Don’t Jump on the Canoo Before Considering the Bigger Picture

When Canoo (NASDAQ:GOEV) made its public market debut via a reverse merger with a special purpose acquisition company (SPAC), it made quite an impression. In the first half of December, GOEV stock briefly changed hands at over $20, providing instant returns for early stakeholders. But that would seemingly be the last hurrah as shares entered a painful bearish trend channel.

A magnifying lens over the Canoo company website GOEV stock

Source: Shutterstock

But this being the new normal, sometimes good news is bad news. At least that’s what the sentiment is on social media. As usual, the moral directive of the regular folks taking it to the bears dominates the random discussions. However, unlike other ill-advised speculative investments, GOEV stock has some credibility associated with the short-squeeze tactic.

Based on the latest information I could grab from Yahoo! Finance (June 15), the short percentage of float for Canoo shares was nearly 27%. Anything into double-digit territory and you’re talking about seriously negative sentiment. Moreover, the short ratio or the days to cover is 4.54, which means that bearish traders will need about a week to cover their tail.

Typically, when you assess what the next big move will be for social media traders, they tend to focus exclusively on short percent of float. If I were trying to induce a short squeeze, though, I’d also look for a higher short ratio. This would give the bears less room to get out of their positions, which implies higher profitability potential. That’s exactly the case for GOEV stock, affording it more justification for speculators.

But is an investment in Canoo justified? Just based on short interest alone, I don’t think GOEV stock is a wise idea. If contrarian gambles on heavily shorted stocks equated to automatic profits, everybody would do it. Because variability of outcome is involved, professional traders don’t have the same confidence that social media traders apparently do.

Rising Competition Is a Big Concern for GOEV Stock

Still, even without the drama associated with trying to guess where social media will take GOEV stock, there’s another catalyst driving shares: the market value. At the time of writing price of just over $9, Canoo’s equity unit seems like a discounted opportunity. That’s especially valid considering its SPAC price of $10.

True, you also don’t want to blindly bet on something because it’s cheap. As other InvestorPlace writers have warned, there’s usually a reason why a security trades in the doldrums. However, GOEV stock is tied to a relevant business. Not only is Canoo an electric vehicle manufacturer but one that specializes in the lifestyle narrative.

It’s something to consider before you go full-on bearish on GOEV stock. Today’s young consumers don’t care about bold and brash as they used to, which explains why companies like Harley-Davidson (NYSE:HOG) have struggled to gin up interest beyond their core baby boomer demographic. Also, millennials care about the environment and social responsibility, factors that benefit Canoo’s EVs.

But as my colleague Chris Markoch mentioned, competition has the potential to swarm Canoo’s revenue channel. Markoch cited an IHS Markit report, which “predicted by 2026 the United States will offer 130 EV models from up to 43 brands.” And that’s got to be the main problem over the long haul regarding these new EV entrants.

Think about the combustion car market. When arguably most consumers think about buying a new or used vehicle, they’re thinking about three or four brands each from the U.S., Germany and Japan. At most, consumers are considering a choice among 15 brands — and practically, the number is surely much fewer.

When you’re getting into 40-plus brands, that is overkill. I fear that Canoo will simply get lost in the haze of EV competitors.

Industry Problems Also Put a Question on Canoo

If I may, I see a lot of projection in internet comments regarding EV sales. For example, many proponents assume that because they love EVs, everybody else must too. And that’s not quite the reality.

Don’t take my word for it. Consider this report from Cnet, which states that 18% of EV owners switched back to combustion-based cars between 2015 and 2019. Other reports stress that the inconvenience of charging drove their decision to return to combustion.

You might point to the small sample size, which is a fair point. But that’s also the point. Currently, EVs are accessible to wealthier consumers who have relatively easy access to home charging. What about when EVs expand to middle-to-lower-income thresholds? Those folks will likely need public charging.

Well, the data above suggests that without a serious investment in charging infrastructure, the EV sector won’t take off. And that’s also not the greatest news for GOEV stock, which lacks some of the pizzazz of its more established competition.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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