Risky? Yes. Without value or merit? No.
Since then, the maker of low-speed electric vehicles for the commercial market had seen its share price jump to as high as $10.60 before a direct share offering took the wind out of its sails at the end of November.
Now around $6.25 as I write this, it’s hard to know if AYRO stock is headed back up to its 52-week high or down to its August trading range between $3 and $4.50.
I wish I could get more excited about this stock, but to me, a double from August to December seems like a pretty darn good run for a company whose sales in the first nine months of 2020 are less than $1 million.
Trading at 156 times its 2020 annualized sales of $1.1 million, I no longer believe the risk-to-reward favors investors. Here’s why.
Equity Firm Drove a Hard Bargain for AYRO Stock
Carnegie Hudson Resources is a private equity firm that focuses on energy-related investments. Along with the American arm of Chinese conglomerate Wanxiang Group and several other institutional investors, it agreed to buy 1.65 million shares of AYRO on Nov. 23 for $6.06 a share.
At the time, AYRO was trading at a 52-week high of $10.60. Essentially, Ayro, in need of growth capital, was willing to give the group of investors a 43% discount on its $10 million investment.
In addition to the share purchase, the investors also got Series A warrants to purchase up to 1.24 million shares of its common stock at an exercise price of $8.09 a share, a 24% discount to its share price at the time. Those shares must be exercised by May 24, 2021.
The investors also got the option to exercise 825,083 Series B warrants at an exercise price of $8.90 within the next five years. Assuming all of the shares are exercised, Ayro will ultimately receive $27.3 million in gross proceeds less applicable commissions.
That’s an average price per share of $7.36, 18% higher than its current price.
While it seems like a good deal for the company, the reality is that it’s still a 31% discount to its market price when the deal was announced on Nov. 23.
Where to From Here?
InvestorPlace’s Matt McCall points out that despite the excitement over the company’s Club Car 411 all-electric logistics and cargo platform for use at university and corporate campuses, It is entirely too reliant on one customer (Club Car) to make it an attractive long-term investment.
He suggests that novel coronavirus issues, such as supply chain interruptions and that online learning will be the norm at major colleges, make revenue growth in 2021 a difficult road to climb.
Another InvestorPlace contributor, Thomas Niel, believes the company is courting a really niche segment of the electric vehicle market.
So, even with partnerships like the one it has with Karma Automotive – owned by Wanxiang Group – and Club Car, its estimate of $300 million in sales and 20,000 vehicles delivered over the next three years is unbelievably optimistic at best and hopelessly out of touch at worst.
In the end, 2021 is unlikely to produce significant revenue from either of these partnerships. At least not enough to justify a price-to-sales multiple of 156.
Niel believes its stock is headed lower. I’m inclined to agree.
The Bottom Line
As I said in August, I believe CEO Rod Keller’s comments about Ayro’s opportunity with the university market to be accurate. I also said its engineering partnership with Gallery Carts for purpose-built food delivery and on-site hospitality vehicles could be a lot more rewarding than any of the so-called pundits realize.
When it comes to the EV market, I tend to lean toward commercial uses as a safer investment for average investors. For every Nio (NYSE:NIO) success story, there will be failed corporate carcasses everywhere over the next five to 10 years.
As risk-to-reward propositions go, AYRO stock is a much better bet at $3.25 than it is at $6.25. If you must buy, wait for the margin of safety to come to you. I’d let it drop at least a couple of bucks before making a speculative play.
Remember, you have plenty of other options available.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.