This is a Z4 Research Initial Quick Look
Side note: Earlier this week, Hennessy Capital Acquisition Corp. IV (NASDAQ:HCACU) (“HCAC”) announced that it would be taking Canoo public. Canoo (CNOO) is not what we were thinking here (we wanted Proterra, the EV bus maker) but let’s have a look at Canoo as we currently have a personal position in the name and may add it to the ZLT.
Side note 2: We’re not “car guys”. However, we cover a wide variety of legacy and emerging segments within energy. A natural evolution of our energy work is evaluating uptake of new technologies.
Canoo’s offering will come in the form of 3 EVs:
- The first vehicle is their lifestyle car, named simply Canoo. It’s a slick, obviously, urban VW minibus looking vehicle designed to get you around the city in comfort. The inside is spacious (18% more volume than a Honda Odyssey and 94% more room than a Tesla 3 while being shorter than both) and looks like a mobile living room. This will be a subscription-based model charging a month to month fee (more on this below). The Canoo is set for launch in 2022 with the Gamma version (which will be 97 to 98% of the final version) ready in 12 to 14 months (fall 2021). This looked geared to urban families but also could serve a wide variety of fleet car functions.
- The second vehicle is a last mile, high cargo capacity, L3H3 class delivery van model set to launch in early 2023. This will have the same footprint as all of their vehicles but offer more space than a similar wheelbase traditional van and be low cost to produce. The delivery vehicle will be sold, not subscribed, and is included in the cheat sheet below as the engineering and delivery portion of revenues. We’d expect a breakout of the two as time passes. Contract wins for this one could serve as catalysts for the name.
- The third is their “sport” vehicle which looks somewhat like a Tesla but with almost 2x the interior space. This is set for 2025 and will also be a subscription model. They will require additional funding before the rollout of this model.
All of the vehicles use a “Skateboard” and “Top Hat” format.
- The Skateboard – This is the chassis containing all the guts and brains of the car/van/truck. It is a low profile sled, completely self-contained and fully functional and includes the battery modules (variable kw options), a composite leaf spring suspension, is steer by wire, an electronic drive train, and has adjustable overhangs. It is completely flat and utilizes hub motors (option for 1 or 2 motors and AWD). The flat skateboard increases interior space of whatever sits atop it. Other competing designs have batteries as an attachment and still have traditional suspension linkage and steering mechanics making them less compatible to a modular top hat. The design is future proofed for upgrading to autonomous operation.
- The Top Hat – This is body and interior. The top hat will come in a wide variety of configurations (multiple car styles, minibus, suvs, pickups, etc.) that marry to the skateboard. Top hats simply plug onto the skateboard with all controls fly by wire. In their presentation, they show 12 different top hats that could be developed but the options are endless.
- This skateboard and top hat format yields low development time lines for new models (18 to 20 months) and a lower cost product that is easier to manufacture. Production will be outsourced to a “world-class contract manufacturer” in the U.S. (somewhere in Michigan). Canoo pays initial tooling costs and a per vehicle fee when the vehicles are completed. The contract manufacturer is in charge of hiring and materials acquisition and assembles skateboards and top hats and marries them.
A few words on subscriptions and cars:
- Subscriptions have increased in popularity over the last several years.
- Car subscriptions may or may not be different. There are market forecasts for “Transportation As A Service” that point to massive growth from a nascent market now over the next decade. According to Clutch data, the average non-car-swap subscription tenure is still 15 to 18 months, shorter than a lease but longer than we would have guessed.
- A Canoo subscription offers no enrollment fee, no long-term contract (just the month to month fee), no charging fee at a network of public chargers, no maintenance fees, no registration with the DMV, no additional sales taxes, and access to insurance via the app.
- This is a direct to consumer model, skipping the dealer and the dealer’s cut. Scaling this geographically may be less hard than it sounds given that there are only 13 well defined U.S. EV markets at present. For maintenance, they plan to partner with well-known auto maintenance chains.
- We have heard the company quote a number of $900 per month for the subscription but don’t know if that’s in the current ballpark or not. Canoo attempts an apples to apples comparison with a lease and says that on average, over the life of the lease, the average cost is 40% over the monthly lease payment (down payment, maintenance, fuel, DMV added in).
- This $900, should it be the number, sounds a bit steep but we note that Hertz has a subscription offering, My Car, that began service in 2019 with pricing ranging from $999 per month to $1,399 per month (before taxes and an enrollment fee). Volvo has a subscription service as well but it’s really a shorter term lease with some additional bonuses, priced at $750 a month (excluding taxes and registration). Several other higher end car makers have subscription plan offerings in the works as well. So there does seem to be some thought behind the efficacy of this model and it’s likely to be tweaked over time as OEMs figure out the best path.
- Key points here from the corporate side in making a subscription model work are low maintenance cost and vehicle longevity which highlights EV over ICE vehicles. It’s key to note that they see the first Canoo’s as 12-year cars, to be constantly maintained and upgraded to like new status when thinking about the subscription model yielding higher returns over the traditional sales model of selling a car once and then not recycling the asset from a sales standpoint as is the case with the subscription.
But where we see the value is the skateboard.
- Glance down at the cheat sheet below. First revenues come from the engineering segment, not subscriptions. Our view is that management must, with 2021 less than 5 months away, have a decent handle on at least that first $120 mm in revenue. As they said in their presentation, this revenue comes from “a couple of projects that are in the advanced stages of negotiation”. They further note the engineering segment has 7 projects in the pipeline now.
- Management hails from BMW/Mini, Tesla, Audi, and Ford. They have a partnership with Hyundai to potentially jointly develop a platform based on the skateboard for future Hyundai and Kia EVs and electric purpose-built vehicles (PBVs). At present they are doing contract engineering for Hyundai to customize their tech for Hyundai applications. We noted previously some of the videos from CES this year may be construed to show skateboard influence in Hyundai’s PBV plans. This could lead to a skateboard licensing deal.
- They also noted being in talks with a number of European car OEMs for development of commercial vehicles for last mile applications.
- For now, we’ve incorporated their guidance into the cheat sheet below just to show how they see things developing and what some of their expectations are from sales to margins. We expect this to evolve a good bit over time. We note that the model as described below is one that kicks off a lot of cash flow with a little bit of scale.
- Capex, as guided, is funded through the rollout of the Canoo and into the development of the delivery van. Near term raises should be limited.
- SPAC management claimed after its review of 15EV targets that Canoo was the closest to commercial success.
Nutshell: We are increasingly keeping an eye on the BEV and FCEV markets and I’ve been speaking to taking stakes in a small group of names in the space aside from Tesla which we’ve long held in the family. This one is one of the names under consideration and I do own it now personally. Others in that group are WKHS (unowned), AYRO (unowned) and we have our eye on a few more. Valuation on a pre-sales model is always an art. However, they do not appear, based upon on their projections, as overvalued. Often these names move with news more than data and this one seems to be getting more of a cool response due to the oddity of the subscription model. This may be missing the bigger opportunity as well as underestimating the appeal of the return potential of a subscription-based model relative to the single point of sale method. We look forward to watching the story evolve and may take a position in the Z4 Long Term (ZLT) portfolio soon. For more information please see the presentation here.
Disclosure: I am/we are long HCAC.U. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.