on subreddit r/wallstreetbets. With more than 30% of float sold short and the rising popularity on  social media, Canoo could be an attractive short squeeze candidate. While such rallies could offer short-term return potential to Reddit traders, they are certainly not for rational investors.

Currently trading at nearly half of its peak price levels since its Nasdaq debut on Dec 22, 2020, one could argue that it might be a favorable entry point. We don’t believe so. Canoo is merely a speculative bet as of now. For starters, the company is still in the pre-revenue stage and is burning cash. It incurred a loss per share of 50 cents in the last reported quarter, deteriorating from a loss of 7 cents in first-quarter 2021. The firm’s cash/cash equivalents also reduced from $642 million (as of Mar 31, 2021) to $563.6 million (as of Jun 30, 2021). Rising operating expenses and high capex requirements are also concerning.

Additionally, certain strategic pivots of the business model that Canoo had announced during its fourth-quarter 2020 earnings call limit its competitiveness. For instance, Canoo indicated that it would be de-emphasizing contract engineering services as it wants to protect its intellectual property. It should be noted here that Canoo’s initial plans of licensing its platform to other EV makers was considered to be a major revenue driver for the firm. It had earlier forecast to generate more than $500 million in sales from the contract manufacturing segment by 2025. However, lost revenues due to terminated engineering contracts (because of the change in strategy) and uncertainty over potential revenue-generating partnerships, especially since Canoo is just a small and new player in the increasingly competitive EV industry, is a spoiler.

Further, the firm stated that offering vehicles via a subscription model would become optional and account for just a small portion of revenues (less than 20% of the revenue mix). The firm’s subscription model had generated a lot of buzz and was believed to be a key growth catalyst for the future. With a major shift in the go-to-market model, Canoo’s business model is no longer differentiated.

It remains to be seen if Canoo can make the most of the proprietary skateboard technology platform. While the company currently has no saleable product, it intends to commence delivery of lifestyle vehicles in fourth-quarter 2022. In the absence of a proven track record, we remain skeptical if the firm would be able to hit production goals. In April, Bank of America initiated coverage on Canoo with an “Underperform” rating, doubting the firm’s “ability to execute in a timely fashion”, given "several significant pivots/changes" in its business model.

So don’t get tempted to hit the buy button on Canoo — which shares space in the industry with other EV players like Workhorse WKHS, Nikola NKLA and Arcimoto FUV — in anticipation of potential short-term gains amid rising Reddit interest in the stock. Meme mania is not the same as mindful investing and is better left to day traders. Amid fundamental changes in its business model, unclear revenue generation path, mounting expenses and high competition, Canoo is not worth your money unless it shows some caliber. The stock currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Arcimoto, Inc. (FUV) : Free Stock Analysis Report
 
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