On Friday I spoke with Rod Keller, CEO of Ayro (AYRO) . The company has garnered attention recently thanks to being a player in one of the hottest sectors of the market, electronic vehicles (EV).
The group will no doubt expand in the coming months as we've seen deals signed and rumors of other EV names coming public. But with the explosions in the valuation of EV companies, big and small, diligence in the space will be needed to identify those stocks with the best long-term potential once the short-term momentum cools.
Does Ayro fit this description? That's the question I hoped to answer after a candid Q&A with Rod.
I'm approaching this with an informal format of the topics discussed or the question asked with a synopsis of the answer along with my own views. So, no quotes, but plenty of takeaways.
It's difficult to think EV and not have your mind immediately go to Tesla (TSLA) . Traders seem drawn to the idea of finding the next Tesla or a Tesla-killer, but that thinking is wrong if you want to find the next big winner in the EV space. Instead, find a niche player with a big total addressable market that doesn't compete with the likes of Tesla or Hyundai or Nikola (NKLA) or Hyliion, which is being purchased by Tortoise Acquisition (SHLL) .
AYRO potentially fits that bill. The company is a self-described designer and manufacturer of purpose-built, automotive-grade, all-electric vehicles. It mainly targets the low-speed electric vehicle (LSEV) market.
- Why is a CEO with a heavy tech background in the PC industry a good fit in the EV market?
- Maturity. The EV space has all the maturity of a group of sixth-grade boys. Rod began his days with Epson before moving onto Dell and eventually Toshiba. His career started at a time when the PC market was very fragmented. Dell ran a unique build-to-order model. Customers could order direct from the manufacturer if they wanted to do so. Big box stores offered limited or little inventory. Today's EV market isn't much different, especially in light-duty electric trucks.
- How does PC experience translate to EV?
- It doesn't, however, after his time in the PC and networking industry, Rod worked on 3-wheel autocycle vehicles in California that was aimed at the police department. From there, he moved into the role of President at Segway. After a short time, the company was sold in 2015 to a competitor, Ninebot.
- The company recently raised $20 million total via two separate stock offerings, what's the plan for those funds?
- The business is capital intensive, so a strong cash position reduces the worries of "going-concern" and the current Covid-19 challenges. The recent influx of cash will help expand the company's product portfolio and international exposure. Just last week, the company announced an engineering partnership with Gallery Carts to launch the first all-electric configurable mobile hospitality vehicle for "on-the-go" venues across the United States.
- Take me down the international expansion rabbit hole.
- Club Car, a subsidiary of Ingersoll Rand, approached AYRO a few years ago. In 2018, Club Car signed a 5-year licensing agreement for light-duty truck in North America, currently known as the Club Car 411. "They've been a great partner" is something Rod reiterated many times while we spoke, and I believe he's sincere. AYRO is working on a Club Car specific product for Europe. Company plans also include expansion into China as well as Europe potentially as early as Q1 next year.
- Would that be considered part of the product portfolio expansion?
- It is, but AYRO builds purpose-driven vehicles, so expansion could also include a mobile hospitality vehicle as well along with adding inventory and production on current models.
- What does that mean for an investor?
- Let's use the restaurant delivery business as an example. Some companies are trying to take an existing vehicle and fit it to a specific market like restaurant delivery. AYRO's approach is to purpose-build a vehicle FOR restaurant delivery. The company is building a round peg for a round hole rather than trying to jam a square peg in the round hole.
- Why the focus on restaurant delivery?
- Opportunity and need. Delivery used to account for a minimal amount of a restaurant's revenue. It didn't matter much the margins were tiny, in some cases, net negative, but with the impact of Covid-19, restaurants are more reliant on take-out business now more than ever. Unfortunately, aggregators like Uber Eats (UBER) , DoorDash, and Grubhub (GRUB) are actually horrible for a restaurant's bottom line, so those businesses are seeking lower-cost ways to fulfill delivery on their own. The AYRO 311 could be that solution. A three-wheel street-legal vehicle that can replace or reduce dependence on profit suckers like Uber Eats, DoorDash, and Grubhub. There were thoughts the 311 could do well on resorts, but with seating that is front to back (passenger behind the driver), it never caught on. People tend to want to sit next to each other. I give respect to a company that says, "We tried this, it didn't work, we're moving on."
- With the new factory, how does AYRO see the breakdown in production?
- Production doesn't begin in the Austin, TX facility. The supply chain starts in Shanghai. When Ayro receives the shell, it is about 40% complete. Receiving those shells takes around 33 days to move from Shanghai through customs and arrive in Austin. The company is exploring a way to reduce the time from 33 days to around 20 or 21 days. Although the current production cycle is not built to order, it isn't far removed. AYRO has a 6-month forecast of need with 30 days firm from Club Car. It should allow the company to shift mix as needed to meet demand beyond the next 30 days. Overall, this should lessen any potential negative impact of idle inventory. And while Club Car is a strong channel partner, AYRO recognizes it is their responsibility to create demand, Club Car is simply a strong channel partner to help fill demand. Also, a big plus Club Car brings with it is its 535 dealer locations. In the near term, that will allow AYRO to focus on production.
- How has Covid-19 impacted AYRO?
- A huge niche opportunity for the company is colleges/universities. There are 1800 universities with 10,000+ students and an average of 400 vehicles on campus that need to curb CO2 emissions. Club Car is bidding to turnover 20% of those vehicles to the 411 each year. Unfortunately, university budgets are virtually frozen due to the unknown financial impact of Covid-19. On the positive side, it should create huge pent-up demand. On the negative side, that won't translate to sales and big revenue growth until we see college life returning to normal. Additionally, there will be an opportunity for AYRO food trucks as universities look to lessen mass cafeteria gatherings and offer food on the go. This will also translate to sporting events, especially football. Tailgating may reach the next level. Also, AYRO's vehicles are zero-emission, so they can even be used indoors to haul things around stadiums like kegs, pallets of water, or maintenance material as well as serving as a form of food truck and/or concession vehicle to bring food/beverage/branded items to patrons where they are located
- How do you see telematics developing?
- The company has finalized a partnership with Autonomic, but some of the forward economics and related details are to be determined. The vision here is a subscription-based fleet revenue income stream. Data is king. There's the potential for business enhancing data in the targeted AYRO environment. It has the potential to boost valuation significantly, but at the moment, it remains just potential. This means the market will have to discount the projected value of a signed partnership until the partnership is cemented and details are known.
- Any update on the AYRO511 concept?
- A few are out in the field, but there still is work to be done. For now, the focus is on where the demand and immediate future will be. An offroad SUV EV faces unique challenges like how quickly a battery can run down when the wheels get stuck in the mud.
- Has Ingersoll Rand (IR) ever approached with a takeover offer?
- Obviously, the company can't comment on that type of question, but Ingersoll Rand has requested a first right of refusal if AYRO is approached with an offer.
In terms of sales projections, AYRO remains bullish on Q3 and Q4, but like so many other businesses in the world right now, much depends on Covid-19 and how soon things begin to return to normal. The biggest question mark is what happens to colleges and universities this fall. It will likely have a huge impact on the short-term valuation of AYRO. If football gets shelved and/or enrollment is lower, then we may see universities remain tight with their budgets. I would anticipate a huge surge in demand and revenue when those budgets return to normal, but a second concern is the demand exceeds AYRO's production capabilities. It's a good problem to have, but a company never wants to risk missing an opportunity. With its recent $20 million in capital raises, the balance sheet of AYRO is significantly improved.
Once AYRO hits 600 vehicles per month in production, it could turn over 7200 vehicles per year. The 411 averages around $20,000, which would generate around $144 million in revenue. With gross margins around 25%, that equates to $36 million. While it isn't yet able to produce 600 vehicles, the company should be able to improve gross margins by the time it reaches that point. With a market cap around $110 million and a recent $20 million cash raise, investors are getting a nice potential return for their risk here as we wait out Covid. There will still be sales under the Club Car partnership and Europe should come online soon.
I view this with significantly more potential than Electrameccanica (SOLO) , which trades at a market cap nearly three times the size. I view AYRO as a name that should be trading in the $200 million to $250 million market cap range. At these levels, it fails to price in any premium of a possible Ingersoll Rand takeover, gives no value to the potential partnership with Autonomic, and sits around one or two times potential sales for 2022.
My overall take is there will be short term Covid related risks to this name, but the upside potential from a proven CEO stands at five to 10 times the current value versus downside of 50% for anyone with a time frame beyond six to nine months.