Editor’s note: This article was updated on Dec. 17, 2020, to update Canoo’s expected ticker.
Hennessy Capital Acquisition Corp IV (NASDAQ:HCAC), a special purpose acquisition corp (SPAC), will merge with a Los Angeles-based electric vehicle maker named Canoo by the end of the year. HCAC stock is worth 60% more than its Dec. 14 price.
When the deal closes its will trade under the symbol GOEV, instead of HCAC.
The valuation forecast is based on my analysis of the company and its own valuation from the company’s slide presentation. The deal recently announced on Aug. 18, envisions a reverse merger with Canoo.
The company projects 2024 revenue of $1.43 billion, 2025 revenue of $2.341 billion, and its first profit at $188 million. Canoo expects to build 10,000 canoo vehicles in 2022, rising to 60,000 in 2024, and 95,000 in 2025.
But even more interesting, Canoo will not sell its vehicles. It only offers a subscription model. This is a lease of the EV, but with no definitive lease term and no down payment, both of which are traditionally in car leases. Moreover, subscription “owners” of Canoo vehicles do not have to pay DMV costs, maintenance costs, or issues with residual value.
A Closer Look at HCAC Stock
Canoo says that this business model will be much more profitable than a one-time sale of the vehicle, with higher margins. It believes that it will make four times the margin of normal one-time sale manufacturers. This is why Canoo’s business model is different.
Canoo believes this lowers the barriers to entry. It is the “simplest way to have a single all to yourself for as long as you want (minimum 1 month)” (page 39 of the slide presentation). The bottom is that the company says: “One monthly payment, no commitment.”
This could clearly transform the way people think about electric vehicles. Tesla (NASDAQ:TSLA) said in its Battery Day event in late Sept. that it would have a $25,000 car in three years. That may or may not happen.
But Canoo plans on being able to deliver its first consumer subscription-based EV model named the canoo by 2022. Shortly after that, it will deliver a last-mile delivery vehicle and a sport vehicle.
Flat Skateboard Architecture
Second, all of these models will be based on an architecture of what the company calls a “skateboard platform.” This delivers the highest usable interior space in its class.
Essentially, people will sit facing each other with this flat structure using its proprietary battery and drivetrain technology.
Canoo says these EVs will be highly efficient to produce and can allow them to modularly design new EVs for different end-users.
However, the jury will be out on whether consumers will really like this or not.
What HCAC Stock and CNOO Stock Is Worth
The slide presentation indicates 244.8 million shares will be outstanding by the close of the merger, on which shareholders will vote on Dec. 21. Therefore, at nearly $20 for HCAC stock, the pro forma market capitalization of the combined company is $4.74 billion. This is on page 52 of the slide presentation.
Moreover, as the company will receive $607 million in the merger, the pro forma enterprise value (EV) is $4.13 billion. Therefore, we can its value using an enterprise-to-sales model and compare this to what the company says its peers and sum-of-the-parts value should be.
Canoo’s 2025 revenue is forecast to be $2.341 billion, but we need to discount the revenue to the present. For example, at a 15% discount rate over 5 years, the present value is about half of the 2025 revenue (49.7%). The present value of $2.341 billion today is $1.164 billion.
As a result, HCAC stock has a pro forma EV-to-sales multiple of 3.55 times (i.e., $4.13 billion divided by $1.164 billion). This is way too cheap. Its enterprise value should at least 5 to 6 times sales to be comparable to other EV makers.
Moreover, the company itself shows on page 52 of the slide presentation that its sum-of-the-parts valuation should be at least $6.582 billion. This is based on comparisons with Tesla and Netflix (NASDAQ:NFLX), a subscription-based business model company.
Now $6.592 billion is 60% higher than HCAC SPAC’s enterprise value of $4.13 billion. Therefore, HCAC stock (CNOO stock) is worth at least 60% more than today.
On the date of publication, Mark R. Hake had a long position in Tesla (TSLA).