Hyliion Doesn’t Have To Be Tesla Or Nikola To Succeed

If you believe the product is as important as personality, Hyliion Holdings Corp. (NYSE: SHLL) is one name that should be high on your list of frontier technology stocks, including Tesla (Nasdaq: TSLA) and Nikola (Nasdaq: NKLA).

Hyliion is working to provide what may be a perfect transition for Class 8 trucks to move from fossil fuels to zero-emission technologies, be it electric or hydrogen fuel cells, making good current of current infrastructure, including driver readiness, service capabilities of truck companies, electrical grids, etc.

For investors, options to invest in electric and other frontier technologies powering the vehicle industry are growing, which is great, but this may also be a good time to shortlist players that have a chance to gain traction in terms of meaningful sales over the next few years. Looking at the fundamentals, Hyliion seems to have a fairly good one.

We believe when the dust settles on the excitement around stocks, there are just a few things that matter for investors – technology, management, and the price you pay for both of those.

Please also read our previous notes on electric vehicle stocks and Workhorse Group (Nasdaq: WKHS), which we continue to hold even though the stock is up almost 100% since our note.

Technology

For any new technology investment, the three key parameters to measure the success of any participant, including Hyliion, Tesla and Nikola, are

  • Readiness
  • Cost advantage
  • Performance advantage

Is the technology ready? Yes.

Hyliion has a clear advantage over both Tesla and Nikola in this field, and that too by a wide margin.

You may often hear from Bears that the company, by not offering battery-only solution, is not creating a new truck, instead focused on upgrading the existing truck design. We believe that opinion is misinformed.  It’s easy to misunderstand smooth transition to new technology as not believing in the new technology, more so these days when some EV companies are competing to make outlandish statements about future products that may fail at the start due to the absence of supporting infrastructure or cost disadvantages.

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Source: SEC Filings

Hyliion has two products,

  • Hybrid powertrain solution that is already shipping to companies like Penske and Ryder
  • Hypertruck ERX is a fully electric truck that uses natural gas to recharge the vehicle, instead of plugging to an electric grid like Tesla or using Hydrogen fuel like Nikola.

As most investor may remember, cars moved from fossil to hybrid to fully electric, Hyliion is a company that can deliver in hybrid to fully electric transition for the trucking industry.

Is there a cost advantage for Hyliion? Yes

Because of its cost advantage, better emission rates, range performance parity, and the infrastructure to adopt technology is ready, so truckers don’t need to reinvent the wheel, which is important because economics matter for truckers, unlike car buyers for whom design aesthetics or CEO’s antics on social media may play a role in the purchase.

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Source: SEC Filings

As the chart above shows, Hyliion does enjoy an edge over both existing as well as emerging solutions. The cost advantage is not just on a total cost of ownership basis but also on its ability to produce the electricity needed to recharge.

The company claims that electricity generated onboard from RCNG is almost 35% cheaper than that from the grid, which is a great advantage over technologies like Tesla that plugs into the grid for recharge.

Does the existing infrastructure provide an advantage to Hyliion? Yes

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Source: SEC Filings

What gives us confidence that the company’s roadmap of achieving volume production over the next six quarters is achievable is the fact that refueling infrastructure is already there, especially in the international markets. As the chart above shows, that is a $12 billion advantage over hydrogen technology and a $7 billion fully electric solution advantage.

Besides refueling, the technology offers performance parity with existing diesel engines, given Hypertruck ERX is claimed to go up to 1300 miles between fill-ups, which is nearly double the range of Nikola and more than 150% over Tesla’s current solution.

Another key advantage is that Hypertruck ERX’s driver display doesn’t need driver retraining since it gives all the information that drivers currently use to monitor the truck’s performance.

Does it enjoy a performance advantage? Yes

Description: Macintosh HD:Users:darspalmann:Downloads:Screen Shot 2020-06-24 at 10.01.26 AM.png
Source: SEC Filings

“The seller said, “You don’t understand. These are not eating sardines, they are trading sardines.” Like sardine traders, many financial market participants are attracted to speculation, never bothering to taste the sardines they are trading.”  – Seth Klarman

Margin of Safety

The performance advantage is important in ‘eating sardines’ and as the chart above shows, Hypertruck ERX truck is designed to do the job on-road as well. As for cachet, Hypertruck ERX is the only Class 8 net-negative carbon-producing electric powertrain and all new software features and updates can be delivered remotely.

Management may lack the cult following, can deliver though

Texas-based Hyliion may lack the cult, at least for now, but the management has the brains and background to deliver, which is what matters, for customers as well as shareholders.

Thomas Healy, Founder and CEO, with Mechanical Engineering degree from Carnegie Mellon University holds 10 electric vehicle powertrain patents. Patrick Sexton, CTO, is a seasoned expert in powertrain technologies with experience at various auto equipment supplier companies and holds 8 engine and transmission patents.

For a car company, engineering heavy management may come up as a disadvantage compared to marketing savvy management but for a trucking company, customers will be drawn toward engineering prowess rather than the buzz from launch events.

Numbers

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Source: SEC Filings

After the deal, the company would have close to $520 million, which the management claims are enough to reach commercialization. If you’re as scared of dilutions as we are, that will come as music to your ears.

As the chart above shows, even if the company achieves half of management’s projections over the next two-three years, it can clearly establish itself as a leader among frontier technologies plays in the class 8 trucking segment.

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Source: SEC Filings

In terms of valuation, the case is the easiest to make. Even after the run-up of the last few days, the company trades at a significant discount to Nikola.

Trader hat

The deal will take a couple of months to complete, during which the excitement of market participants, especially day traders, and headline traders will ebb and flow, providing good opportunity for investors to work on understanding the fundamental business and establish positions accordingly.

DISCLAIMER: We own shares in Tortoise Acquisition Corp (NYSE: SHLL), Workhorse Group (Nasdaq: WKHS) and NIO Limited (NYSE: NIO).

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