Ayro Inc. (AYRO) designs and manufactures specialty emissions-free electric vehicles for short-haul use. The company currently has two models that are configurable and purpose-built with applications in campus and corporate fleet settings for tasks like security, maintenance, landscaping, catering and general transportation. While Ayro has a current capacity to produce approximately 600 vehicles per month, an ambitious expansion plan highlights the growth opportunity here. An existing order backlog, along with several strategic partnerships with key industry players, supports a positive outlook for the company. Overall, the stock remains speculative with questions regarding its long-term profitability, but is well-positioned to benefit from the accelerating demand in this segment.
(Source: Seeking Alpha)
Company Q3 Developments
Ayro was founded in 2016, and completed a merger with “DropCar Inc.” in May to begin trading with the new ticker symbol in conjunction with a series of registered direct offerings raising new capital.
Ayro recently reported its Q3 earnings on November 6th with revenues of $388,654 and a net loss of $3.1 million. Favorably, revenue has grown sequentially in each quarter this year. Indeed, the company is still in the early stages of development but does have a real product with current production. The overall financial position is stable, with $27.9 million in cash at the end of the quarter and just $241,399 in total debt.
(Source: Company IR)
During the Q3 2020 conference call, management highlighted several key developments during the quarter which set up a positive outlook. First, Ayro expanded its Austin manufacturing facility from 10,000 square feet to 24,000 square feet, tripling its monthly production capacity to 600 vehicles per month.
(Source: Ayro Inc.)
Currently, the company’s core Club Car 411 model is sold exclusively through “Club Car” commercial dealerships and corporate accounts in North America. Club Car is a division of industrial giant Ingersoll Rand Inc. (IR) and is itself an established leader in low-speed vehicles with personal utility and golf cart categories. Under the agreement, Ayro receives orders from Club Car dealers for vehicles of specific configurations, and it invoices Club Car once the vehicle has shipped. In August, the company announced an order for nine vehicles to be used in a military medical campus, highlighting the opportunity for future sales into more than 6,000 hospitals in the U.S. that could benefit from a purpose-built EV. The attraction of the Club Car 411 is the versatility of the rear-body options, including box, truck or flatbed configurations.
An extension of the Club Car deal is a relationship with independent “Gallery Carts Inc.,” which specializes in food kiosk delivery solutions. Ayro has received $584k in orders for specialty all-electric mobile food carts based on the Club Car 411 platform. The company is particularly bullish on the segment seeing opportunities for various applications in the foodservice industry, including last-mile delivery. From the Q3 conference call:
These mobile food carts allow for hot and cold beverage, and food equipment to be integrated directly into the Club Car 411. Gallery’s customers in the mobile food and beverage distribution markets could have applications for such a purpose built EV on universities, corporate and government campuses, as well as at arenas, resorts and event centers, especially since COVID-19 has greatly reduced the desire for large crowds and gatherings. This mobile hospitality EV can alleviate solutions or situations rather where large numbers of people would otherwise be in risky proximity to one another.
(Source: Gallery Inc.)
Finally, a major development in the quarter was the announcement for a strategic manufacturing, engineering partnership with “Karma Automotive,” which is a U.S.-based luxury EV manufacturer. The deal calls for dedicated inventory and an assembly line for Ayro’s EVs within Karma’s Moreno Valley, California facility. The two companies will co-develop a next-generation, light-duty electric truck with an expected launch in Q1 2021. Ayro believes the partnership can produce over 20k EVs through 2023 with sales opportunities in global markets. Management spoke on the opportunity during the conference call:
We believe that the combination of Ayro’s end user market and engineering expertise and Karma’s manufacturing, development and global supply chain capabilities could allow the partnership to be able to produce over 20,000 EV’s through 2023, which would have a combined value of over $300 million. The initial targeted market will be customers in North America, but there is no reason why we can’t leverage our combined expertise to eventually meet more global demand.
The controlling owner of Karma, Chinese conglomerate Wanxiang Group, subsequently invested $10 million into Ayro through a registered direct offering announced just this week. Shares of Ayro responded positively, surging by as much as 25% on the announcement, suggesting that the deal is a recognition of the company’s growth opportunity.
It’s an exciting time in the market for electric vehicles-related companies. Tesla Inc. (TSLA), up over 560% year to date and set to join the S&P 500 Index, highlights the enthusiasm in the segment based on an accelerating transition from fossil fuels. What we like about Ayro is that the company is specializing in a specific category of light-duty utility vehicles with important niche applications. There is a market for specialty emission-free vehicles, and the company can benefit as corporate fleets look for next-generation technologies.
That being said, Ayro remains very much a “story stock” based on long-term plans with limited current revenues or order backlog. To be clear, the reported $584k in orders for the Club 411 Gallery food carts and expanding manufacturing capacity are a good start, but the company will need to quickly ramp up production with tangible numbers to justify the bullish outlook.
One figure we can work with is management’s target of producing upwards of 20,000 EVs, representing a combined $300 million in value through 2023 with the Karma partnership. Considering the stock’s current market value of ~$225 million, if Ayro can execute and begin approaching those types of revenue numbers in the next three years, a case can be made that the stock has value at the current level. It will be important over the upcoming quarters for Ayro to show sequential expansion in both production and revenue numbers for the stock to maintain momentum.
We believe the positive sentiment in the EV segment can support shares of Ayro, putting aside questions regarding the valuation, including a current price-to-sales ratio of over 160x based on revenues of just $1.3 million over the past twelve months. Assuming the company can produce 500 vehicles per month by the end of 2021, each representing about $15k in revenue, annualized sales of ~$90 million imply a price-to-sales ratio of 2.9x, which is reasonable. By this measure, we rate shares of Ayro as a Hold with a price target for 2021 of $7.50 per share, giving the company the benefit of the doubt and time to grow into its valuation.
The risk here is that Ayro’s product portfolio fails to gain traction resulting in disappointing delivery and revenue figures. While the partnerships with major players including Club Car and Karma are encouraging and help bring credibility to the company, keep in mind that the market for EVs remains competitive and larger players could introduce alternative products.
Shares of Ayro are high-risk and speculative, but for investors confident that the company can execute on meeting the market demand, a small allocation may be appropriate in the context of a diversified portfolio.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.