Why Is Canoo Stock Dropping?

Canoo (NASDAQ:GOEV) is an EV startup that was once considered a leading contender for electrifying fleet vehicles. Prominently signing a deal with Walmart for 4,500 delivery vehicles in 2022, Canoo appeared to be well on its way to success.

Even earlier, Canoo had partnered with Hyundai in an attempt to leverage the startup’s technology to develop EVs for the motor giant’s consumer business

Despite early enthusiasm and what seemed to be a promising start, Canoo shares have produced extreme losses for long-term shareholders.

The stock reached its highest close at over $500 per share in late 2020. As of the time of this writing, however, GOEV trades at just north of $1 per share.

What happened to Canoo to produce such large losses, and is there any way the company can turn this spectacularly negative trend around?

Why Is Canoo Stock Dropping?

Canoo’s stock has been dropping fast because it has generated very little revenue since it went public in 2020. The Q2 earnings report detailed quarterly record revenues of just $605,000, a tiny amount for a company still valued at $84.3 million.

Crucially, Canoo has not been able to successfully capitalize on its promising early partnerships. The Hyundai deal fell apart in early 2021, leaving Canoo without a key partner that investors had hoped would generate reliable revenues for the company.

The Walmart deal, though still in place, hasn’t been followed up by significant shipments of the agreed-upon vehicles.

At the same time, Canoo’s continued investment in building out its operation has resulted in staggering losses. As of the end of Q2, the company’s trailing 12-month net loss was $259 million, more than 3 times Canoo’s current market capitalization.

More Problems From a Weak Balance Sheet

Another substantial issue for Canoo is its financial position. Total assets at the end of Q2 were just over $543 million, including only about $4.5 million in cash and cash equivalents. Considering the enormous losses the company has sustained over the last year, such a low cash reserve raises significant concerns for investors.

Further exacerbating these concerns is the company’s current ratio of 0.17x. With total current assets of just $33.4 million and total current liabilities of $195.0 million, the company appears to be in a precarious position with regard to its ability to meet its current obligations.

Lack of revenue, steep losses and a generally weak financial position culminated in a management announcement at the end of Q1 that Canoo may not be able to continue operating for the long haul.

This disclosure sent already deeply embattled share prices lower, eventually bringing GOEV shares to their present low level.

Effects of a General EV Shakeout

In addition to Canoo’s own problems, it’s also useful to recognize that investors appear to be souring on EV stocks in general.

Nowhere can this be seen more prominently than in the case of market leader Tesla (NASDAQ:TSLA), which is down nearly 9 percent YTD due to slowing sales growth.

Tesla, however, is a dominant company in its industry that is already producing vehicles at scale and turning a respectable profit.

Startups like Canoo that are still in the early stages of bringing their products to market and far from generating positive earnings have fared much worse.

For reference, consider fellow EV startups Rivian Automotive (NASDAQ:RIVN) and Lucid Motors (NASDAQ:LCID). These two stocks have lost 43.6% and 16.2% YTD, respectively.

Stock Dilution

Adding to what appears to be a nearly perfect storm of problems for Canoo investors is the fact that the stock has been consistently diluted in the years since its IPO.

At the end of 2020, there were about 5 million shares of GOEV outstanding. In the subsequent years, that number has skyrocketed to nearly 70 million.

This trend has massively watered down the stakes of early shareholders and created a negative price spiral that has only been compounded by the company’s performance and financial position. Though more recent developments have certainly not helped Canoo, ongoing dilution is perhaps the largest factor in the stock’s downward march.

Is There Hope for Canoo?

While management has been clear that Canoo’s future is deeply uncertain, the company is still making efforts to ensure the business survives.

Recently, Canoo has announced the relocation of key engineering jobs from California to Texas and Oklahoma. The company is also moving its headquarters to Texas, following the trend of many California tech startups moving in search of more favorable business conditions.

Management is also attempting to reorganize in order to ensure its own survival and success. The most recent management change was the exit of the company’s chief technology officer, also a co-founder of Canoo. It’s not yet clear, however, how the management shakeup will affect Canoo’s business strategy.

In spite of the bad news, there are also still opportunities in front of Canoo, even with its lackluster record. In the Q2 report, for example, management reported that it had successfully delivered vehicles to the United States Postal Service that were actively on the road.

If the USPS continues to buy from Canoo, the electrification of its fleet could represent a very real business opportunity for the struggling company.

Likewise, ongoing expansion efforts into the Middle East could create opportunities for international sales. The company recently sold its first vehicles into the Saudi Arabian market. With that country prioritizing a green energy transition plan, success there could benefit Canoo going forward.

Despite efforts to keep itself afloat, Canoo’s problems make the stock appear very risky at this time. Even if the company can reorganize and begin generating some kind of reliable revenue, its long history of stock dilution and probable need to raise additional capital suggest that shareholders could see their positions continue to lose value.

Even ignoring the potential for ongoing dilution, GOEV still looks fairly expensive at its current price. Shares currently trade at over 56x trailing 12-month sales, a level that would normally imply very high growth expectations.

Given that Canoo doesn’t seem to be in a position to deliver such growth soon, though, it’s quite likely that its shares still have room left to fall.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.