Zapp Wants Extra Zip To Compete In The EVP2W Sector (NASDAQ:ZAPP)

Funding thesis

I’ve carefully adopted the meteoric rise and subsequent Humpty Dumpty-like fall of the particular goal acquisition firm (SPAC) sector since my In search of Alpha article of 1/12/21 once I expressed concern relating to “three overarching monetary threat components” going through Desktop Metallic, Inc. (DM). Since that point the inventory has decreased from $30.78 to $1.55 or 95.0% I’ve written 6 different bearish articles about former SPACs Atlis Motor Automobiles Inc. (NXU), Lightning eMotors, Inc. (ZEV), and VG Acquisition Group. All of those shares have suffered comparable losses. The SPAC craze peaked in 2021, as 621 firms de-SPACed. Nonetheless, there have been solely 16 of those transactions in H1 2023, and at a a lot decrease valuation than prior years. The aim of this text is to debate the bull and bear instances for Zapp Electrical Automobiles Group Restricted (NASDAQ:ZAPP), the newest firm to de-SPAC on this SWOT-style evaluation.

About Zapp

On 5/1/23, Zapp Electrical Automobiles Group Restricted, a Cayman Islands exempted firm, started buying and selling on the Nasdaq Nationwide Market on account of its merger with CIIG Capital Companions II, a particular goal acquisition firm. The corporate was based in 2017 by trade veteran Swin Chatsuwan and a cadre of automotive professionals and mobility specialists. The corporate’s debut product, the i300, is a high-performance electrical “excellent metropolis bike” which the corporate believes will revolutionize the two-wheeler EVP2W market. The i300 has obtained widespread acclaim, together with successful the celebrated Purple Dot Product Design Award, the German Design Award, the Australian Good Design Award, and different E-Mobility awards. One other feather of their cap is the current issuance of two European patents for his or her “distinctive Z-shaped exoskeleton and detachable entrance fenders” per a 7/26/23 press release. Right here is the link to a complete 39-page 7/6/23 investor presentation which offers substantial granularity concerning the firm’s current enterprise operations, future growth plans, and different key metrics.

Inventory efficiency

Because the above chart reveals, ZAPP’s buying and selling sample resembles a flatlined EKG because the inventory has decreased from $8.00 to $1.52 or 81.0% since going public on 5/1/23. Of the 5 shares that In search of Alpha classifies as Zapp’s peer group, 4 of them have decreased a median of 32.7% in 2023. LiveWire Group, Inc. (LVWR) is the outlier of the cohort and has gained 128.5% YTD.

The bull case

The ZAPP bull case is that the worth proposition of the i300 is that it’s light-weight and has a excessive torque everlasting magnet motor, rechargeable and detachable battery pack, and an MSRP of $9,757.

Supply: 5/15/23 firm press launch et al.

The physics of the IPMM, which to my information is an trade first, impresses and intrigues me provided that different competing motor options are sometimes cost-prohibitive for one of these software. The bulls cite favorable media protection by Bloomberg, Forbes, and GQ et al. and reference the corporate’s strategic contract manufacturing partnership with Thai Summit Group, which is the “key automotive driver of Thailand” per their website and has labored with Ford Motor Firm (F), Common Motors Firm (GM), and Honda Motor Co., Ltd. (HMC). Thai EXIM, the Export-Import Financial institution of Thailand, has supplied ZAPP with a receivables financing credit score line in help of their prospects going ahead. In my opinion, the choice to fabricate in Thailand is an particularly curious one given the nation’s extended historical past of civil, financial, and political unrest.

The bear case

As a de facto growth stage firm with a restricted working historical past as a public firm, ZAPP faces threatening headwinds going ahead. Product growth and different prices related to the creation of a brand new class on this cyclical and unstable sector is notoriously pricey, and their deliberate entrance to the U.S. market would require appreciable capital, effort, and time. As well as, the sobering truth is that the i300 has been in growth for nearly six years (admittedly the COVID-19 disaster was a legit issue on this delay) and may solely be ordered on-line on the firm web site at Zapp i300 City Electrical Scooter/Motorcycle | Zapp EV. If ZAPP can’t be prepared for “prime time” within the foreseeable future, it could very nicely be “sport time”- akin to an existential second. Probably the most formidable competitor domestically – 800 lb. gorilla within the room – is LiveWire Group, whose market capitalization of $2.0B dwarfs ZAPP’s market capitalization of $109.3M. LVWR has a robust strategic relationship with Harley-Davidson (HOG) which spun off its electric motorcycle division on 9/20/22 as a separate, publicly traded firm in a SPAC cope with AEA-Bridges Impression Corp, in a $1.8B merger. LVWR has retail companions in additional than a dozen states within the U.S. and lately demonstrated their S2 Del Mar mannequin with an MSRP of $15,499 to a lot fanfare on the current 83rd Sturgis Motor Rally. A video of this occasion is accessible on YouTube. The corporate can be up in opposition to stiff competitors from Niu Applied sciences (NIU), whose market capitalization of $243.8M, is ~2 ½ instances greater than ZAPP, and at present has over 400 retail shops within the U.S. by retail companions. One other excessive hurdle for ZAPP is that in H1 2023 the European electrical scooter and bikes market, the place ZAPP has centered their efforts, has skilled an 11.5% lower in gross sales. Sticky inflation and different financial obstacles will proceed to hamstring that economic system going ahead and constrain progress to an unknown extent.

The bear case can be bolstered by the current lackluster efficiency of firms which IPO through a SPAC merger. The De-SPAC Index decreased by 74.7% in 2022. And it seems that 2023 may even be an equally difficult 12 months for this sector based mostly on a number of different guideposts which might be mentioned later on this article.

ZAPP monetary threat components

On 5/4/23 the corporate filed Kind 20-F- Annual and Transition Report (international non-public issuer) with the SEC which detailed the merger settlement with CIIG Capital Companions II. On 7/6/23 ZAPP filed Kind 6-Ok -Report of Overseas Issuer which consisted solely of the investor presentation beforehand referenced. Primarily based on my evaluation of those filings, the potential buyers within the inventory ought to pay attention to the next monetary threat components:

1. Shareholder dilution – both by the issuance of extra shares and/or through the train of any warrants, is a bona fide caveat given the corporate’s bold U.S. growth plans and the roll-out of their direct-to-consumer mannequin would require substantial capital assets.

2. Scalability to satisfy a lofty go-to-market technique might be hampered by ZAPP’s historical past of missed product growth timelines and an unproven direct-to-consumer franchised mannequin technique. My extrapolation of the 2022 international powered two-wheeler market on pg. 28 of the 7/6/23 investor presentation reveals {that a} scant 1.8M of the 60.5M models or ~3% was from the U.S. and European phase. This information signifies to me that any significant penetration within the two-wheeler EV market areas might take for much longer to attain than ZAPP anticipates, and due to this fact negatively have an effect on gross sales projections and drain their capital assets.

Valuation

As a former CPA with vital audit expertise, together with public firms, I desire quantitative evaluation because it focuses on goal information. My most well-liked metric on this regard is the value/gross sales ratio – which ranges from 0.56 (finest is NIU) to 53.91(worst is LVWR) amongst ZAPP’s peer group. I imagine that it’s going to take a protracted time frame for ZAPP to return near that of LVWR. My modeling work to estimate ZAPP’s current valuation was based mostly on the methodology used to find out a post-money valuation of $573M and is defined extra on pg. 139 of the corporate’s proxy assertion/prospectus, which incorporates the next data as of 10/10/22:

The median fairness market capitalization of $400M which was used to derive the $573M quantity has decreased to $198M or 52.5% throughout that point interval, which interprets to a inventory value of $1.57. In my opinion, ZAPP is pretty priced this present day and could also be range-bound absent any vital developments.

Microcap inventory caveat

I imagine that since microcap stocks are inherently dangerous, funding in these firms requires a deep degree of scrutiny as defined on this well-written primer on the topic printed by Jeremy Blum, a fellow In search of Alpha contributor.

Conclusion

Primarily based on my evaluation of the bull and bear instances for Zapp Electrical Automobiles Group Restricted, the corporate faces a number of challenges because it strives to develop traction within the dynamic, evolving, and fluid two-wheeler EVP2W market. The Wall Avenue setting at present has no urge for food for money-losing firms like ZAPP, which has a restricted working historical past as a public firm. The corporate’s mission to redefine the EVP2W sector through their “steadiness sheet-light enterprise mannequin” is essentially aspirational, and I imagine would require a gestation interval for much longer than that of an elephant to make even an iota of penetration into this early-stage sector. Because the aspiring “new child on the block”, the corporate faces a heavy carry as there are not less than thirty opponents on this house, lots of which at present have merchandise in the marketplace now which have model recognition and superior monetary firepower. Anecdotally, ZAPP’s SPAC roots counsel a suboptimal future, given their lack of a transparent path to profitability. Empirically, the 7/27/23 disclosure by trade behemoth LiveWire Group, Inc. that 2023 Q2 electrical automobile gross sales decreased by a staggering 85% is a cautionary story for the sector as a complete and ZAPP specifically. In consequence, in my view, ZAPP Wants Extra Zip to Compete within the EVP2W Sector.