Hyliion (NYSE:HYLN) stock is interesting because it represents a lot of potential. Investors who have followed the markets this year have seen many unusual trends. In particular, money chasing risky growth in overvalued stocks that will eventually face market corrections. In addition, the increase in electric vehicle projects financed by SPAC is an accelerating trend.
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But there is a trend that has continued this year that is anything but atypical.
The idea of investing early in fledgling companies like Hyliion, in rapidly growing sectors, such as electric vehicles, is not a new one. This is an investment principle that has been praised through the ages.
Perhaps you associate this with the parable of investing a small amount in Amazon (NASDAQ:AMZN) and watch it grow and become a fortune. And of course, there are countless other examples.
This is basically what Hyliion stands for. And that is also why, although HYLN’s shares have already lost much of their value, investors continue to hope that they will keep their promise. I stand firm in my belief that it will not happen.
SPAC Truths
HYLN’s shares are an EV move among many that hit the market this year through SPAC financing. I’m not going to list them all here, but half a dozen come to mind and there are many more.
An important difference between raising money to finance a company through a shell company (SPAC) and following the traditional IPO route is that SPACs are less rigid. The IPO process is more difficult and more expensive. But it has some benefits. Extra vetting (in IPOs) tends to make companies reach the market in a more proven way. And they tend to be stronger and last longer.
Expert opinion
Renaissance Capital talked about this problem recently:
“Of the 313 SPAC IPOs since the beginning of 2015, 93 completed mergers and went public. Of these, common shares delivered an average loss of -9.6% and an average return of -29.1%, compared to the average after-market return of 47.1% for traditional IPOs since 2015 ”.
This is not to say that all SPACs are bad. It turns out that SPAC’s IPOs tend not to perform as well as their most examined traditional IPO pairs. Unfortunately, Hyliion’s shares appear to be in this field of value destruction.
In mid-June, when Hyliion announced that it was going public through a SPAC through Tortoise Acquisition Corp. (NYSE:SHLL) stocks rose rapidly. Hyliion went from a company that was stagnant at $ 10 the previous year to a good deed. It more than quintupled to more than $ 53 per share in early September. It went public in early October and has since decreased by 57% in value.
Ultimately, for HYLN’s stock to rise again, one thing is needed: sales.
Derth Sales
In Hyliion’s third quarter earnings report, he highlighted that installed eight of its hybrid engines in the quarter for four customers based on the fleet. I’m not sure if an installation is technically a sale. Did these fleet-based customers really pay Hyliion to install those retrofit EV power trains in their vehicles?
My guess is that it is much more of a trial period in which Hyliion is paying fleet-based operators, and not the other way around. A simple offer to let us refurbish our hybrid powertrains for your trucks and we’ll pay you well if something goes wrong. Hyliion obtains data and can announce that it has installed its solutions, fleet operators win a gift that can save money in the future.
Best case scenario: Hyliion sold eight of its power trains. Most likely scenario: they are paying to get data without risk to operators.
I will not even go into the significant obstacle that Hyliion faces in relation to its solutions that potentially void the guarantees. I talked about it about a month ago, when I last wrote about Hyliion.
The hype period is over for the HYLN stock
Hyliion was a darling of the market for a few months between June and September. The company raised more than half a billion dollars after announcing that it was going public through a SPAC.
As Hyliion CEO Thomas Healy stated: “With extensive resources from our strategic mix, Hyliion is well capitalized and prepared to disrupt the transmission market. Our focus in 2020 and 2021 will be to position the company for long-term sustainable growth, capturing the material market opportunity with electrification of Class 8 vehicles. ”
The company has been funded for a long time. That is right. But it needs to close deals and sell its powertrains. This takes time and does not appear in the financial statements immediately. And until that happens, investors like you will not make money from Hyliion.
I also question the long-term validity of your market. Of course, perhaps Hyliion can persuade fleet operators to refurbish and hybridize their Class 8 trucks. This is not easy, but if they prove that it increases efficiency and decreases costs, companies will say yes. But Class 8 EVs are coming and companies will solve the problems. I just don’t see Hyliion’s strategy working. I don’t see it going up and I don’t think you should buy shares.
On the date of publication, Alex Sirois did not hold (directly or indirectly) any positions in the securities mentioned in this article.