Hyliion Holdings Likely Has More Downside, but Watch It Closely

InvestorPlace readers know that I have been very bullish on Hyliion Holdings (NYSE:HYLN) stock for a while.

Photo of Hyliion tractor inside service bay
Source: Hyliion media

A major reason is Hyliion’s middle-of-the-road approach to investing in the electric vehicle space.

The sustainable trucking outfit offers plug-and-play electric powertrain solutions that are not reliant on a vast EV infrastructure.

Instead, they are targeting the decarbonization of existing Class 8 vehicle powertrains.

The brainchild of Thomas Healy of ALS Ice Bucket Challenge fame, HYLN has raised $600 million to finance its growth. Out of that total, $390 million consists of cash and cash equivalents and $200 million marketable securities. That is a fair amount of change to pursue product development, partnerships and pre-orders.

With so much going right for the company, why is the stock down nearly 50% in the last three months?

Well, there are multiple factors to explain this. First, although the junior trucking outfit has raised a lot of capital, it does not have a lot of contracts in its kitty.

In addition, the wider EV sector is having a bit of a flashpoint moment as vaccines continue to roll out translating to a resurgence in cyclical stocks.

Finally, there is the little matter of its financials. Operational loss is increasing while the top line remains non-existent.

Overall, though, there are things to like about this company. There is less risk when investing in this one than, say, a Tesla (NASDAQ:TSLA) or NIO (NYSE:NIO), primarily because of the reduced cost of its core offering. Plus, there is a huge total addressable market (TAM) for it to exploit.

However, at the moment, the company is operating on a “Sell the sizzle, not the steak,” mantra.

HYLN Stock and the Wider EV Selloff

The selloff in EV stocks has mostly been focused on Chinese companies. However, it has also affected other companies in the space as well. And it’s not all that surprising.

Now that normalcy is returning, especially in the U.S, cyclical stocks that did not receive a lot of love last year are making a comeback. We live in a world where Coca-Cola (NYSE:KO) is up 26.3%, and Tesla is up 331% during the same period.

But there is a clear pivot that is happening. Despite the massive $5 trillion 10 year market opportunity on offer, investors turn towards traditional investments that do well in a recovery period.

Plus, Joe Biden has unveiled an ambitious $2 trillion American Jobs Plan covering many aspects of infrastructure. That plan did have something for EV stocks, but it mostly consists of traditional proposals touching roads and bridges. It is no surprise, therefore, that stocks attached to these segments are gaining steam.

Hyliion is not a bellwether of the EV industry, but it’s not immune to factors affecting the wider sector. In addition, when you are still at a nascent stage and do not have the firepower of, let’s say, a Tesla, you feel the pinch a bit more.

Operating Metrics Need a Lift

At the end of the day, the fortunes of any stock are made on fundamental strength. Unfortunately, Hyliion has a lot of work to do in that respect. Although still a young company, it has not seen much preorder action while operating loss keeps ballooning.

Sales, general, and administrative costs are increasing rapidly, understandable considering the business is transforming, and its research and development expenditure is also increasing.

For the foreseeable future, these costs will keep increasing at a rapid pace. Hence, shareholders should expect more dilution. Total outstanding shares have jumped to 170.3 million at the last reporting date from 24.2 million at the end of 2018. When you take all of this into consideration, you begin to understand why investors bailed on HYLN stock.

Firmly Neutral Territory

HYLN stock is not a dud. On the contrary, it has a viable product and a total addressable market of eight million trucks in operation, and 944,000 trucks sold annually, a replacement opportunity worth roughly $800 billion.

In addition, its Hypertruck ERX system is equipped with data analytics software. That is an enviable source of recurring revenues and margin growth. If you couple all this with the ambition, charisma, and talent of Thomas Healy, you have all the makings of a winner.

Still, HYLN stock debuted at the height of EV mania, when most retail investors were fixated on finding the next Tesla. Hence, the valuation and fundamentals went in opposite directions. That doesn’t mean it’s a bad company. It just means that for the risk you are taking on, shares need to trade at a more reasonable valuation.

For me, the stock has moved from a “buy” to a “neutral” category and will remain there until we see more preorders.

On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence.

Article printed from InvestorPlace Media, https://investorplace.com/2021/05/hyln-stock-more-downside-watch-closely/.

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