To The Moon

Summary

• Hyliion Holdings Corp. is well-positioned for growth in the electric vehicle market, with strong demand from fleet operators and favorable regulations supporting its powertrain solutions.

• The company is actively working to improve its margins and manage cash burn, with a focus on cost reduction, increased production, and renegotiating contracts.

• Despite risks such as increased competition and supply chain challenges, Hyliion's explosive revenue growth and strategic initiatives make it an attractive high-risk, high-reward investment option.

Semi Trucks on Bridge

The demand for fleet-focused electric vehicles drives the growth potential of Hyliion Holdings Corp. (NYSE:HYLN), a company positioning itself to grow its gross margins as it reports explosive revenue growth. Hyliion is a buy as it further benefits from favorable regulations mandating credit-generating vehicle purchases, all while prioritizing green and efficient tech, making it an attractive investment option in the electric vehicle (EV) market's future.

Based on the company's most recent earnings call, strategic initiatives and regulatory backdrop, it seems probable that Hyliion will be successful in ramping up its sales and get its cost basis under control to stabilize its gross margin. The fact that it can be bought up at a discount makes HYLN stock a high-risk, high-return play that's worth considering.

Company overview

Hyliion, headquartered in Cedar Park, Texas, focuses on the development of powertrain systems for Class 8 commercial vehicles. Their aim is to provide energy-efficient options for heavy-duty trucking while reducing greenhouse gas emissions and carbon intensity. Hyliion has been refining its technology since its establishment in 2015 and is expected to expand production in early 2024.

Fleet operators have shown strong interest in their product offerings, and the company maintains a strategic financial approach to minimize negative gross margins. With a favorable regulatory environment and the global shift towards sustainability, Hyliion is well-positioned to make an impact in the growing electric vehicle market.

Increased production and anticipated demand

Hyliion is prepared for a change as they plan to ramp up production in 2024. This marks a major step forward for the company, indicating a mature stage of business and showcasing their innovative technology. Recently, the management reported "great interest from fleets," indicating a positive market reception of their product. This is particularly noteworthy in the growing EV market, which still poses challenges related to customer acceptance and adaptability. Management also noted that conserving cash and preserving its margins was an important focus.

Hyliion is also making a substantial effort to elevate their manufacturing quality and capability. They're accomplishing this by investing heavily in their infrastructure, such as modern manufacturing facilities and a state-of-the-art assembly plant equipped with the latest technological advancements for powertrain solutions. They have established robust partnerships with prominent fleet operators and logistics firms such as Hyzon Motors.

The commercial vehicle market experiences a strong demand for electric vehicles, which is fueled by favorable market trends. This demand is caused by the urgent need to reduce CO2 emissions, which has prompted various states and countries to introduce regulations and incentive programs to increase the use of electric vehicles in the industry. One such regulation is the Zero-Emission Vehicles (ZEV) mandate, while California's Hybrid and Zero-Emission Truck and Bus Voucher Incentive Project (HVIP) is an example of an incentive program that supports the adoption of Hyliion's solutions.

Hyliion's CEO highlighted the company's positive performance, attributed in part to supportive regulatory policies. For example, the Improved Renewable Energy (IRE) incentive program boosts investment in sustainable energy solutions, including electric vehicles, with financial benefits for participating companies. This regulatory assistance is expected to generate greater demand for Hyliion's powertrain solutions and spur significant company growth.

Furthermore, the Advanced Clean Truck (ACT) mandate promotes a shift towards zero-emission commercial truck sales and encourages companies to adopt electric vehicles in their fleets, providing yet another catalyst for Hyliion's success.

Margin gap

It should be noted that some analysts' biggest concerns regarding Hyliion can be found in its negative margins, as well as its rate of cash burn. Indeed, when one analyzes and compares its gross, operating, and net profit margins there is a substantial cause for concern, but it should be noted that they have improved substantially from the previous financial year.

Author supplied

In the earnings call, it was mentioned that production of the Hypertruck ERX system was set to begin later this year, but it has since been brought forward to next quarter, ahead of schedule. It's also building out its range of C sample trucks which are undergoing a process of validation before being launched as a fleet trial in this quarter.

Steps are also being taken by management to help reduce its rate of cash burn, which include restructuring its cost basis for 210 of its Founders trucks that were set to be shipped in the first quarter of next year. Hyliion reported that it was experiencing higher costs than anticipated due to their suppliers passing on extra costs to the company. In light of this, the brand will pass these costs onto their customers, as well as look at how their contracts are arranged.

These factors mean that we can anticipate that revenue will be coming in slower over the next few quarters due to a shift from growth to improving the company's internal efficiency in reducing costs. Once the kinks have been sufficiently worked out we can then expect it to pivot to growth once its losses have been stabilized to an acceptable level.

Here's an excerpt from the earnings call that suggests this might be the case.

We are going to start production a little earlier, but our ramp up growth plans for production are going to be a little slower, primarily driven by we want to be smart with capital, right? So, we want to ship less units at a loss. So, we will conserve cash that way. Give our engineering team the time to roll in some product improvements that are going to pull some costs out of the system, also give the suppliers some time to deliver components to us. So they are not putting as much surcharges on them.

Now as for the bigger picture, Hyliion presently has around $400 million in cash on its balance sheet, and it expects to consume around a bit less than half of that this year alone. Management said it expects to end on around $275 million in cash this year. Favorably for investors, a focus for the company is to also not dilute existing shareholders by issuing new shares. Given the cash burn rate, it expects to raise money some time past 2026, but not earlier than that, according to management.

Another factor that leads me to suggest it will sufficiently cut down on its costs is that it's near the tail end of its major R&D process and is rapidly moving toward commercialization. This is vital, as R&D has made up around two thirds of the company's operating expenses for the last two years.

Author supplied

This shift in spending was confirmed by management in the most recent earnings call.

Let me comment on expenses a little bit. We've been I mentioned, I think, at the end of last quarter, we're leveling off the growth and spending, if you look at us, this quarter, compared to the fourth quarter that it really is leveling off. And that leveling is really driven by the powertrain side of it as we finish up R&D and move on to commercialization.

To sum everything up: Management is aware of the company's problems. They are making strategic decisions to manage costs. The company is moving from the startup phase to commercialization. This shift will likely cut operating expenses via reduced R&D spending. It will also increase the operating margin. The company plans to raise prices and renegotiate contracts. They will also restructure operations to cut COGS and increase gross margin. These actions will lower the cash burn rate. There is no immediate risk of cash shortage if you believe management's guidance has any weight.

Valuation

I rated Hyliion as a buy due to its sound plan for getting its margins under control and managing its cash burn, as well as the fact that its shares can be bought up at a relative bargain.

The company's P/S ratio stands at 164. Although this number may seem dramatic, so is its revenue growth, recording a nearly 1,000% increase in last financial year.

Author supplied

I don't think it's likely that its shares will fall much lower than its current level, unless something changes substantially in the thesis. If you go by what management has guided its situation is set to substantially improve. So if one is bullish on the company's prospects, then now looks to be a more attractive option than waiting for a bigger discount.

There's a clear downward trend in the stock price but the movements on the volume candles suggest that it will more or less stay in this region for some time to come. Waiting for it to reach "the bottom" might be impossible, and momentum shifted upwards quite recently. A better deal might beget missing out on future rallies altogether.

Hyliion might appear to be substantially overvalued compared with it peers on a P/S basis, however the average of those companies aren't putting enormous revenue growth figures on the board either.

TradingView

Rating this stock as a buy is speculative to say the least given its limited operating history, but I feel there's more evidence and a stronger rational basis to suggest it's worth buying than holding, and I certainly wouldn't recommend holders to sell given how cheap the stock is already.

Risks

Although Hyliion's investment thesis has potential, investors must take into account the perilous risks that could affect the company's profits and growth. With the surging number of players entering the commercial electric vehicle market, Hyliion must use its technological advancements, cost efficiency, and strong customer ties to distinguish itself from other new startups and established companies. Challenges with supply chain management, operational efficiency, and manufacturing capacity could all hinder the production and scaling process, which may result in missed revenue opportunities or dissatisfied customers.

There's also the fact that Hyliion's survival in the short-term largely hinges on management's execution of its cost reduction strategies and successfully negotiating its existing contracts. There is much uncertainty around how management actually intends to do this, and frankly its plans were a little vague in the most recent earnings call, at least with respect to specifics.

I'll caution again that now might be the best time to buy if one is bullish on the company's prospects, and this thesis largely hinges on timing. There is too much uncertainty around the company's performance to say definitively that it will remain a buy twelve months from now given that it's still in the early stages and navigating a complex environment. But if an investor has a high risk tolerance and is familiar with investing in early stage companies, Hyliion is showing some promising signals, although they should be taken with a pinch of salt.

Conclusion

Hyliion offers a promising investment option in the ever-growing market of electric commercial vehicles. The company is aiming to boost production and there's a high demand from fleet operators, which along with friendly regulations, create a good base for its future growth. Furthermore, Hyliion is actively working towards achieving profitability and narrowing the margin gap. Although some more detail around management's plans to reduce costs would be reassuring, I believe its overall strategy to increase its margins are sound. Working through these growing pains is essential, and I believe its explosive revenue growth shows that its more than halfway there to having its product validated by the market.

So if you are in the mood for a high risk, high reward option, here's one that I think ticks both of those boxes.

$Hyliion Holdings Corp.(HYLN)$

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