Since reaching a peak in September, HYLN stock has tumbled 62% as allegations of fraud have circled its electric vehicle (EV) competitors. Now that it’s trading around $20, does Hyliion (NYSE:HLYN) stock represent a fantastic entry point into an innovative company? Or is it yet another fraud on a slow deathmarch to zero?

Hyliion, a startup developing an electric drive for Class 8 trucks, claims its technology will improve fuel efficiency anywhere from 10% to 30%. There’s been no shortage of supporters calling Hyliion’s technology a major “breakthrough” and detractors saying the company’s “fuel efficiency claim is a lie.” Everyone seems to have an opinion.

But don’t let anyone tell you they know what will happen. Hyliion represents a new class of investments that were once only available to venture capitalists (VCs): zero-profit, high-potential moonshots.

Many of these moonshots will succeed, rewarding their investors with 1,000% type returns. Others will fail, wiping out investors’ hard-earned money and filling countless investors with lifelong regret.

HYLN stock will almost certainly fall into one of these categories, though it remains to be seen which. Here’s how to profit from the stock without getting burnt.

HYLN Stock: Another Hot 2020 SPAC

Firstly, let’s consider the context of Hyliion, which back-door listed via Special Purpose Acquisition Company (SPAC) in September.

While the SPAC process allows excellent companies to list cheaply, it’s also allowed substandard ones to trade without meeting the stringent profit or market capitalization requirements of an IPO. That’s created a colossal glut of money-losing companies — something NYSE and NASDAQ listing requirements were designed to prevent.

The movement has hit the EV industry particularly hard. Nikola (NASDAQ:NKLA), Lordstown (NASDAQ:RIDE), Fisker (NYSE:SPAQ), Chargepoint (NYSE:SBE), Canoo (NASDAQ:HCAC), and Hyliion all listed via SPAC with either zero revenues or zero profits. These new entrants are all valued somewhere between $2 billion and $8 billion, certainly nothing to sneeze at.

But not all will become the next $50 billion automaker. That’s because, in the U.S. alone, they’ll have to compete against both established automakers like Ford (NYSE:F) and General Motors (NYSE:GM), and newer electric vehicle competitors like Tesla (NASDAQ:TSLA) and Rivian.

This SPAC(e) Isn’t Big Enough for All of Us…

It’s hubris to expect all new entrants to succeed, no matter how good their story. Three-quarters of all startups fail, and even the most established venture capital firms have their share of misses. That’s because breakthrough technologies eventually consolidate, leaving the weakest players behind.

It’s easy to forget that New York City alone once hosted at least five rideshare companies before Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) drove competitors out of business. And even well-funded new entrants like cloud storage company RackSpace (NASDAQ:RXT) can fall flat when established companies like Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) muscle in.

Now, consider automakers. Virtually all have some plans for electric vehicles, and many have bulked up in anticipation of an intense fight for consumer dollars. Meanwhile, analysts expect the auto market to grow at just 4.8% per year through 2025.

That means investors in EV SPACs need to think like venture capitalists: buy into great industries, but spread your bets across many players.

What About Hyliion Stock?

Hyliion looks much like a Silicon Valley startup. Its charismatic 28-year-old founder, Thomas Healy, has an engineering background including a far-reaching study into so-called Deflate-gate, an NFL sports scandal from 2015.

Under his watch, Hyliion has grown from a DOE business plan winner into a $3.2 billion company. Its flagship Hypertruck ERX powertrain system promises up to 10% in fuel savings from regenerative braking. In other words, it turns a Class 8 semi-truck into a larger version of the Toyota Prius (minus the power-split transmission): charging a battery when the truck brakes or goes downhill and sending the energy back through the axles when needed.

Its financials also look like a Silicon Valley startup’s — Hyliion has recorded zero revenues. Its sole 1,000 order comes from “strategic partner” Agility Logistics, a company with a $39 million investment in the upstart EV maker.

The Three Bull Cases for HYLN Stock

So does that make the company a VC winner with 1,000% potential returns? Perhaps, for three reasons. Firstly, Hyliion’s technology fits neatly into existing Class 8 semis; its generators don’t care whether they’re powered by diesel, CNG, or (enticingly, for green-focused investors) RNG. Just note that it won’t work as well with plug-ins, hydrogen fuel cells, or other systems that directly power an electric drivetrain.

Secondly, the EV upstart has solid backing. It has a supply agreement with Dana (NYSE:DAN), a major producer of electrical driveshafts, and has assembled an experienced management team. The company is also flush with $560 million cash from its recent IPO, giving it a leg up over competitors in R&D spending.

Finally, Hyliion is entering a booming market. Fuel makes up almost 40% of total trucking expenses, and even a tiny efficiency improvement can give competitors a much-needed edge. Analysts expect the e-axle market to grow by an eye-popping 34.6% CAGR through 2025.

Bear Case #1: Does Hyliion have the technology?

That doesn’t mean it’s smooth sailing for the EV company. Firstly, an external test of Hyliion’s technologies by PAM Transportation Services saw only “a small percentage” improvement in fuel efficiency. That’s a far cry from the 10% the company claims to produce. The discrepancy has caused short-sellers like Bonitas Research to cry foul: the Austin-based analysis firm has pointed to numerous supposed instances of puffery, including claims of “30% fuel reduction” and “1-month payback” periods.

It’s common practice for startups to exaggerate claims, a fact that all VC analysts are aware of, and gladly call out. But when a publicly-traded company is doing the same, it’s a red flag about its underlying technology. And here’s why:

Bear Case #2: Will Hyliion Get Investigated By the SEC?

While puffery is typical in private-capital settings, it’s illegal for public companies to mislead investors. And CEO Healy could land in hot water for the same reasons that took down former Nikola CEO Trevor Milton: showmanship that breaks SEC rules.

“From our end, there’s a lot of differences,” Mr. Healy told FreightWaves in an interview, distancing his company from Nikola’s fraud allegations. “One is actually having delivered products to fleets…”

Not so fast. Hyliion’s S1 Filings clearly state, “We are in the pre-commercialization stage of development and have generated no revenue from these [Hypertruck ERX] customers since inception” (emphasis added).

Its ready-to-sell Hybrid Electric systems has also logged zero sales. These minor fibs add up over time, painting a picture of a company that claims to “have over 700 natural gas stations” when they own none.

It would take an SEC insider to know whether the Commission would bring down the hammer. But if the SEC does decide to take action, Hyliion would be in for a very rough time. When it comes to fibbing, Wall Street isn’t nearly as kind as Silicon Valley.

Bear Case #3: Will Competition Kill Hyliion?

Finally, Hyliion isn’t alone in the fight for EV dominance. Meritor (NYSE:MTOR), one of the largest axle manufacturers, has a competing electrical system that truckers can also install on existing vehicles. Other auto parts manufacturers, from Allison Transmission (NYSE:ALSN) to ZF Friedrichshafen AG, are also working on various electrical axle technologies. And more broadly, Nikola, despite its recent tarnishing, still has a pending agreement with General Motors to produce Class 8 hydrogen fuel cell vehicles — a technology that will circumvent Hyliion’s innovations.

Multiple vendors could end up sharing the market. But in the world where fuel efficiency matters, the best player will eventually take the lion’s share.

How to Invest in HYLN Stock

Investors who want to profit from the electric vehicle revolution should follow what venture capital firms do: allocate a larger share in the stronger players — i.e., Meritor, GM and Tesla — and a smaller share in moonshot projects like Hyliion. That would give your portfolio some stability while leaving the door open for the 1,000% growers.

Shorter-term investors might play the news game, allocating capital based on technical analysis and market-moving information. It’s a strategy that works when others are also following it.

Whatever your plan, however, know this: in the long-run, profits from the EV trucking industry will eventually consolidate to a handful of winners with the best technology. HYLN stock could be a winner, but the haven’t perfected their ERX technology yet (although they have half a billion dollars to try). And if someone tells you they’ve made it — then don’t believe it until you see the proof.

On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.