Read The Full Article On: Fool
n this episode of Industry Focus: Energy, Nick Sciple is joined by Motley Fool senior auto analyst John Rosevear to discuss some hidden gems of the electric vehicle space. The headlines around EV are dominated by a few well-known companies, but there are new companies joining the space all the time, and the market is also rediscovering some older players. John gives a breakdown of the business and operations of lesser-known players and sheds light on their strengths, weaknesses, prospects, and much more.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
0 stocks that could be the biggest winners of the stock market crash
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now… and Tesla, Inc. wasn’t one of them! That’s right — they think these 10 stocks are even better buys.
Nick Sciple: Welcome to Industry Focus. I am Nick Sciple. 2020 has been a massive year for electric vehicles. Tesla and Nio have surged to all-time highs, and Nikola Motors helped kick off an epic SPAC boom this summer. While Nikola Tesla’s namesake companies have dominated the headlines — we’ve seen a bunch of smaller EV companies come public or announced plans to do so — at the same time, the market has rediscovered some EV-related stocks that have been public for years.
Motley Fool senior auto analyst John Rosevear joins the show this week to help shed some light on some of these less well-known EV players. John, great to have you back on the show, as always.
John Rosevear: And it’s great to be here, as always.
Sciple: Just off the top before we dive into some of these companies, you look at the activity in the automotive space this year — I pulled a stat from The New York Times earlier this week. SPAC transactions, just with automotive businesses this year — that’s special-purpose acquisition companies — just with automotive businesses this year have totaled nearly $10 billion. Have you ever seen anything like this in the auto space, this much excitement and demand for new issues in this sector?
Rosevear: No. I mean, seriously, no. And it’s all — you know, Tesla stock ran up to crazy levels, and then Nio, which went public a while ago, one of the Chinese automakers, ran up and everybody said, whoa! I got to get into this party. And we’ve seen these deals come out of nowhere. I have been joking with some of my colleagues that, you know, one of the electric vehicle companies we remember from 2012 when Tesla was first big, that seemed to go away — which ones will come back? Well, Fisker was kind of one of them. And we’re going to talk about that at some point. Actually, I think we did talk about that last time.
Yeah, it’s a gold rush right now. What it reminds me of is internet infrastructure companies in 1999 — I think we’ve had that conversation before — which implies there will be a shakeout. But, of course, history does not always repeat, though it does rhyme. Yeah, it’s really remarkable.
Sciple: Right. Yeah, you mentioned, about a month ago we had a podcast where we talked about the new Ford Bronco, some consolidation on autonomous vehicles. We also talked about a lot of these new EV companies, so Nikola, Hyliion, Fisker, but there’s just been so much activity that [laughs] we’ve got a whole another show worth of companies to talk about. And so I want to dive into that. We want to start out with some of these Chinese companies.
Nio, as you mentioned earlier, for the longest time, had been the only Chinese automaker, at least in the electric vehicle space, to be publicly traded in the U.S. Well, that’s changed recently. The news today is that Xpeng Motors is coming public today on the New York Stock Exchange under ticker XPEV. This is a company using the traditional IPO route versus some other companies that have used SPACs, as we discussed earlier. What do folks need to know about Xpeng, John?
Rosevear: Well, Xpeng went public this morning. It was projected to price around $12. It priced around $15. It was about 100 million shares. These are American depositary shares; we know what those are. They raised about $1.5 billion. This is not one of those Chinese electric car companies that is promising to come to the United States. They’re going to compete in China. They’re going to compete with companies like Tesla, that you may have heard of — [laughs] Nio — that you may or may not have heard of, and some others that we’ll get to.
Their newest vehicle is the P7, which is a really nice-looking sedan, about the same size as a Model 3. The key distinction there is that where Tesla tunes its cars for taut handling and performance, Xpeng is aiming more for sort of a cushy ride. They say that’s better adapted to the Chinese market where we have traffic jams and potholes and things like that and not so much of people bringing out their sports cars on back roads.
Sciple: Right. So this is made for a different consumer than we would see in the U.S., where that Tesla vehicle is much more sporty driver’s car type thing.
Rosevear: Right. Yeah. You know, you go test-drive a Tesla, and maybe you’re a Chinese consumer that hasn’t owned a BMW or Audi or something like that before. And go, whoa! that’s kind of harsh. The Xpeng, they put more attention on the interior; the seats are plusher; the stereo is really nice, the ride is soft; Think of it as sort of Buick soft almost, from what I’ve heard, I haven’t driven one myself. But that’s what they’re aiming for — a comfortable ride to work, that kind of thing. And, you know, that’s a differentiator. The question is whether they can deliver the quality and the range and the tech and all of that as a still emerging company.
Sciple: Yeah. I think the big question in China, China has been the largest market for electric vehicles for a number of years, continues to be so. Lots of companies operate in that space. Do you see potential for Xpeng to be a standout among that group and not shake out like you said earlier, you might have teased earlier?
Rosevear: I don’t know yet. [laughs] You know, it’s China. There’s a gold rush. There’s a lot of companies coming into this, including probably some that we haven’t heard of yet. There a few more that haven’t yet gone public that might. A company called Weltmeister that was started by some BMW alums. You know, there’s room in this market, but it has the potential to become a really huge market. But so far, it’s not. And companies like Nio, Xpeng, Li Auto, which were all competing broadly in the Tesla-esque kind of space, upscale electric vehicles with some performance and good range and so forth. And where you’re expecting comfortable seats and a nice stereo and all that kind of stuff. It’s possible that they’re going to be taking shares to the extent they do from Tesla rather than winning over lots and lots of new buyers. It’s early to say which way this market is going to go.
In Xpeng’s favor, they do have their own factory; it opened a couple of months ago. They also have a deal with a big Chinese contract manufacturer that builds their first model, which is a small electric SUV. So they have something there. They just got a whole bunch of cash in the bank. They did a $500 million raise earlier in the summer; so they’ve raised $2 billion here in the space of a couple of months. They have another model, a smaller sedan, I think, coming to market next year, that could give them some volume. They have the production capacity to build. I was just looking at this this morning. I think it’s a total of 250,000 vehicles a year. Could they get there? That will depend on quality and how they compare to some of the other names that we’ve talked about and will talk about. They’re not a slam-dunk winner, but the potential addressable market could be huge.
Sciple: Yeah, it’s interesting, John, as you say, their ability to raise a lot of capital here in the past few months. It wasn’t that long ago, a year ago, a lot of these companies were struggling to get access to capital, so I guess the shift in the market can really change the competitive dynamics in that market. Some companies that might not have been able to get financing to bring their vehicle to market now are in a position to do so.
You mentioned Li Auto briefly. That’s another company, another Chinese EV company, that’s come public in recent months. So it went public on the Nasdaq under ticker symbol LI on July 30. It’s a five-year-old Chinese EV company, raised over a $1 billion in its IPO. What can you tell us about this company and its approach?
Rosevear: Li Auto’s take is a little different. They have an electric SUV with an onboard range extender, which is basically a gasoline-powered generator. And if you were familiar with the original Chevrolet Volt, where it was pitched as an electric car with an engine that recharged the batteries rather than drove the wheels, it’s the same kind of thing. And their take is that there are parts of China where there is interest in electric vehicles but there isn’t much charging infrastructure. On the other hand, there are gas stations. So, basically, think of it as a really, really smart plug-in hybrid with some real-world range that’s beyond what you can associate with a plug-in hybrid, but functionally, if they need more range, they can put gas in it instead of recharging it.
They think this is a bit of a competitive advantage. Management seems really sharp. I don’t have a strong read on them yet; it’s on my things to do next week. Sorry, guys. [laughs] I’ve been looking at Xpeng the last couple of days. But it’s a company that is well regarded by Wall Street, perhaps more so than Xpeng might be. So people who’ve taken deeper looks at this have come away impressed. There’s a strong buy rating on it from at least a couple of the major banks. And their vehicle looks good. They have a production plan, they have a growth plan, and now they have money in the bank. Again, how this market is going to shape up and shake out, we don’t know yet.
Sciple: So with this hybrid approach, John, and one of the big things we talk about a lot with electric vehicles, particularly in China and Europe, is the regulatory dynamics and incentives and that sort of thing. Being this hybrid approach, are they still in that same category where they get some of the benefit of that, that sort of thing.
Rosevear: They do get some benefit. I haven’t looked into exactly how that works out, but they’re presenting this as an electric car with a range extender, not a hybrid, which may be taking advantage of a slice-and-dice inside China’s regulations on all of this. I do know that there’s been a lot of interest in them and that their pricing, net of incentive, seems to be competitive. But no, I don’t know for sure. Certainly, there are some incentives on hybrids, but China wants to get everybody off gasoline eventually, and they want to be a leader in electric vehicles, related. But I think Li is pitching this as a good product for right now.
Sciple: Right. I think one of the things they mention is their still limited charging infrastructure in the company, and something like this can be a stopgap until you can really build that out in a way that’s sustainable for long-term trips, that sort of thing. You mentioned the dynamics at play in China, and there’s a lot of companies operating in that space — Xpeng, Li, obviously you mentioned Tesla has moved into China. There’s other bigger companies, like Geely, who is the parent company of Volvo and Polestar; there’s also BYD that Warren Buffett invested in over a decade ago. As you look out into this Chinese EV environment right now, which companies would you say are the leaders that you’re most confident in, and who are you more skeptical about?
Rosevear: Tesla is the big name, but the ones we haven’t talked about yet are companies that everybody knows. Volkswagen is coming in a big way to this market. They’re already shipping some electric vehicles, but, I mean, their commitment is huge. They want to be selling 3 million a year globally by 2025. General Motors is making a big electric vehicle commitment there, too. In terms of the big names, I mean, Tesla everywhere has a big share of mind, it remains to be seen what their sustainable level of sales is going to be there. And it’s possible that they will be able to build more cars in their new Shanghai factory then the Chinese market is willing to absorb, at least in the near term, which raises some interesting questions. Do they send them here? Do they send them to other Asian markets? What do they do there? Because to back up, for folks who don’t know the auto business. Well, if you run an auto factory at below 80% of capacity, as a general rule of thumb, not specific to Tesla, you are probably not making money. [laughs] So, I mean, these are expensive. And the way the tooling is amortized and so forth, you have to be running at about 80% of capacity to break even in your factory. So that is a consideration for Tesla.
What Nio has is Nio has put a lot of effort into infrastructure. They have a good service network, a good sales network, and not just recharging through their Nio energy subsidiary, but they also have a network of battery swap stations. And this is their new thing now, which may give them an interesting level-up over Tesla. Starting just in the last couple of weeks, you can buy a Nio electric vehicle; they offer two SUVs, with a sedan coming soon, and without a battery. And you subscribe to the battery swap service. And there’s this network of stations throughout China. where it will automatically, no humans involved, swap the battery out, three minutes end-to-end. Which may address the refueling concerns, the recharging time concerns. And it is certainly a distinct twist. On the one hand, it’s less money up front for the consumer, and for Nio, it’s an ongoing revenue stream, along with their partner CATL, which is the giant battery maker in China. They make battery cells and packs and so forth.
It’s a really interesting idea and one that could give them an advantage. But where we’re going to go from there, we’ll see. It depends on how fast the overall market grows, how fast the most profitable parts of the market grow, you know, the sweet spots between $40,000 and $70,000 roughly, where everybody wants to be. Everybody wants to be selling $50,000 vehicles, because you can usually make good margins on those, whereas you’ve got to be really good to make margins on a $20,000 vehicle that can compete globally.
Sciple: Yeah. Just to underline your point, John. Yeah, that idea of your factory utilization rate needs to be over 80% for you to be making money, I think that’s — it impacts Tesla, but it impacts everyone operating in the space. Just this idea that we have massive amounts of new vehicles coming onto the market. And you know, the market is growing quickly, but is the rate of supply growth going to overcome the rate of demand growth? And if that is the case, who are the companies that are going to be shaken out because of those financial dynamics you mentioned?
Rosevear: Well, one thing that I think a lot of investors who are maybe tech-focused and growth company focused, and who come to this space, don’t quite realize, is that, Volkswagen can absorb those losses. Volkswagen can run an electric car plant at 40% capacity for six years until the market catches up. GM can do that; Ford can do that; Toyota can do that. Nio cannot do that. You know, Tesla probably cannot do that, for long anyway, without multiple capital raises and so forth. Because for Volkswagen and one single electric vehicle plant, well, they have 150 other factories around the world. And as long as they’re doing well on balance, they’re fine. They can afford to run a losing factory for a while until a new technology comes on or to comply with regulations somewhere, so on and so forth.
It’s a variable that people forget that the amount of capital needed to build cars is just so massive. Ballpark, it takes $1 billion to build and tool a car factory. And that is money that is spent before you ship a single vehicle. And that factory can maybe do 250,000 to 500,000 vehicles a year. You want to sell 10 million vehicles; you need a lot more factories. And 500,000 a year, by the way, is a huge auto factory. That’s really big. There are very few that are bigger than that. The trend in the industry for years has been more, smaller factories, because it’s easier to run them at capacity, or just close them if they’re not needed; you know, ideal them rather than run them along on one shift at 40% or whatever. It’s a huge money game.
When you see competitors like Nio, who just got raised nearly $1 billion from economic development authorities in and around the city of Hefei, which is China’s industrial heartland more or less, or one of them, wants to be a center of EV development manufacturing, that city, that city government, and the Anhui province where it’s located. And you say, well, if economic development authorities in a country like China are backing this company, maybe they can absorb capital hits for a while, because homegrown electric vehicles are strongly in line with the government’s policy priorities. On the other hand, an American electric-car maker is going to need big partnerships and a lot of cash in the bank in order to pull this off. And as investors, we have to remember that these aren’t like software companies. These are very different companies with very different capital structures and massive, massive capital needs before products are shipped. And that is one of the things that’s going to be the differentiator as we sort through winners and losers over the next months and years.
Sciple: Yeah, I think that’s an important factor to remember. I guess the example that I would give is, you think a lot of these software companies, as they reach scale, this idea of escape velocity, of network effects, you know — how can there be another social media company to challenge Facebook? Those dynamics aren’t true when it comes to the auto business, right? I mean, the big four automakers have had massive advantages in scale for a long time, and it’s still a brutal business, very difficult to make money throughout the cycle, etc., etc.
Rosevear: Related point. Auto factories are auto factories. There isn’t some kind of new magical manufacturing advantage you get with electric cars. Powertrains, as we say, are not the hard part. The hard part, the expensive part, the part that requires the huge tools and the know-how is stamping sheet metal and assembling car bodies basically. As long as cars are made out of metal, that is going to be very expensive.
I do want to tell an anecdote. Years ago, Tom Gardner and I had a debate for Fool members, where Tom said, OK, Tesla is Amazon and General Motors is Barnes & Noble and it’s 1998. And my answer to that was, OK, but here’s the thing. Every time Amazon wants to launch books from a new publisher, they have to build the factory. The factory costs $1 billion up front. Right now, Tesla/Amazon has half of the factory at that time, because their Fremont plant was only up to about 200,000 a year or so. Barnes & Noble has 150 factories fully up and running. [laughs] What does that do to your question? Now, of course, Tesla’s stock has soared since then, but I will note, they’ve only just added a second factory and it’s a fairly small one in China, near Shanghai. Just, you’ve got to remember the capital needs here.
Sciple: Yeah. So an important thing to remember when investing in this space, and that’s a little digression on automotive investing, to kind of move back to our discussion of some of these new IPOs. I want to talk about Canoo. It’s a really interesting company. On Aug. 18, it announced it would merge with Hennessy Capital Acquisition Corp., which is another SPAC, special-purpose acquisition company, in a deal valuing the company at $2.4 billion. Canoo is really interesting. They’re going with a subscription-based model, like a vehicle-as-a-service model for how you get access to their vehicles. Can you tell us about that?
Rosevear: As far as I know, it’s exactly what it sounds like. You know, you pay the set fee; you get the vehicle; you get the access to charging; you get service; I think you get insurance, too, or that may be optional. What they’ve got is a skateboard. This is a term you will hear thrown around among electric vehicle companies. Think of a skateboard, an integrated platform that’s got the electric motors, the suspension and the batteries all in it, and then you can put whatever body you want on it. Canoo’s is fairly small. They have little people movers on these little, like, minivans. They also have small work trucks that you might see around a college campus, something like that, you know, with the outdoor crew, the grounds crew and things like that.
They’ve designed a few different things. They’re going to start with the little people mover, which I think seats six; it’s like a little bus. And then there’s a delivery van version of that. And then they promise, by 2025, a sports sedan. All offered via the subscription service, which might actually make a lot of sense for a commercial customer, because you know all your costs up front. You know, if it’s all in on a monthly fee for these vehicles, you know, they’re covering service, they’re taking the risk of service, they’re covering charging, they’re covering all this stuff, you know, that might actually be a compelling thing.
I think you will find, though, that it will be a little bit of a harder sell to consumers at least in the near term. People don’t want, you know, a long-term rental necessarily. Although if you think of it as an alternative to leasing, it may find some level of appeal. But I think this is something that will be intriguing to commercial customers, if they deliver on the product and the quality and so forth.
Sciple: Yeah. I mean, this is just kind of an oddball company. You look at the design of their product — it looks like a Volkswagen bus, kind of, with the way that it looks. And you know, this modularity aspect of being able to use the same skateboard for a lot of different types of vehicles goes back to some of those points we talked about earlier when it comes to the cost of development and being able to use some of those building blocks for other vehicles that you roll out. And you see that with other automakers as well.
I read they have a partnership with Hyundai. John, how significant is that, or can you tell us anything about that partnership?
Rosevear: I don’t know a lot about that, so [laughs] sorry, guys. I’m failing as the expert here. Certainly, all of these companies will draw advantages from partnerships with automakers to the extent that they are getting production help that they’re getting to participate in the supply chain at better prices. You know, if you’re Canoo and you’re going to build 300 vehicles next year, but you can buy parts at maybe Hyundai’s price plus 5%, that’s a huge advantage versus trying to go to some auto supplier and saying, hey, can you do this for me? And they’ll say, who are you and what’s your minimum order and, you know, cost it over four years and all that stuff. So those kinds of things can be very helpful. So to the extent that they have an automaker partner, that is good news, I don’t know the specifics of this deal yet.
Sciple: Yes. So this is what I’m going to keep an eye on, just because it’s a really interesting business model, interesting company, kind of plucky. I don’t know if it’s one that’s particularly investable, but as John mentioned, this idea that perhaps as they roll out the delivery van in later years, there’s opportunities in logistics or things like that. To the extent they could find those customers, that could be interesting.
One of the other companies I wanted to move on to is Lordstown Motors. This is another one that goes back to this idea of larger automakers selling off factories, etc. What can you tell us about Lordstown?
Rosevear: Once upon a time, GM had a huge factory in Lordstown, Ohio. It made, most recently, the Chevrolet Cruze compact sedan, which GM was discontinuing. Their plan, last year, as part of a larger restructuring, was to close the factory. Local officials saw, you know, what had once been 5,000 jobs but had dwindled down to much fewer, going away entirely — saw economic disruption, you know. President Trump got on Twitter and made some noise about it. And a deal was put together, where this new company, Lordstown Motors, would get the factory from GM on good advantageous terms along with some help from GM in terms of getting their product, which at that point was an idea for an electric pickup, into production. So that happened last year.
And Lordstown showed their pickup not long ago — trying to remember what it’s called … the Endurance, the Lordstown Endurance. It’s a rugged, American-looking four-wheel-drive pickup. They think they’ve got interest from fleets and so forth. They’re getting a fair amount of help from GM. They’re getting some help also from Workhorse, which we’ll talk about in a bit, an existing company. And now they’ve got capital coming in. They’ve got the factory, but of course, they have to tool it up and begin production. Having the factory does put them a big step ahead of other companies that may not yet be at that stage. And they have GM’s know-how in terms of getting it tooled and getting workers and so forth. And GM has a little stake in them that could turn out to be profitable if this thing takes off. And there’s also the possibility that GM could buy them out at some point as well, or at least GM is allied with them.
So because GM is in this, it’s one of the reasons we take Lordstown a little more seriously than we might otherwise. They have shown a real product. They have a factory. They have money in the bank, or they will after this SPAC deal closes. And they have some help from people who know how to do this. So that makes it an intriguing company, more so than it might appear at first glance.
Sciple: Yeah. Well, the ability to acquire the factory reminds me — if you look back at the history of Tesla, they were able to acquire their factory for a song coming out of 2008, and Fremont became the foundation on which the company was built. And so, Lordstown taking advantage of a similar opportunity, GM had a little bit too much supply of factories and needed to divest itself of one.
And I looked at a quote from Lordstown CEO Steve Burns, who’s talking about this approach to using a SPAC, and say, hey, you know, the traditional timeline for an IPO is maybe a year and a half, and right now we’re in a race to be No. 1 to get an electric truck to market. And in a time like this, being able to get that speed to market, speed to get access to your capital through a SPAC, makes a little bit more sense on top of the big SPAC activity we’ve seen this year.
John, we hear a lot about this race to catch up with Tesla or race to be the first company to launch an electric truck, and the access to capital may be making that more possible. Maybe going back to what we talked about earlier when it comes to the auto industry as a whole, when we described that race, I mean, how would you characterize that? Because it’s not going 100 miles an hour every step of the way; it’s a methodical process to rolling out these products.
Rosevear: Investors who are looking at electric vehicles talk a lot about Tesla, but Tesla is not, as of now, a presence in the pickup space. And the Cybertruck, as we saw it as a niche product — it’s not a product with huge commercial appeal and so forth, at least we don’t think. The companies here that are coming — Rivian is coming with a luxury truck. That’s another start-up, a very well-funded one that also has a factory. It also has a major automaker partner in Ford and also has funding from Amazon; we’ve talked about them in the past. But it’s Ford’s electric truck and GM’s electric truck. And what Lordstown wants to do is get out in front of things like that and get a piece of the commercial fleet market that is big, that is steady, and that is lucrative. And if they can prove to those folks that they have a good product at a good price, they will win some. But that means getting out there before Ford is shipping 30,000 electric F-150s a month, which, you know, it could be in two years if the demand is there, before GM is shipping electric Silverados and so forth, because we know those products are coming. Ford is planning to start making prototypes of an electric F-150 next year, and it will be out in 2022 by mid-year, CEO Jim Farley has said. So they are, to an extent, racing that.
In terms of other companies looking at the space, we know Nikola has designed and talked about a pickup, but it needs somebody to build it for them; they’re not going to build that in their own factory. Tesla has shown the Cybertruck, but it’s not clear when that’s coming, where it will be built, or so forth. I mean, they are doing some work around a potential factory in Texas, but the timeframe is still some distance away. And again, it’s not clear whether that’s a commercial fleet product. Lordstown is after the commercial fleet market, first and foremost. I think they’ll be delighted to put leather seats in it and sell it to an individual who wants one, but I mean, selling 500 trucks to the cable company, 800 trucks to an oilfield service company, that’s the kind of business they want. And Steve Burns, the CEO of Lordstown, is the kind of guy who speaks that language and can get in there and make those sales and build those partnerships. And he’s already got some interest.
Sciple: Yeah, it’s a good point, because Ford and GM already have these relationships with the cable company from fleet sales and that sort of thing, so getting in ahead of those and forming those relationships, is probably particularly valuable. So you mentioned the CEO of Lordstown, Steve Burns. He’s exactly the former CEO of Workhorse, which is the last company we wanted to talk about today. This is a company that’s actually been public for a number of years, the better part of a decade, but has gotten bundled up in a lot of this interest in EVs this year. And I looked up this morning; the stock is up over 450% so far in 2020.
So we’ll get into Workhorse itself here in a second, but first, what’s the relationship between Lordstown and Workhorse today?
Rosevear: Lordstown, think of it as a company that kind of got spun out of Workhorse in the sense that they took a Workhorse design they had on the drawing board for an electric pickup, and Steve Burns went to run Lordstown, I think when the opportunity to buy this factory came up from General Motors.
Workhorse has a 10% stake in Lordstown. That stake cannot be diluted for at least a couple of years, so they will have a 10% stake after the SPAC deal that takes Lordstown public. And they get royalties on the design for some period of time as well. So for Workhorse, if Lordstown does well, this is going to be a nice income stream for a few years, and an appreciating asset, too. If the stock as well, it could be quite a big deal for Workhorse, which is not a zero-revenue company but is a tiny-revenue company at the moment.
Sciple: Yeah. Reminder on the ticker for Workhorse, that’s WKHS. And to John’s point, yeah, [laughs] the revenue of this company or the financials of this company really leave a lot to be desired. So Workhorse generated a loss of $133 million in its latest quarter, on revenue of just $92,000. You’re looking at the market cap today at around $1.8 billion. Clearly, the market is valuing this business on its potential. There’s some potential in that Lordstown stake that we’ve just discussed.
When we look at the underlying business itself, the business that Workhorse is in directly, what potential do you see in that business from here, what opportunities do they have?
Rosevear: Let’s take half a step back. What Workhorse has is their product is an electric delivery van. You think of a UPS van — it’s that. In fact, they designed it with input and help from UPS. They’re ramping up to production. They’re going to build, I think, just a few hundred this year, but they’re hoping to have it in bigger production next year. They have interest from companies like UPS. They are trying to win a contract with the U.S. Postal Service, which is looking for electric postal vans over the next several years. They were a finalist in that. They went up against a couple of other groups, one of which had Ford involved, kind of indirectly. If they win that, that could be a very big contract.
But they are plain, no frills, you know. Here’s a delivery van. It works. You can order it with 70 miles of range, if that’s your route, or more range if you need more range. We don’t need to worry about having 500 miles of range for the family trip, because this is a UPS van. It runs its route and goes back to the garage. It’s a no-frills, no-nonsense product that will do the job. It’s a workhorse, is the idea.
They have also been experimenting with a drone. The idea could be, in time, that they build self-driving vans and the drone drops the packages on everybody’s porch or something like that. I mean, they’re thinking around future tech there, too. But in the near term, this is an electric delivery van that just works, is the idea. It just works and it’s available at a fair price with no more range than you need, so you’re not paying for batteries and weight that you don’t otherwise need, because with a smaller battery, you can haul more cargo with the same weight of vehicles. That’s a consideration if you’re trying to move freight, move packages, things like that.
This is the kind of thing that could be a compelling — if they can scale up; if they can deliver on quality; if they can stay afloat financially — could be a compelling little business, because they’re the opposite of Tesla, in that there’s nothing sexy about UPS trucks. [laughs] But these are products that if you make them at scale, they have good margins and good profits and its steady business, because UPS is going to order X-thousand new trucks every year as they cycle out of the ones that now have 300,000 miles on them or whatever. So this is something that could turn into a nice profitable business, if they can acquire and retain the customers and deliver the products.
Sciple: Right. And you look at the financials that I quoted earlier. Clearly, the market thinks we’re at an inflection point where this is going to take off and the vast majority of the new commercial trucks, etc., that are sold are likely going to be some portion of the market that Workhorse can service. When you just look at where the stock is priced today relative to the opportunity and all those ifs that you listed out, you know, how optimistic are people being here with this company?
Rosevear: Well, they’re being optimistic with all of them, Nick. [laughs] I mean, what’s Tesla’s market cap today? Come on — this is a company that might sell 500,000 cars this year, which would give it 0.005% of the global market. But Tesla’s extreme run over the last year is what has all of these other companies’ stocks in tow; you know, the sector is being pulled along. There is certainly some potential here.
I think a lot depends on what kind of contracts they get over the next few months, so we can start to make some volume assumptions that aren’t just, oh, their factory should be able to do 100,000 or whatever. You know, I think it could be worth much more than $1.8 billion in time. Certainly, this could be a $10 billion, $15 billion company. Is that an eight- or 10-bagger from here? Yeah, maybe; you might wait 10 years for that and it might go bust.
But there is a real opportunity here if they can capture even a smallish, but significant, share of the market for commercial vans and commercial vehicles with this sort of down-to-earth, real-world cost-focused approach to their products, which is the right one for this market. You know, we’ll see how it goes, but there is real potential here, even at this price.
On the other hand, there is also huge risk. If Ford comes out two years from now with an electric Transit that blows away Workhorse’s vans on specs and is $1,000 cheaper, Workhorse is gone. They’re toast. Nobody is going to buy it anymore. Because the fleet buyers do this on total cost of ownership over the life cycle of the vehicle. And they know what they’re getting with a Ford; they may not know what they’re getting with a Workhorse in terms of durability and so forth.
Sciple: Yeah. So, I think, from my perspective, I’d like to see a little bit more than $92,000 in revenue, a little bit more proof of concept on the execution, and see some uptake from businesses. One thing I noted is they have a deal with Ryder System, where they’re going to offer some short-term rentals and leases to customers. Maybe that gives an opportunity for folks to dip their toe and we can see that lead to some traction over from sales, that sort of thing. But it’s still very early for me to see a stock bid up over 400% this year relative to the extent of execution we’ve seen so far.
Rosevear: Yeah, the Ryder thing is, obviously, commercial customers can come rent half a dozen of them and run them for three months and see how that goes. Which is something a company like Workhorse needs to do. Whether that will generate significant demand over time depends entirely on how well they rate the products and what the pricing is and the cost of ownership over time. Is the range adequate? Is the cargo adequate? Do they hold up over time?
You know, they’re building the van bodies out of composite instead of sheet metal. Makes them lighter-weight; gives them better range. How durable is that versus an aluminum or steel truck? All this remains to be seen. Certainly, Workhorse has done its own testing, but that’s different from, you know, UPS testing 1,000 of them in the field in the snowy Upper Midwest in January, where electric vehicles have traditionally had a hard time, and seeing how that goes. A lot of that is going to happen over the next year or so. And then, after that, they could have a big business or they could have not a big business.
Sciple: Right. Time will tell. There’s a lot of execution between now and then. Kind of wrapping everything together, John, we opened up the show talking about all the interest in EVs that’s come just over the summer. Lots of companies coming public, whether it’s Nikola, Hyliion, Fisker, Canoo, Xpeng, like we talked about earlier, Li Auto — the list goes on and on and on. Could you give me maybe one or two EV stocks, whether it’s something we’ve discussed today or another company, that you’re most excited about right now, and why?
Rosevear: I’m liking Nio more and more. I was down on Nio earlier in the year, because they were running out of cash simply, and it seemed like they had spent too much money last year on expanding their sales network and spent to the point where they couldn’t keep going, maybe. But they threw a financial Hail Mary and connected and got this big investment from the economic development authorities in and around the city of Hefei. And now it looks pretty good. Now, all those sales and service centers help them bounce back very quickly on sales when things reopen in China after the pandemic, after the first quarter. Remember, they got hit before we did.
And you know, their second-quarter sales were up, like, 200% from a year ago or something like that. They did deliver a positive operating margin after the second quarter, which was a goal they had stated that Wall Street was skeptical about. So some of the interest and buying activity around the stock is genuine. Of course, they’re still a small player, but they have big partners, including government backing, which counts for an awful lot in China. They’re aligned with the government’s policy goals and so forth. So I don’t think they’re going away anytime soon.
But how big can they get? I don’t know. That sort of depends on how the sweet spot of the EV market, you know, the $40,000-to-$60,000 range where everybody wants to be, where Tesla’s Model 3 and Model Y are. You know, how many sales can they take away from Tesla with some of their new whiz-bang innovations, like the battery swap service, where you buy the car without the battery and then subscribe to battery swaps? Lowers the initial entry cost, which will be very appealing. If it costs you $40,000 to get into a Tesla, and $30,000 to get you into a Nio that seems just as nice inside, that can be a very compelling offer in China.
I think they have a lot of potential, and they’re far enough along that we don’t think they’re just going to disappear. And they’ve built the kind of alliances where they’re not going to just disappear. Whether they get to the point of selling 10 million cars a year, I don’t know. But I think their near-term growth potential is very strong and that they’ve been de-risked quite a bit by this government investment they took on earlier this year.
Sciple: All right. So Nio is one to pay attention to. You mentioned how big the market is going to be, who can grab market share, who can maintain the market share they have — time will tell. But John, I know you and I will be watching and we’ll be discussing it on the podcast as opportunities present themselves.
Rosevear: Indeed we will.
Sciple: All right. Thanks for joining me.
And as always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don’t buy or sell anything based solely on what you hear.
Thanks to Tim Sparks for making us sound so great. For John Rosevear, I’m Nick Sciple. Thanks for listening, and Fool on!