After yesterday’s crazy action on GameStop (NYSE:GME), it seems almost anything is possible in the markets at the moment. Over the past six months, Hyliion Holdings (NYSE:HYLN) has traded as high as $58.66 and as low as $17.84. Although HYLN stock has stabilized in recent weeks, the question of its rightful value remains.
Is it a $60 or $18 stock? I’ll look at both ends of the pricing spectrum.
It’s interesting to note that Hyliion’s 52-week high was on Sep. 2, 2020, precisely one month before the merger with Tortoise Acquisition took place. By the time the deal was completed and HYLN stock began trading on Oct. 2, it was trading below $40.
Today Hyliion trades at around $17, lower than its lowest point in the past six months. So, to make the argument HYLN is a $60 stock, perhaps more will take a very compelling argument.
One, I’m not sure I’m able to make it, but I’ll give it my best shot.
The Bull Case for HYLN Stock
First, to be a $60-dollar stock, it would need a market capitalization of $9.2 billion based on 153.9 million shares outstanding as of Oct. 1, 2020, and $10.4 billion accounting for the exercise of almost 20 million warrants outstanding with an exercise price of $11.50.
That’s a big ask.
For this, I turn to InvestorPlace’s Faisal Humayun for a little perspective on its valuation.
“In their financial projections, Hyliion expects sales (hybrid electric unit and Hypertruck) of 300 units for the current year. Unit sales is guided to increase to 34,500 units with revenue of $2.1 billion by 2024,” Humayun wrote on Jan. 18. “I believe that these projections are very optimistic. A significant correction for HYLN stock indicates that the markets might also be expecting a slower progress. One reason for being cautiously optimistic is competition.”
Assuming it hits the optimistic revenue projection of $2.1 billion by 2024, a $10.4 billion valuation would suggest a 2024 forward price-to-sales ratio of less than 5. That’s not so crazy.
Tesla (NASDAQ:TSLA) trades at 27 times 2020 sales and 18 times 2021 sales. Based on 30% sales growth in 2022 through 2024, it would have annual revenue of $101 billion at the end of 2024 and trade at eight times sales based on its current valuation of $832 billion.
Of course, Tesla has real revenues at this point. Hyliion merely has hopes and dreams, but the numbers are doable.
Hyliion Isn’t Worth More Than the Teens
One of InvestorPlace’s best number crunchers is Mark Hake. He does an excellent job breaking down a company’s valuation in simple language that anyone can understand, and he’s always a good read.
Hake recently suggested that Hyliion might be worth buying on the dip. That was on Jan. 12. Since then, nothing’s transpired as it’s traded in a fairly tight range between $17 and $18.
In December, Hake argued that Hyliion’s fair value was $19.09 a share based on the assumption that it hits its projections. Trading below that, Hake suggests it’s a buy.
“Using a 15% discount factor, its 2024 revenue amounts to 57.175% of its revenue four years in the future. That means the present value of its 2024 revenue is $1,195 million (i.e., 0.57175 times $2,090 million),” Hake wrote on Jan. 12.
He then points out that based on an enterprise value of $2.1 billion, it is trading at 1.8 times sales based on a present value basis. Higher than some of its peers, he further points out that if you don’t discount its future revenue, HYLN trades at just 1.03 times projected sales.
He finishes by putting a fair value of $21.03 a share, providing more than 20% upside.
Why would I use Hake’s potential buy recommendation to argue it isn’t worth more than the teens?
The assumptions used are just that: assumptions. A lot could go wrong to set HYLN way off course on its road to $60.
The Bottom Line on HYLN Stock
In my last article about Hyliion in mid-January, I suggested that HYLN was an attractive speculative play in the $15 to $18 range.
I especially liked the fact that it was forcing the early redemption of 12.5 million warrants that provided the company with $142 million in cash at a time when the expenses were going to start accelerating.
At $60, Hyliion is ridiculously expensive for the typical investor. At $18 or below, it’s probably trading below fair value.
Hyliion’s true value is likely somewhere in the middle.
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. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.