- Hennessy Capital Acquisition Corp. IV to merge with Canoo Holdings Ltd.
- Canoo vehicles are ideal for commercial use in last mile delivery fleets
- Walmart, other retailers are possible partners as they ramp up last mile tech
- Canoo to offer leases rather than purchases to allow fast adoption
- Canoo trades at 0.85x 2025 revenue, much lower than public comps
- Company sees positive Ebitda in 2024 on rapid revenue growth
- Management team led by Ulrich Kranz, who spent 30+ years at BMW
By John Jannarone and Jarrett Banks of IPO Edge
From Tesla, Inc. to Nikola Corporation to Hyliion Inc., many electric vehicle (EV) stocks have surged so much that investors may feel late to the game. One company with shares that still have plenty of upside: Canoo Holdings Ltd., whose versatile vehicle platform looks set to leave rivals in the dust.
Canoo will go public through a merger with Dan Hennessy’s Hennessy Capital Acquisition Corp. IV (ticker: HCAC), a special purpose acquisition company, or SPAC, that raised cash to find a target. Investors who purchase shares of the SPAC now will see them automatically convert to Canoo shares once the deal is formally approved.
The defining characteristic of Canoo’s model is its so-called skateboard platform that was designed to allow the most possible vehicle interior space. The skateboard serves as the base for a range of vehicle designs known as top hats that have a wide range of cabin layouts.
Simplicity of design has important advantages. It is far more efficient to have such a modular approach because the skateboard accounts for the vast majority of research development expenses along with crash testing costs.
While there are a wide range of top hat designs in the works, investors should focus on one that stands out: a commercial model ideally suited for last mile delivery. The vehicle, which is expected to hit the market in 2023, is configured as compact city-built delivery solution with maximum cargo volume that no other manufacturer offers.
Why the focus on last mile? As delivery demand increases, a need has arisen to make short trips carrying retail items such as restaurant meals, groceries, and convenience-store items. The coronavirus pandemic didn’t simply cause a spike in last mile delivery demand – it more likely accelerated it.
Importantly, electric vehicles are known to be highly efficient for last mile delivery. By one estimate, electric vehicles cost just 35{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} of their diesel counterparts for last mile delivery operations.
It’s not just FedEx Corporation or United Parcel Service, Inc. that could be potential users of Canoo vehicles. Other retailers such as Amazon.com, Inc. and Target Corporation continue to look for smarter ways to get packages to homes.
Walmart Inc. has already bought electric long-haul vehicles and said it aims to convert its whole fleet in the next several years. And with recent investments in its last-mile operations, the next step could easily be to switch to an all-electric last mile fleet. Such a massive contract would be transformational for Canoo and extremely lucrative for investors.
Canoo also has a consumer model lined up for delivery more imminently – in 2022. The company plans to entice customers with a subscription service featuring a minimum term of a month and no upfront payment. The new generation of consumers increasingly looks to transportation as a service; while Generation Z may not give up their cars entirely for Uber rides, they are highly likely to lease rather than own.
Canoo is also shaking up the dealership model, having customers instead download an app that serves as a point of control. The company says the app manages maintenance, public battery charging and access to insurance, “liberating you from the tyranny of auto ownership.” The subscription model should enable Canoo to be less dependent on new vehicle sales and be “asset light” by leveraging the lessons of larger companies and auto subscription experts.
It’s also important to note that the consumer vehicles were designed specifically for a subscription model. The vehicles are not only made of extra-durable materials but also only come in one color and one trim, greatly minimizing production expenses. Other companies like Tesla simply aren’t configured optimally for a subscription model.
Even before the first cars are delivered, Canoo has found another way to generate revenue. In a strong vote of confidence in Canoo’s technology, South Korean auto giant Hyundai is paying the company for “engineering services” to use the skateboard for a range of lower-cost electric cars and trucks. Canoo will work with Hyundai and subsidiary Kia to modify the skateboard that integrates the battery pack, motors and other key components.
Investors should also take comfort in an experienced leader at Canoo’s helm. Ulrich Kranz, an engineer for over 40 years, spent 33 years at BMW and left the company to pursue the skateboard and top hat model.
“He brought the skateboard to life on a $250 million budget,” Dan Hennessy said in an interview with IPO Edge. “We have seen most of the EV companies but these guys are world class.”
Indeed, Mr. Hennessy and his team did some serious diligence before deciding to merge with Canoo. The SPAC evaluated 190 possible targets since its IPO in early 2019, including an in-depth analysis of 15 different EV and advanced mobility companies. It is also notable that Mr. Hennessy is now on his fourth SPAC deal, probably making him the only person to make such an achievement with transactions of substantial size.
One important factor was a business plan that is focused on core profitability – without relying on temporary benefits such as government subsidies for green vehicles. Canoo forecasts a long-term gross margin of 30{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} based on conservative estimates for metrics such as usable vehicle life. It expects to be just shy of profitability in 2023 and swings to positive Ebitda in 2024.
“Canoo is much further along towards profitability than others,” Mr. Hennessy said. “That is hugely important.”
Best of all, investors still have an opportunity to own Canoo at a reasonable valuation. Based on the latest share price, the company trades at an enterprise value of 0.85 times 2025 sales and 1.4 times 2024 sales. By contrast, Nikola trades at 4.7 times 2024 revenue and NIO Limited trades at 3.9 times, according to Sentieo, an AI-based research platform.
There are plenty of EV companies for investors to choose from. But with a truly unique design and clear advantage in the last mile segment, Canoo looks ready to take off.
Contact:
John Jannarone, Editor-in-Chief
editor@IPO-Edge.com
Twitter: @IPOEdge
Instagram: @IPOEdge
