Hyliion (NYSE:HYLN) stock is interesting because it represents so much potential. Investors who’ve followed the markets this year have seen a lot of atypical trends. In particular, money chasing risky growth in overvalued equities that will ultimately face market corrections. Further, the uptick in SPAC-funded electric vehicle projects is an accelerating trend.
But there’s one trend that has continued this year that’s anything but atypical.
The idea of investing early in fledgling companies like Hyliion, in quickly rising industries like electric vehicles, is nothing new. This is an investment principle that gets touted across the ages.
Perhaps you associate it with the parable of investing a small amount in Amazon (NASDAQ:AMZN) and watching it grow into a fortune. And of course there are countless other examples.
That’s basically what Hyliion represents. And it’s also why, despite HYLN shares having already lost a good portion of their value, investors hang on in hope that it will fulfill its promise. I remain steadfast in my belief that it won’t.
SPAC Truths
HYLN stock is one EV play among many to have come to market this year via SPAC funding. I won’t list them all here, but half a dozen come to mind, and there are many more.
One key differentiator between raising money to fund a company via a shell company (SPAC) and going the traditional IPO route is that SPACs are less stringent. The IPO process is more difficult and more expensive. But it does have some benefits. The extra vetting (in IPOs) tends to result in companies reaching the market that are more proven. And they tend to be stronger, and to last longer.
An Expert’s Opinion
Renaissance Capital spoke to this issue recently:
“Of the 313 SPACs IPOs since the start of 2015, 93 have completed mergers and taken a company public. Of these, the common shares have delivered an average loss of -9.6% and a median return of -29.1%, compared to the average aftermarket return of 47.1% for traditional IPOs since 2015.”
That’s not to say all SPACs are bad. It’s just that SPAC IPOs tend not to do as well as their more vetted traditional IPO counterparts. Unfortunately, Hyliion stock looks to be in that value destroying camp.
In mid-June when Hyliion announced that it was going public via a SPAC through Tortoise Acquisition Corp. (NYSE:SHLL) shares quickly rose. Hyliion went from a company that had been flat at $10 for the previous year to a hot stock. It more than quintupled to above $53 per share by early September. It went public in early October and has since declined 57% in value.
Ultimately, if HYLN stock is to rise again it needs one thing: sales.
Sales Derth
In Hyliion’s Q3 earnings report it highlighted that it installed eight of its hybrid powertrains in the quarter for four fleet-based customers. I’m not sure if an installation is technically a sale. Did those fleet-based customers actually pay Hyliion to install those retrofit, EV powertrains to their vehicles?
My guess is that it’s much more of a trial period in which Hyliion is paying those fleet-based operators, and not the other way around. A simple offer of let us retrofit our hybrid drivetrains to your trucks and well pay you if anything goes wrong. Hyliion gets data and can tout that it installed its solutions, the fleet-based operators get a freebie which may be able to save them money in the future.
Best case scenario: Hyliion sold eight of its drivetrains. More likely scenario: they’re paying to get data at no risk to the operators.
I won’t even get into the significant hurdle Hyliion faces regarding its solutions potentially voiding warranties. I talked about this about a month ago, when I last wrote about Hyliion.
Hype Period Is Over for HYLN Stock
Hyliion was a market darling for a period of a few months between June and September. The company raised over half a billion dollars after announcing that it was going public through a SPAC.
As Hyliion CEO Thomas Healy stated: “With ample resources from our strategic combination, Hyliion is well-capitalized and primed to disrupt the powertrain market. Our focus in 2020 and 2021 will be to position the company for long-term sustainable growth, capturing the material market opportunity from the electrification of Class 8 vehicles.”
The company is funded for quite some time. That’s certain. But it needs to make deals and sell its powertrains. That’s something that requires time and doesn’t show up on financial statements immediately. And until it does that, investors like you won’t make money from Hyliion.
I also question the validity of its market in the long-term. Sure, perhaps Hyliion can persuade fleet operators to retrofit and hybridize their Class 8 trucks. That’s not easy, but if they prove that it increases efficiency and decreases costs companies will say yes. But Class 8 EVs are coming and companies are going to work out the kinks. I just don’t see the strategy of Hyliion working. I don’t see it rising, and I don’t think you should buy any shares.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
