GreenPower Motor: Its Path To Sustainable Growth And Profitability

source: company website

The share price of GreenPower Motor Company Inc. (GP) has been under pressure since the last week of November, when it had been trading over $28 per share, and has now plummeted to a little over $19 per share as I write.

While it was already taking a hit, it didn't help when shorting firm White Diamond released a report that accused the company of misleading shareholders and investors, concluding it was worth only $1.50 per share.

In this article we'll look at some of the factors that have recently had an impact on the share price of GreenPower, and what the company needs to do in order to convince investors it will be able to grow revenue in the months and years ahead.

Recent numbers

As the numbers will show in the last earnings report release, GreenPower is a very small company whose exposure is primarily to a niche segment of the California market.

For the quarter ended June 30, 2020, the company generated revenues of $2.3 million, with the cost of revenues finishing the reporting period at $1.7 million. Gross profit in the quarter was $618,583.

The majority of sales in the quarter came from the sale 18 EV Stars. Management also said it has approval for $4.5 million in HVIP vouchers from the state of California, which it will allocate toward the 52 EV Stars currently under order. That number doesn't include the 100 EV Star order from Green Commuter before the quarter.

At the end of the reporting period the company reported "had finished goods inventory of approximately $2.9 million, comprised of nine EV Stars, two EV Star cab and chassis, two school buses, one EV350 and charging stations, as well as work in process inventory of $3.2 million, including 14 EV Stars, 10 EV Star plus, five EV250s, as well as initial deposits for the 100 EV Star project and parts inventory." The company had a restricted cash balance of $310,000 as of and June 30, 2020, and a miniscule line of credit of a little under $10,000. Management said it has exercised a "significant number of warrants" that boosted its cash since the end of the quarter. It also engaged in the conversion of some of its convertible debentures, resulting in the reduction of its liabilities and cost of interest.

Costs in the quarter were $1.45 million, the lowest level over the last four quarters.

In the important school bus market, the company said in the earnings report that there were approximately 480,000 buses in the U.S. market. It is believed that under a Biden presidency the goal will be to all of them be EV buses by 2030. If it works out that way and GreenPower gets a lot of that business, it would be a long-term growth catalyst for the company.

It remains to be seen how the report from White Diamond will impact the company over the long term, if at all.

White Diamond's allegations

Before getting into some of the allegations made by White Diamond, it needs to be understood that the share price of GreenPower had already corrected, as mentioned above. We'll get into it more a little later, but after the big drop the share price started consolidating and began a move upward. At the time of that move White Diamond released its report, suggesting self-interest in the timing of the release, assuming White Diamond was short the stock. I haven't seen anywhere whether or not White Diamond had a short position in GreenPower.

Also, at the time its share price starting to correct, it had already soared over 1,000 percent on the year; it was overdue for a correction.

As for the EV sector as a whole, it has been under attack from shorts on a consistent basis, probably because they smell blood in the water because of the huge upward move in the share prices of many of the companies over 2020. It's inevitable that there will be ongoing corrections, and when they begin, a lot of times reports are released in conjunction with a downward move in order to push it down even further for the obvious purpose of making more money.

That doesn't mean there is never something of substance in these types of reports, only that they are heavily biased and primarily produced for the purpose of driving the share price of the companies down in order to make a profit.

Concerning the 32-page report, the primary focus was on GreenPower not being a manufacturer of buses, but only an importer of them from China. The chief issue there was that GreenPower allegedly wasn't telling the truth when it stated it is "buy America compliant." That's important because it is needed in order to be eligible for state subsidies. If it isn't compliant, it can't received federal subsidies, which would severely limit revenue because the lack of markets it could enter, such as New York. The subsidies it gets in California are for that alone.

The White Diamond report added that all the company does is rebrand the vehicles it imports and marks up the price. White Diamond added it sent its findings to the proper authorities in order to let them know that GreenPower is allegedly making false claims.GreenPower asserts this on its website:

With full FTA compliance that includes “Buy America” and the rigorous Altoona Bus Testing, GreenPower is leveraging strong demand for the EV Star that is expected to grow in the upcoming year with a national-focused strategy.

Management reinforced that in its earnings report, so it's hard to believe it would make those types of claims so openly if it didn't really believe it was true.

In regard to White Diamond's report, only time will tell if it is accurate or not. For now, other than the initial drop in share price, which rebounded by 20 percent soon afterwards, the allegations have yet to find legs.

I think the reason why is because so many of those types of companies have been releasing similar reports in relationship to many other EV companies, they're starting to be ignored. Also, many shorts have been getting crushed as they bet against the the EV companies being able to keep the type of upward move in the share prices they've enjoyed throughout much of 2020. These reports, at least to some degree, are almost certainly being used to put downward pressure on the share prices of these companies in order to make some of that money back. I guess they should have went long instead.

There are other smaller items in the report, buy this is by far the most important to the performance of GreenPower if it indeed non-compliant for "Buy America."

What the company must do over the long term

In order to generate significant growth, GreenPower does need to expand beyond the California market. Whether or not the above report is true or not, it does need to show investors it has a path to grow its revenue over the long haul.

That said, there is still a lot of room for growth in the California market, but it will eventually have to expand to other markets in order to reinforce its growth narrative.

It's also important because the California subsidy program looks like it's shrinking, and even though there is some wiggle room there for GreenPower at this time, it does need to expand beyond, not only the California market, but also its heavy reliance upon subsidies, which are estimated to account for just under 75 percent of the companies revenues.

I think in the long term this will be the wave of the future for the EV segment GreenPower is competing in, but it could go through a period of slowing growth because of state budget issues. That's another reason it needs to eventually expand beyond the California market, in order to reduce its geographic risk. I don't see that as an issue now, but it will be one further out.

Nonetheless, Hybrid and Zero-Emission Truck and Bus Voucher Incentive Project (HVIP) is expected to accept new voucher requests starting in early 2021, so other than a possible short-term lag, GreenPower is likely to receive further subsidies in 2021.

Another positive catalyst for the company is that it was selected "as an eligible vehicle for the Morongo Basin Transit Authority (“MBTA”) and California Association for Coordinated Transportation (“CalACT”) purchasing cooperative RFP for zero emissions shuttles. This two-year contract allows CalACT members, including transit authorities, other public agencies and non-profits assigned by MBTA, to purchase up to 150 zero-emission vehicles per year. GreenPower’s dealer Creative Bus Sales is only one of four dealers, representing select models of electric shuttles, including GreenPower’s EV Star, that are qualified to sell under the contract."

There is no doubt in my mind GreenPower will get a decent portion of those sales over the next couple of years.

Again, further out it will need to expand geographically, but when it's in one of the top markets in the world, it is a good strategy to focus there and boost sales before spreading itself out too thin.

I don't think there is any huge need to expand in the near term, but as the California subsidy market matures it will need to enter other markets to reduce its risk in a single market. It doesn't appear it will have to do so over the next couple of years.

Conclusion

Some of the news reports concerning a negative outlook for the company gave the appearance of GreenPower was running on fumes. But the company, so far, has proven to be resilient, and as I mentioned earlier, the inevitable correction after the big run up throughout 2020 was needed.

The report from White Diamond had a temporary impact on the share price of GreenPower, but it has started to consolidate after the negative allegations.

As for the source of its vehicles, I don't see that as being relevant. The company has found a business model that works, and contrary to a number of hyped up EV companies, it is actually generating revenue with some quality products that meet a sizeable niche market. That should continue on.

I think there could be some short-term pressures on the share price of the company, but unless there is some hiccup on the subsidy side of the business, I see the company continuing to enjoy accelerated growth through 2021 and beyond.

For now I see it as a better day trade and swing trade, but once it proves it can gain more market share in California, it could be a decent place to put some of your speculative capital.

Further out, if it does boost its geographic footprint, the share price of the company could soar for a prolonged period of time, depending on the details.

If you believe in the company I don't think it'll destroy your capital, but I do believe it's going to trade very volatile over the next several months. How volatile will be determined by new business it wins under the different programs it is approved for. So if you don't mind the wild swings in its share price, it could be a profitable holding over time.

I would wait for good entry points to take a position, or add to an existing one. In the current period of consolidation, it's impossible to know whether or not it's going to take another hit or resume its growth trajectory. That's why I think it's better to take short-term positions and take a quick profit, rather than buy-and-hold with conviction.

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.