Are pricey warrants powering Lotus Technology’s rally?

Shares of the EV arm of Britain’s luxury Lotus brand have jumped more than 40% over the last two weeks, but are still sharply down from their trading debut in February

Key Takeaways:

• Lotus Technology said its backers could raise up to $173 million if holders of warrants to buy its stock at $11.50 per share exercise those warrants
• The stock currently trades well below the exercise price, but has rallied more than 40% in the last two weeks, hinting that some believe the company is undervalued

By Doug Young

The road for aspiring luxury electric vehicle (EV) maker Lotus Technology Inc. (LOT.US) has been anything but smooth since it completed its backdoor listing in February. After charging out of the gate with a closing price of $13.51 on Feb. 22, the day it completed its merger with a special purpose acquisition company (SPAC), the company’s stock charged mostly downward for its first two months, losing more than half of its value to trade as low as $5.64.

But things have been picking up these last two weeks, as the company disclosed it was moving ahead with a plan to help its backers raise up to $173 million if holders of previously issued warrants for its stock choose to exercise those warrants. It provided the latest update on that plan last week, while also noting there’s a strong possibility the warrant holders may choose not to exercise their rights to buy the shares.

That’s because the warrants are exercisable at a price of $11.50 per American depositary share (ADS), which is still well above the stock’s latest close. But it appears that perhaps some stock buyers believe the warrant holders may still buy the shares, based on a rally that has seen them rise more than 40% over the last two weeks to close at $8.01 on Thursday.

At the end of the day, it really comes down to what you think this company is worth, which is tricky business for such a young name like Lotus Technology. The company is the EV arm of Britain’s iconic Lotus brand of luxury cars, which became controlled by China’s Geely when it purchased 51% of Lotus’ shares in 2017.

Since then, Geely has pumped $3 billion of its own funds into Lotus to revive the brand, including $1.3 billion for a new factory in the Central China city of Wuhan. Lotus is the luxury piece in Geely’s plans for a broad spectrum of EV brands, positioned in the market for cars costing over $80,000. Geely is also developing a slightly cheaper but still upscale brand called Zeekr, which is also planning a New York listing.

Further down the food chain, Geely is developing EVs under its Volvo brand, which it purchased from Ford in 2010, and it’s also making more mainstream EV models under its own Geely brand.

But back to Lotus and its hunt for more respect from investors. According to third-party research in its latest SEC filing, the global market for EVs costing more than $80,000 is expected to grow by an average of 35% annually between 2021 and 2031, with annual demand reaching nearly 1.9 million vehicles by 2031. The research points out that there are currently only 10 such EV models in that price range worldwide, compared with over 100 in that range using traditional internal combustion engines (ICEs). Accordingly, Lotus feels it is well positioned as an early mover into the market for such luxury EVs.

Revving up revenue

After several years of preparation, the company began reporting its first significant revenue last year. It generated $679 million in sales for the year with 6,970 vehicles delivered, up sharply from the $9.6 million in revenue it generated in 2022.

Its R&D expenses have actually been coming down over the last three years, falling from $511 million in 2021 to $369 million last year, with the earlier high figure probably due to intensive spending to develop its first electric model. While R&D spending has been falling, the opposite is true for its sales and marketing costs, which rose from just $38 million in 2021 to $329 million last year, as it ramps up its sales network and promotes its products.

Significantly, the company is also losing its government support, which has been an important factor helping companies worldwide but is especially big in China. Its income from government grants tumbled to just $4 million last year from $491 million in 2021. The bottom line is that the company’s operating expenses grew from $113 million in 2021 to $736 million last year, and the figure is likely to keep growing as its business ramps up.

Its gross profit of $102 million gives it a gross margin of about 15.5%, though the company has said it’s aiming to raise that to 21% to 23% by 2025. Industry giant Tesla (TSLA.US) was once in that range as recently as late 2022 and early 2023, though the figure crashed to just 15.2% in the first quarter of this year due to stiff competition. Lotus Technology may be able to avoid some of that pressure since it’s operating in a far less competitive segment of the market, even if that segment is also much smaller than the one where Tesla operates.

Lotus Technology recorded a net loss of $750 million last year, which was slightly larger than the $725 million loss in 2022, but still not bad for a company spending so heavily on its new business. The company raised about $1 billion last year in the run-up to its IPO, though we should note that it won’t receive any of the new $173 million in proceeds if the holders of the $11.50 warrants we mentioned earlier exercise those warrants.

Despite the $1 billion cash infusion last year, the company’s total cash fell by nearly half to $427 million by the end of 2023 from $740 million a year earlier. That means if it continues to burn cash at the same rate, it will almost certainly need to raise more money later this year.

All of that brings us back to how much this company is worth, and whether its current rally might reflect a “rediscovery” of the stock by investors. It currently trades at a price-to-sales (P/S) ratio of 8.6, which is ahead of the 6.4 for Tesla and light years ahead of the 1 for global EV leader BYD (1211.HK; 002594.SZ). While Lotus’ number is high, it’s likely to come down somewhat this year if the company can post significant growth.

Given its ties to a local leader like Geely, together with its strong first-year sales in 2023 and operations in a market segment with relatively little competition, the company does look well positioned for growth if it can keep posting strong sales growth.

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