May 9, 2021

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Canoo’s Odd Business Shift Makes It the Best ‘Hypogrowth’ Play of 2021

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Generally, I try to avoid becoming overly negative on a particular company. Based on Murphy’s law, such negativity results in the target firm becoming one of the top-performing hypergrowth securities. But regarding Canoo (NASDAQ:GOEV), I have doubts. From where I stand, everything that could go wrong for the company, did go wrong. Logically, this bodes poorly for GOEV stock.

A Canoo MPDV being loaded with small shipping containers

Source: Canoo media

As my InvestorPlace colleagues have covered extensively, Canoo’s earnings report for the fourth quarter of 2020 didn’t quite go according to plan. While the actual numbers didn’t catch analysts off guard, the drama beyond the print did. As our own Larry Ramer wrote, key members of the company’s executive team abandoned ship. Further, Canoo CEO Ulrich Kranz didn’t speak on the conference call.

When you’re a small fry trying to impart a paradigm shift in a centuries-old industry, not being present carries greater significance. Following the implosion of GOEV stock, it’s clear that many other investors felt the same way.

Further adding to the misery, Canoo reversed its original plan to offer its flagship electric vehicle — a spacious van catering specifically to the millennial lifestyle — as a subscription-only service. Instead, the firm is going with a more traditional direct-to-consumer model. InvestorPlace contributor Chris MacDonald pointed out that Canoo cited balance sheet risks as the primary reason for the change.

Despite its engineering prowess, this disclosure made the company look incompetent. GOEV stock had to drop because the capital markets cannot reward such wishy-washy strategies, not at this level. But we’re still not done.

While Canoo marketed itself as a consumer-oriented company, that appears to have changed. Now, it’s going to focus on commercial vehicles such as delivery vans.

Usually, analysts don’t like sudden shifts in business but they can be forgiven if there is a viable path regarding the transition. But as Ramer warned, Canoo’s development deal with Hyundai appears to be dead.

Bizarre Changes Turn GOEV Stock Toxic

To be clear, we don’t know for sure if the Canoo-Hyundai partnership has fallen through. However, Canoo’s investor presentation now makes no mention of the Korean automaker. Given all the bizarre and maddening changes recently, it’s a solid bet that the partnership is no more. Confirmation of such could knock GOEV stock down a few notches.

And that’s what I really fear. While MacDonald stated that GOEV stock could appeal to long-term, hypergrowth investors, I don’t have impulse to make a similar caveat. Instead, I view Canoo as one of the best hypo growth stocks in the market — perhaps the very best.

Lest my sarcasm be interpreted as clickbait, let me state emphatically that this is a dubious honor.

First, I felt the company’s EV was already a challenging prospect because of its controversial design. I see a toaster on wheels and I dare say many others share my opinion. But it may have worked because millennials and Generation Z will spend more for sustainable products. Further, young people hate commitment.

That’s not just an anecdotal observation. According to Scientific American, statistics show that millennials are commitment-phobes. Therefore, a subscription model would have been perfect for this target consumer base. Now, the company must come up with an entirely new strategy for its new focus on commercial EVs.

Second, let’s talk about those commercial EVs. More than likely, Canoo is setting up GOEV stock for failure. Exhibit A is Workhorse (NASDAQ:WKHS). It seemed like everyone was talking about how it was a surefire bet that it would win the U.S. Postal Service contract for its next-generation mail carrier fleet. But I warned investors to be careful.

I encourage people to read my latest take on WKHS. Long story short, just because a platform is electric does not make it automatically superior to current transportation methods.

Climate Change Can, Ironically, Sink Canoo

While the headline above might be a tad bit hyperbolic, the message nevertheless resonates. As President Joe Biden is preparing for an upcoming climate summit with international leaders, the United Nations warned that the world is “on the verge of the abyss.” According to the U.N., we have very limited time to contain global temperatures.

Adding to the consternation, NASA warned that the western U.S. is experiencing moderate to severe drought and that conditions will likely worsen in the upcoming months. This might portend heat waves like we saw last year, along with terrible wildfires. That could translate to grid disruptions, which will not be helpful for EVs.

As we saw with the Texas winter storm, consumer sentiment for EVs can take a beating as prospective buyers realize the cons (not just the pros, of which there are many) of going electric. And though clean commercial transportation is a definite plus, it doesn’t really mean much if the parcels stay grounded.

In other words, I don’t like Canoo’s business shift. It had plausible competitiveness with the consumer end. Moving haphazardly to the commercial sector, it’s a different story and not in a good way. Unless you want to bleed money, I’d stay away from GOEV stock.

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

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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.