Description

Arcimoto (FUV)

Arcimoto is listed on Nasdaq under the ticker “FUV” which stands for “Fun Utility Vehicle”, however the only thing fun about the company will be shorting the stock to the low single digits. Arcimoto saw its stock price soar over 500% to a peak of $36.65 (over $1bn market cap with $2.2mm in 2020 sales) in the 3 months following the US presidential election. FUV rode the wave of EV-related stocks and significantly benefited from social media pumping, exaggerated and mis-leading press-releases, fabrications about its pre-orders and a highly promotional CEO who is known to bash and troll critics on Twitter and Seeking Alpha. Like most stocks in the EV space, the valuation has absolutely zero foundation in reality and has been bid up by retail. The company’s investor presentations are short on substance, chock full of pictures and do not provide any forward financial guidance. While the stock has come down substantially from its early February peak, and short seller Bonitas Research put out a report on the company at ~$15 on March 23, I believe the stock has another 50% downside. Last March this stock traded for less than $1 and had a market cap of $30mm.

The story begins with the company’s CEO and founder, Mark Frohnmayer. Before starting Arcimoto, Mark was a software developer involved in programming video games in the late 90s and early 2000s. A company he co-founded in 2000, GarageGames, was acquired by Barry Diller’s IAC in 2007. Arcimoto was founded with Mark’s proceeds from the sale ($6 million) beginning its 12 year development. FUV went public via Regulation A+ IPO in September 2017, raising $19.5 million at $6.50/sh in an offering that was downsized from $29.9 million. After eight generations, Arcimoto completed regulatory compliance for the Fun Utility Vehicle and initiated production in 2019.

The FUV is a fully electric, 2 person, 3 wheel vehicle with a 20kWh Li-ion battery (1/4th of the Tesla Model 3’s battery). Top speed is 75mph with a range of 100 miles under average city driving conditions (up to around 40 mph, stop and go), 66 miles at 55 miles per hour, and 32 miles at 70 miles per hour. The company is selling multiple versions of its three-wheeled electric vehicle: the Deliverator (last mile delivery), the Rapid Responder (for emergency services,) and Cameo (rear facing seat meant for the film industry) and the Roadster (a version of the original with less frontal surface area and a lower center of gravity). Each product shares 90% to 95% of the same parts and can be built on the same assembly line. The FUV starting price is $17,900 and quickly gets to $21,150 once critical elements like half doors and a cargo box are added. The multiple versions of the FUV are designed and intended for the sub-markets in which the company expects to generate sales.

Arcimoto's narrative has been constructed around its offer of a fun zero carbon emissions alternative for single passenger commuters to get around. In social media pumps and a Ross Gerber test drive of the vehicle it is compared to Tesla and claims to be revolutionizing transportation. However, it is much less safe than a car (FUV weighs 1,300 pounds, while the average SUV weighs 4,800 pounds) and less convenient than a motorcycle/moped. Elon Musk crashed one into a wall in 2019 and in 2020 tweeted that he could not support the three-wheeled vehicle as it was unsafe. On November 18, 2020, Arcimoto filed a safety recall notice with the National Highway Traffic Safety Administration regarding possible immediate power loss on 100% of its delivered vehicles. This was not disclosed to investors nor were customers notified (per Bonitas research). Since December 2018, Arcimoto has filed 19 separate recall notices, the majority related to the most basic elements of a vehicle such as power, steering and braking. None of these were disclosed in company press releases and the CEO’s response to inquiries has been cagey and defensive.

Promoting specific use cases, the CEO stated that the average delivery driver drives 75 to 100 miles per day and 80-85% of ride share pickups are for a single person. However, these scenarios are unrealistic for such drivers as it tests the upper limit of the battery and rules out ride-share pooling. It takes 4 hours to charge using Charge Point charging stations with 220 volts, and 8-10 hours to charge using a regular home outlet. Not to mention the vehicle’s open cockpit design makes it impractical for markets that experience rain, snow, high winds, cold weather, hot weather, or any other condition where a driver would wish to be enclosed. In company presentations the stated TAM is grossly overexaggerated and includes daily driver, last mile delivery, first responders and fun noting that HOG sells 250k motorcycles each year and the NA ATV market is >500k units per year. Company production and pre-orders tell a different story.

The company has been accepting pre-orders for its vehicle since 2015. Today, Arcimoto’s website shows customers in California, Oregon, Washington, and Florida can reserve vehicles for $2,500. In other states, people can put in pre-orders for just $100. There is no guarantee that its pre-orders will translate into actual sales as the $100 deposit required to pre-order an FUV is fully refundable. This pre-order number is supposed to be a gauge of customer demand, estimated by Mark to be over 50,000 per year, however pre-order growth was only 12% in 2020 totaling 4,717. This collapse in growth has coincided with heavy promotion on social media and significant web traffic. According to SimilarWeb, from August 2020 to January 2021, the Arcimoto.com has gotten 560,000 views which translated into less than 500 new pre-orders (0.08% conversion). Customer deposits have been shrinking since 2019, part due to purchases and deliveries, but also due to refunds in which the company had 591 in 2020 (the 2020 10-K was the first time such metric was reported). In short, as the company has gotten more exposure it has failed to convert that into actual demand, pre-order growth has stalled and deposits are being refunded.

Production and Sales

Production has been an on-going challenge for the company. In 2017 Arcimoto’s global production footprint was projected to be 100,000+ per year by June 2022. In 2019 only 57 units were produced of which 46 were delivered to customers. The company blames COVID for production setbacks and a lackluster delivery of 97 units in 2020. Per the Q4’20 call it is clear that Arcimoto has no grasp of their supply chain which, combined with COVID, was blamed for continued low production. Current production is only a few units per day and runs 4 days per week. On the Q3’20 earnings call near term production goal was 3 units per day by year end 2020 in their current facility. The last medium-term target given in August 2020 was for 50,000 vehicles per year by late 2022 vs annual production of 600-800 (50 weeks, 4 days, 3-4 units). On the Q4’20 call the CEO said that they were now producing 4 units per day and their production and delivery target for 2021 is 500 units.

The company purchased a 185,000 sq ft facility in Eugene OR which will close 4/19/21. This is 5x the size of the company’s current production facility (implying annual production capacity of 4,000 units). In a press release the CEO stated that Arcimoto would start “right away” with factory retrofits. However, that is false as the previous owner is leasing it back through the remainder of 2021. On 3/8/21 the CEO tweeted “my hope is that we have some production-related activities happening by the end of this year, but not anticipating serious unit output until late ‘22.” This was clarified on the Q4’20 earnings release when Mark said that Q4 2022 was their mass production target, however “mass production” was not quantified. It seems the company has dropped their ambitious goal of 50,000 units per year.

The vehicle is sold online and needs to be delivered from the company’s Eugene facility to customers’ homes. Taxes vary by state and delivery varies by destination. If you live in Oregon and order a vehicle it will cost $2,165 for taxes, the registration fee, the destination fee, and the home delivery fee. Those living in northern California, will pay between $3,395 to $4,395 and in southern California, add an extra $500 for fees and taxes. Aside from greatly increasing the cost, this poses the problem of service; where do you take your FUV to be serviced for one of the many recalls? Mark acknowledged this issue on the Q4’20 call noting that service capabilities need to be built out, but again blamed COVID without offering any details or a plan to service customers.

Pumping

The company has very high website and YouTube traffic with over 1mm video views and 9k subscribers.

@Gali or Galileo Russell was added to the Board of Directors in early January 2021. He is best known for having an investment YouTube channel called HyperChange with 152,000 subscribers. He owns a whopping 300 shares! Safe to say his biggest contribution to the company is interviewing the CEO and promoting the company on his YouTube channel.

The CEO has done many interviews and is especially active on Twitter where he is quick to belittle and criticize naysayers. He has interviews on Hyperchange, Tesla Daily, Couch Investor, Now You Know, and Young Investor. These interviews have reached well over 100,000 people combined.

Tesla bull Ross Gerber took the FUV for a test drive and came to the company’s defense on Twitter following the Bonita’s short report. His firm currently owns 0 FUV stock.

Despite relentless marketing and pumping on social media, it does not solve the fundamental issue that there simply isn’t mass demand for this product. If you own a car and a bike, there is no need for an in-between. If you live in a city and don’t own a car, chances are you don’t need a $20k electric trike and probably do not have anywhere to put one.

Valuation and Comps

Given that we have no idea what FUV’s margin profile will look like, we will use EV/Revenue and 2023 numbers as the company won’t be operational in the new facility until 2022. Despite a stated long-term objective to deliver the FUVs at a price of $10,000, I use a price of $21,000/unit to derive revenue. One could argue that FUV deserves a premium multiple to its fossil fueled comps, but I believe that is negated by the tremendous brand value and long operating history of the much larger comps. Arcimoto is basically a glorified golf cart manufacturer – they do not have any IP, technology or otherwise that would warrant a premium valuation. The vehicle is impractical and unsafe for everyday driving and should be considered a recreational vehicle only. There is nothing to stop Yamaha, EZ-GO (Textron), Polaris or any number of Chinese companies from introducing a competing product backed by significantly greater R&D and marketing budgets.

Harley Davidson - HOG ($12Bn EV) trades at 2.7x 2023 revenues

Polaris - PII ($9.4Bn EV) trades at 1.08x 2023 revenues

Piaggio – PIA IM ($1.9Bn EV) trades at 0.85x 2023 revenues

Yamaha Motor Co. – 7272 JT ($11.2Bn EV) trades at 0.65x 2023 revenues

Assuming the company can sell their full production capacity of 4,000 units at an average price of $21,000, we get revenues of $84mm. At the high end of the comps 2.7x revenues, that is an EV of $227mm and net of cash, a market cap of $187mm or $5.23/share, representing a 58% downside.

In the extremely unrealistic scenario that the company produces and sells 20,000 units, we get revenues of $420mm netting us a per share value of $30.57 at 2.7x revenues. I assign this a 0% probability as the company has not grown their order book beyond ~5,000 units in the context of dramatically higher marketing, social media presence and web traffic.

Ayro (AYRO) is a close comp as it is focused on all-electric utility vehicles and generated a similar level of sales ($1.6mm in 2020). Arcimoto also has litigation pending vs. Ayro regarding patent infringement. There are no revenues estimates for Ayro, however it has a market cap of $205mm which is more than 50% lower than FUV’s current market cap of $452mm.

Electrameccanica (SOLO) is the closest comp. They are selling three-wheel electric vehicles with a similar price point, range, and charge time, however it is enclosed and only seats 1 person. Production is outsourced to a contract manufacturer in China capable of putting out 20,000 units per year. The street is estimating $142mm of sales in 2023. Current market cap is $547mm with $128mm of net cash. Might be a good pair trade but is probably a better short than a long. I think they eat Arcimoto’s lunch.

The Street is projecting $177mm in 2023 revenues for Arcimoto implying sales of 8,428 units at $21,000. Applying HOG’s 2.7x sales we get an EV of $477.9mm which is close to the current EV. This comp multiple makes sense because HOG has been around since 1903, produces nearly 250k units annually and has one of the world’s most recognizable brands. Using Yamaha’s 0.65x multiple we get a stock price of $2.11/share, representing 88% downside from current levels.

In my view, FUV should trade at 1x forward sales, which I think is 4,000 units equating to $84mm in revenues and a stock price of ~$1.28/share. If they are able to produce and sell that many units in one year, it would represent the entirety of their pre-order book.

As an abstract calculation of margin of safety, FUV has $39.5mm of cash ($1.1/share), $6.6mm of fixed assets ($0.18/sh), a $10mm building ($0.28/sh) and it took $42mm of development costs to get to production ($1.17/share), which gets us to $2.73/sh.

The last time the company raised capital on 7/9/20, 1,370,000 shares were sold at $7.30/sh.

Whichever way you slice it, the current valuation does not make any fundamental sense. It has been grossly inflated by retail traders and social media scammers. The wind has come out of the sails and it looks like retail traders are abandoning ship.

I think anyone dumb enough to buy the stock at these valuation levels has already done so and is quickly headed for the exit as the company fumbles production goals and reality sets in on the EV sector. We are seeing a rotation to quality and away from highly speculative companies without revenues. 

Risks

The biggest risk is that this is a retail driven stock. These types are relatively valuation agnostic and anti-short seller.

Short interest is already ~25% of the float.

Promotional press releases, social media posts or favorable articles written about the company.

Cathie Woods adds it to one of her funds.

Catalyst

Reality sets in on the EV sector.

Rotation to quality and away from speculative businesses. 

Company continues to miss production and delivery goals.

Not wanting to wait until 2023, customers request refunds for their deposits causing pre-orders to decrease.