• Sono has entered the fast-expanding global EV market with a niche vehicle powered directly by the sun.
• The company has around 20,000 orders and will commence production through a third-party contract manufacturer.
• Common shares have collapsed since their November 2021 listing on the back of the risk-off trade.

Sono Motors (SEV) entered the bustling EV scene with its Sion solar car in November last year through an IPO that saw the Munich, Germany-based company take a position on the NASDAQ at a valuation of around $2.6 billion. This was the culmination of a journey from founding in 2016 to a series of highly successful crowdfunding campaigns. At the core of the company’s mission to help decarbonize transport is Sion, its solar-powered passenger vehicle. The concept is unique, and Sono hopes the car could eventually become the world’s first affordable solar electric vehicle for the mass market.

If the concept sounds niche, that’s because it is. It seems inherently obvious to use solar panels on EVs, essentially creating carbon-free energy at no incremental cost to owners. Indeed, this has been explored by other automakers including Tesla (TSLA) who wanted to develop a solar roof option for the Model 3. This idea was eventually walked back on by Elon Musk, who concluded that the maths for putting solar panels on vehicles does not work out as “the actual surface of the car is not that much.” Apart from Fisker’s (FSR) Ocean SUV, most other automakers have abandoned the feature for either expense or efficiency reasons.

Hence, the Sion aims to create a subset of its own. The go-public transaction acted as a salvo for the company who was facing material financial difficulty and was hurtling close to bankruptcy, but shares are since down 87% year-to-date on the back of a market whose previous insatiable appetite for EV companies has turned into fear and relative derision. The more than year-long risk-off trade has seen a large selloff of broadly unprofitable firms in fast-growing sectors.

In this sense, whilst the go-public transaction allowed Sono to raise at least $150 million in new capital, the company did so during the worst period. Sentiment has turned sour, and the scale and extent of the pullback of its common shares reflect this material redaction of the previous hype and euphoria extended to EV companies. Indeed, at one point, pre-revenue peer Lucid Motors (LCID) had a larger valuation than Ford (F) and General Motors (GM).

Orders Are Growing As Production Is Set To Commence In Calendar 2023

Sono Motors had just over 20,000 reservations as of the start of September 2022. These are non-binding orders, but they have a small deposit fee attached to their €29,900 ($29,600) price tag. The company expects production and deliveries to commence in the second half of next year with a contract manufacturer based in Finland. Sono announced the signing of a term sheet with Valmet Automotive back in April after previous plans with Sweden-based NEVS fell through. Valmet is set to provide the company with a carbon-neutral production capacity for 43,000 vehicles per year.

The company’s value proposition is that solar panels attached to cars can enable a greater range and broader cost-saving benefits for drivers. According to management, Sion can generate additional range from solar power of around 70 miles per week up to a maximum of 152 miles in sunshine-heavy weather or states like California. Hence, Sion can nearly self-sufficiently cover the average distance driven by an American on a weekly basis.

Solar Instead Of Paint

But there’s a problem. Whilst the company raised enough capital to avert the financial difficulties it faced pre-IPO, Sono still needs at least $200 million to get to the Start of Production. Manufacturing a car is not easy, even when being done by a third party. It’s an incredibly capital-intensive process, and Sono had up until IPO burnt through hundreds of millions of dollars in capital from its VCs and crowdfunding rounds. The company went public to be able to further tap the market for liquidity, but the collapse of its common shares and the broader pullback of previously buoyant animal spirits enjoyed by the sector now means EV manufacturers can and will fail. This most recently saw Electric Last Mile (ELMS) collapse just over a year after going public. The gushing money tap is over, and Sono will find it difficult to raise the amount it is targeting without risking an even more material collapse of its shares.

Sono plans to also sell and license its solar technology to other manufacturers as well as use it on Sion. Its polymer technology is set to be lighter, more flexible, and cheaper than competing glass-reliant hardware. Hence, the company might find that this eventually comes to dominate its revenues if there is a failure to raise more cash for Sion SoP.

The future for EVs is bright, with sales forecasted to grow to at least 26.8 million by 2030, up from 6.6 million in 2021. Sono’s approach to this growth is unique and with 20,000 orders it’s clearly building momentum. Shares are one to watch with a valuation that has collapsed to just $115 million.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Sono: Will Unique Sunshine Powered EV Drive Sales? appeared first on Up2info.com.

• Sono Motors is currently developing a disruptive solar technology that may make mobility much more sustainable.
• I assumed that SEV’s injection molding technology will be accepted by automobile manufacturers and other competitors.
• In a recent presentation, SONO noted 17k reservations, which would be equivalent to net revenue of around €368 million.

Sono Group N.V. (SEV) has already proven that its solar vehicles meet certain customer demands. Besides, the company operates in a market that grows at a large pace. In my view, if management successfully estimates future capital expenditures, and becomes a leader in the next e-mobility wave, positive free cash flow will likely be reported soon. Even taking into account risks from new governmental regulation and underestimation of capex, in my view, the company is trading undervalued.

Solar On Every Vehicle

If you think that the electric vehicle is the future, perhaps you are not aware of the revolution of mobility by making every vehicle solar. Sono Motors is currently developing a disruptive solar technology that may make mobility much more sustainable.

We don’t know much about the total amount of capital expenditures necessary to design the new factories. However, we do have some information about the demand and the potential net sales. In a recent presentation, SONO noted 17k reservations, which would be equivalent to net revenue of around €368 million.

We also know that deliveries are expected to start from 2023, and management plans to manufacture cars, buses, trailers, and electric vans.

These vehicles will be produced through contract manufacturing with customer deliveries expected to begin in the second half of 2023. Source: Prospectus

Base Case Scenario Would Include Rapid Development Of The Manufacturing Facilities And Rapid Acceptance Of The New Technology

Under my base case scenario, I assumed that SEV’s injection molding technology will be accepted by automobile manufacturers and other competitors. If other car manufacturers decide to follow the SEV’s business innovation, SEV’s fame and sales growth may grow:

Solar cells are typically inflexible and developed for flat surfaces that have the same exposure to sunlight, such as rooftops. Through a multi-year development and testing process, our solar experts and automotive engineers developed an injection molding technology, which is or is expected to be covered by our various patents. Source: Prospectus

I am also assuming that SEV’s pricing strategy will help target a large number of clients. If the company meets the demand of the mass market, revenue growth will likely be impressive:

The Sion’s net entry price of currently €25.1 thousand, coupled with its expected electric battery range based on the WLTP standard of up to 305 kilometers, or up to 190 miles, and its solar-charging capability, set the Sion apart from other electric mobility options. Source: Prospectus

SONO is enjoying a market that is expected to grow a CAGR of 36.4% from now to 2028. I believe that future sales growth will grow close to that of the target market:

Solar Vehicle Market is expected to reach CAGR of 36.4% by 2028. (Source)

SONO compares itself with Tesla, Inc. (TSLA), so I believe that we can compare both companies. In my view, we could use the financial figures of TSLA to understand how SONO will do in the future.

While other car manufacturers such as Tesla, Inc., have successfully commercialized pure battery electric vehicles, electric vehicles with a self-recharging component based on solar modules have not yet been introduced into the car market and remain commercially unproven. Source: Prospectus

I used some of the optimistic figures reported by other analysts as well as the expected sales growth for the solar vehicle market. My results include 2032 sales of €2.4 billion. My DCF model also includes an EBITDA margin close to 14% and free cash flow margin of 7% that SONO will likely reach by 2027 and 2032 respectively.

If we assume a discount of around 15% in 2022 and 10% in 2031 as well as an exit multiple of 8x, I believe that the implied market capitalization could be close to €600 million. The fair price would be close to €8.

There Are Many Risks From Underestimation Of Necessary Capital Expenditures, Governmental Regulation, And Consumer Trends

I identified several major risks coming from the demand side and risks related to capital expenditures. First, if management is not successful in assessing future government regulations, consumer demands, and technological trends, sales may not grow as expected:

The market for electric vehicles, particularly solar electric vehicles, is still rapidly evolving, characterized by rapidly changing technologies, price and other competition, evolving government regulation and industry standards, as well as changing or uncertain consumer demands and behaviors. Source: Prospectus

Besides, I am worried about the total amount of capital expenditures that SEV will need to develop its production facilities. If the total amount of capex is significantly larger than the total amount of cash flow from operations, free cash flow will likely not grow as expected. In this case scenario, investors will have to wait for a long time to recover their investment:

We currently expect that we will need to spend at least €440 million, of which a bit more than a quarter for capital expenditure, between January 2022 and the second half of 2023 for additional development activities, start of serial production and overhead costs in this period. Source: Prospectus

With sales growth around 20% from 2024 to 2027 and 15%-10% from 2028 to 2032, I obtained 2032 sales close to €550 million. Also, with an EBITDA margin around 10% from 2027 to 2032 and capital expenditures of €300 million in 2022, 2032 free cash flow would not be far from €15 million.

With a discount of around 25% and an exit multiple around 5.5x, the implied price would be close to €1-€1.5.

Risks: SEV Is A Foreign Private Issuer, The Russian War, And The Facilities In Finland

SEV was incorporated in The Netherlands, so the company may not have to comply with certain rules established by the securities law in the United States. SEV may not have to be as transparent as companies registered in the United States:

As a foreign private issuer, we are not required to file periodic reports and consolidated financial statements with the SEC as frequently or as promptly as domestic registrants whose securities are registered under the Securities Exchange Act of 1934. Source: Prospectus

Besides, SEV expects to manufacture certain models in Europe. I am not sure whether judges in the United States will be able to impose sanctions against SEV as most assets may be far from the United States. I am also a bit concerned about the recent invasion of Russia and the effect of the war in Finland, where management expects to produce certain models:

The Sion will be produced in Uusikaupunki, Finland by the contract manufacturer Valmet Automotive, with the aim of ultimately using 100% renewable energy.

In February 2022, the government of Russia invaded Ukraine across a broad front. In response to this aggression, governments around the world have imposed severe sanctions against Russia. These sanctions disrupted the manufacturing, delivery and overall supply chain of vehicle manufacturers and suppliers. Source: Prospectus

Balance Sheet: Cash In Hand Is Equal To €132 Million, And The Market Capitalization Is Below €330 Million

I believe that the current market capitalization is too low, not only because of future free cash flow generation. As of December 31, 2021, SEV reported €132 million in cash and no financial debt. Besides, management already reported €44 million in advance payments received from customers, which will help finance future capital expenditures. Considering that the current market capitalization is below €330 million, I would say that SEV is undervalued.

Conclusion

Already reporting a significant number of reservations, SEV has already proven that the technology suits the demands of many customers. The company is also operating in a target market that grows at a CAGR of more than 33%, so I would be expecting significant sales growth in the coming years. There are obvious risks, and the stock is not for everybody. We don’t know whether governmental regulation and underestimation of future capital expenditures could be detrimental to SEV’s business model. With that, I believe that the future free cash flow would justify significantly higher price marks than the current stock price.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of SEV either through stock ownership, options, or other derivatives. 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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Sono’s New Solar E-Mobility Wave Could Push The Price Up appeared first on Up2info.com.