Hyliion’s Outlook Should Scare Investors

Stocks to sell

Hyliion (NYSE:HYLN) stock is one of the SPAC-funded,  electric-vehicle names that have recently hit the markets. Investors know all about Nikola (NASDAQ:NKLA) and its woes. Lordstown Motors (NASDAQ:RIDE) and Fisker (NYSE:FSR) are two of the other EV companies that have obtained funding by merging with a SPAC. But Hyliion stock is not as well-known as those other equities.

A 3D rendering of a green truck in front of a blue sky.

Source: Shutterstock

SPACs have become a popular investment vehicle for EV makers. Ultimately, though, a SPAC is simply another method of funding an existing business. While markets were interested in Hyliion stock and it rose initially, the current situation looks less positive. 

Wall Street doesn’t know what to make of Hyliion because it doesn’t really have  sales, and it is targeting a market that might not even exist in a few years. And that’s why investors should stay away from Hyliion.

Wall Street Has No Clear Opinion

Only two analysts are currently covering Hyliion. Both of those analysts currently have a “hold” rating on the equity . That tells potential investors very little. Those same analysts give HYLN stock an average target price of $24.50.  The shares currently trade at $24.80. 

Analysts may not have delivered a clear judgment on Hyliion, but I have a definite view on it. Macro trends, including strong environmental awareness and a friendly incoming administration in Washington, certainly favor Hyliion. But Hyliion will, of course,  falter unless it generates significant sales. Right now it looks to be heading in that direction. 

Hyliion’s Sales Look Questionable

When Hyliion released its third-quarter financial results on Nov. 12, the company highlighted three key details:

  • The company completed a strategic combination with the SPAC Tortoise Acquisition Corp. on Oct. 1, yielding approximately $520 million in net proceeds that will be used to fund Hyliion’s growth plans and long-term objectives.
  • Hyliion installed eight hybrid electric powretrains in Q3 for four  fleet owners.
  • It signed an agreement with FEV North America to accelerate the commercialization of the latter company’s Hypertruck ERX

The first point really is not very important. Investors were already well-aware of the SPAC and the money it would raise for Hyliion. The company recorded a net loss of $18.67 million in Q3 which doesn’t seem particularly significant given the $520 million that it received from the merger.

Points two and three are of more interest for potential  and current owners of HYLN stock. While both look favorable on paper, investors need to make judgments about what they really mean. 

Investors Need More Detail

One of the key factors that could easily dissuade investors from buying Hyliion is that the firm’s products could void vehicle warranties. When I first read about Hyliion, that seemed to be  an obvious point. You can’t simply change  vehicles’ components and expect that the automaker will honor the warranty. Most vehicle owners know that there are strict rules about that issue. 

The restrictions on altering powertrains are particularly strict. Yet Hyliion’s key business right now is inserting its electric powertrain into Class 8 internal combustion trucks. 

As for the second point emphasized by Hyliion, given vehicle owners’ concerns about their warranties,  Hyliion could have simply given the fleet owners a free test trial of the powertrains. .

Hyliion Represents the Muddled Middle

The U.S. and the world are racing toward adopting EVs. The trend has taken root and shows no signs of slowing. The U.S. has elected a new President who has shown that he is pro-EV and is likely to create an environment which should accelerate the adoption of EVs. 

But Hyliion looks to me like an intermediate solution. Maybe, using its demonstration vehicles set to be launched in 2021, it can show that its products are viable. But even if it does, so what?

Are Class 8 vehicle manufacturers likely to continue to produce internal-combustion tractor-trailer vehicles the same way they always have? Will companies like Peterbilt (NASDAQ:PCAR) and Freightliner simply produce their vehicles and then have them retrofitted with Hyliion’s extenders?

I think manufacturers will eventually transition to making trucks with fully electric drivetrains. 

Therefore, Hyliion’s main product  seems to represent an intermediate step in the evolution of Class 8 trucks toward full EVs. And investors don’t want to buy the shares of a company in that situation. 

The Bottom Line on HYLN Stock

Class 8 trucks are transitioning from traditional diesel/gas internal combustion to electric power.  So Class 8 EVs are the future, not Hyliion range extenders. It looks like the market for Hyliion’s products is going to be short-lived because my bet is battery-powered trucks will prove their mettle relatively soon. 

That gives Hyliion a short window. And markets don’t even know if Hyliion can mass-produce its powertrains during that window because of issues like warranties and viability.

As a result, I think Hyliion stock is going to continue to go downward. Hyliion has a lot to prove, and not much time in which to do so.

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

Articles You May Like

5 More Trump Stocks to Trade
Cathie Wood says her ‘volatile’ ARK Innovation fund shouldn’t be a ‘huge slice of any portfolio’
Dental supply stock rallies on theory RFK’s anti-fluoride stance will prompt more dentist visits
Top Wall Street analysts are upbeat on these stocks for the long haul
Greenlight’s David Einhorn says the markets are broken and getting worse