Anything related to the EV sector is red hot at the moment. The novel coronavirus pandemic, Elon Musk’s Tesla (NASDAQ:TSLA), and increasing environmental regulations combine for outsized market caps. In the midst of this environment, Hyliion (NYSE:HYLN) stock made its debut through a special purpose acquisition company (SPAC) merger with Tortoise Acquisition that valued Hyliion stock and the company at $4.6 billion.
The Cedar Park, Texas-based firm develops electrified drive train systems installed in Class 8 trucks for most commercial vehicle original equipment manufacturers. Essentially, it’s a hybrid solution for heavy trucks, tractors, and tractor trailers (semis and big rigs).
The brainchild of 28-year-old Thomas Healy, a serial entrepreneur. His latest venture is a unique play on the EV space. Until now, most of the applause lines and headlines have been reserved for Tesla’s snazzy, fully electric, mid-size SUVs and luxury cars.
Deliveries are reaching record levels this year. However, Tesla is the only company that has managed to demonstrate a level of viability. On the bright side, Hyliion is uniquely positioned because it doesn’t operate within the same niches as Tesla. That should make some investors breathe a sigh of relief. But as InvestorPlace‘s Josh Enomoto points out, there is no guarantee that other companies will not enter this market eventually.
The supply chain is also an issue. Large parts of it are outsourced in exchange for equity stakes. Revenue forecasts, though ambitious, have little data to back them up. There isn’t a lot of information at this stage that can allow us to predict where the company will be in five years. That makes investing in Hyliion stock risky.
Better Investments Out There Than Hyliion Stock
Let’s look at the EV sector in general at the moment. Although Tesla is generating the bulk of applause lines, its sales do not justify the price multiples at which it’s trading. Tesla has a market cap of $386.8 billion. Toyota (NYSE:TM) has a market cap of $198 billion. The former sold just under 11 million vehicles last year. Tesla sold less than 300,000. Need I say more?
Still, to a certain extent, Tesla and Nio (NYSE:NIO) are examples of companies that have done the hard yards and are now reaping their just rewards. Tesla has a clearly identifiable market and its recent Battery Day event is a testament to how it is working overtime to relegate traditional internal combustion engines to the dustbin of history. On the other hand, Nio has one great thing going for it, with the world’s greatest EV market in China. The Chinese are famous for supporting local over foreign brands, and that’s why Nio edges a lot of established names in the EV space.
Where does Hyliion fit in? Well, it’s more of a middle-of-the-road play. Its plug & play solution offers certain advantages. Aside from the e-axle, APU power, and aero improvements, the company is also offering a software package as part of the Hyliion system. The software package involves data analytics, power distribution control module, thermal management. The market is also somewhat identifiable, class 7/8 heavy-duty tractors, but the uptake rate is up in the air.
The company touts pre-orders for 1,000 units. However, the customer Agility Logistics USA is an equity partner in Hyliion Holdings. Can you really classify it as a sale? But it does raise a lot of ethical questions.
Supply Chain Issues
One of the best things that Tesla has going for is its complete control over the supply chain. It ensures the protection of intellectual property and gives greater control of margins. Unfortunately, in the case of Hyliion, the company’s supply chain consists of several technological partnerships, commercial agreements and third-party contracts.
If you decide to outsource everything, it takes value from the firm, potentially compromises IP and makes barriers to entry low. If the company doesn’t handle raw materials, manufacture anything or sell anything, what is its value? Is the non-capital intensive approach an interim strategy or is it a long-term business model? These are questions that need answering. Strong supply chains, particularly in technological innovation areas, are key for any company’s long-term success.
As the orders ramp up, outsourcing a large chunk of the business in exchange for debt holdings and equity will weigh down on margins.
My Final Word on Hyliion
There are several aspects of Hyliion’s growth story that are compelling. But there are too many variables here that make its foundation a bit shaky. According to a June investor presentation, Hyliion’s projected revenue is $1 million in 2020. If you think that is ambitious, the company forecasts $344 million in 2022, more than $1 billion in 2023, and nearly $2.1 billion in 2024. Are these kinds of growth rates realistic? Especially considering a supply chain strategy that contracts out a large part of its business operations.
There are several companies out there that are offering more compelling growth stories. I don’t doubt that the alternative fuel market is offering excellent gains. But you should always perform due diligence before investing your hard-earned money into any company.
Like most InvestorPlace authors, I would like to see more data that confirms the company has a sustainable business model before giving a buy verdict on Hyliion stock.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.