Hyliion Holdings (NASDAQ: HYLN) is a promising new entry in the up-and-coming zero-emissions transport sector. It recently went public through a merger with a shell company, Tortoise Acquisition, in a deal worth over $500 million. Hyliion aims to develop environmentally-clean semi-trucks, which could have significant upside potential in the future. However, its overdependence on its suppliers, unclear commercial viability, and questionable growth rates make Hyliion stock a risky bet at this stage.
The company has one of the more interesting business models in the electric vehicle industry. It essentially develops electrified drive train systems that can be fitted in Class 8 trucks and powertrains. Hence, haulage companies will benefit from the hybrid solution without having to replace their fleet. Its pièce de résistance is its ERX powertrain system, which the management claims could have 2.6 times the range of a Tesla (NASDAQ: TSLA).
Hyliion has potential, but the risks are too grave to ignore. Let’s dive a little deeper into these.
Uncertain Future Ahead
The alternative fuels market is growing, and EV companies are riding the tailwinds in the sector. Additionally, Covid 19 has significantly impacted consumer preferences toward online retail and home delivery. Hence, companies such as Hyliion will benefit from these tailwinds in the logistics business providing a major growth catalyst for the future.
However, the battle for the ideal technology for eco-friendly powertrains is still inconclusive. Each technology has its pros and cons, and stakeholders are still trying to get a grip on which works best. Hyliion’s product is unique, but it’s tough to estimate its sales potential at this point. Its recent 1,000-unit pre-order doesn’t quite help either. The order is placed by Agility Logistics, which has an equity interest in the company. Therefore, it’s tough to consider the order anything more than an inter-company transfer. It provides no information about the commercial viability of Hyliion’s product. Additionally, Agility is more involved in the airfreight business than trucking.
Shaky Business Model
One of Hyliion’s business model’s main problems is that it is outsourcing significant parts of its business to a variety of firms. Some of these even hold stakes in the company. For example, Dana Incorporated, an EV component supplier, holds an equity interest in Hyliion and also provides it with components and its expertise. Additionally, it outsources batteries from Toshiba (OTCMKTS: TOSYY), its designs from IAV Automotive Engineering, and its modification centers from Fontaine Modification. Therefore, the company’s supply chain is overly reliant on its partnerships and agreements with third parties. The situation raises questions about the long-term technological viability of the company.
Another concern for Hyliion’s investors relates to its prospects. The management believes that it has immense potential with its total addressable market to be worth billions. However, it expects to rake in only $9 million from sales of 320 units till 2021. If everything goes smoothly, the company would be able to sell its ERX unit by 2022. It expects to sell 2500 ERX units and 4,100 hybrids, generating over $300 million in revenues. That figure could exceed $2 billion by 2024. However, there isn’t a lot of clarity on whether the company would back up its claims. Projections so far are lofty, hence most investors would want to employ the wait and see approach.
Final Word on Hyliion stock
Hyliion’s business model is attractive and one which may have a significant upside in the future. Its plug and play hybrid system is a novelty in the electric vehicle industry, and the company can capitalize on its technology before its competitors make inroads. However, the company’s business model’s problem is that it continues to outsource substantial portions of its business. Such measures will have a detrimental impact on the company’s moat. Additionally, the company’s ability to successfully launch its ERX units is also a question mark so far. Therefore, investing in Hyliion stock is a risky bet at this point.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article