Why is Arrival Stock Falling? It’s Complicated.
The old saying about necessity being the mother of invention is particularly true in countries where resources are scarce. If you want to board a bus in Havana, Cuba, you’ll see a group of people milling about at the bus stop. Just walk up to them and say “el ultimo” loudly. Someone will raise their hand. Remember that person. When someone else walks up and says, “el ultimo,” you acknowledge them. When the bus arrives, everyone stands behind the person they remembered, and an orderly queue is formed. This clever cultural innovation keeps people from having to stand around in a queue in the hot sun or jockey for positions with their elbows. It’s fair and efficient.
Innovation doesn’t need to be complex. Switching buses from petrol to electricity and wrapping them in some smart city infrastructure can save municipalities a great deal of money. As petrol prices soar, vehicle electrification has never been so compelling. It’s an easy-to-understand thesis that retail investors can get on board with and did they ever. We warned our readers from the get-go to avoid electric vehicle special purpose acquisition companies (SPACs) as they were riddled with hype and inflated prices. Now that the dust has settled, investors are sorting through the wreckage to find value while trying to avoid value traps. One place they’re looking is at a firm called Arrival (ARVL).
About Arrival Stock (ARVL)
The only time we looked at Arrival was briefly in a piece on six SPACs. Now that the merger has gone through, Arrival seems to be generating a lot of interest from our readers, so wanted to take a closer look at what they do. In a nutshell, this $2.36 billion company went public using a SPAC and then promptly lost 63% of its value. While we pay little attention to short-term stock price movements, it’s no surprise that a third of all disruptive tech SPACs have lost more than half their value given they were never good for retail investors in the first place. Now, we want to explore if this price adjustment represents value or a value trap.
The most comprehensive document available to investors right now is the 20-F annual report filed by the company for 2020. Much of what it contains is still relevant, so that’s what we’re basing this piece on. The Luxemburg incorporated company was founded in 2015 noting that “under Luxembourg law, there may be less publicly available information about Arrival than is regularly published by or about U.S. issuers.” The following year they began working with UPS who came in as an investor along with a purchase commitment for 10,000 delivery vans that can be modified or cancelled at any time without penalty.
Arrival has four vehicle programs currently under development – seems like they’re biting off more than they can chew.
Arrival is developing four vehicle platforms for deployment through 2023 with an estimated start of production of the Arrival Bus in Q4 2021, the Arrival small and large van in Q3 2022 and the small vehicle platform in Q4 2023.Arrival 20-F
Of these, the bus is expected to be deployed and manufactured ahead of the vans. Arrival currently has several microfactories in active development in the U.S. and U.K that represent the company’s competitive advantage – how they produce their vehicles.
The Arrival Microfactory
Arrival makes a bold claim. The operational expense savings associated with its microfactories are said to be approximately 50% when compared to a traditional OEM facility. The primary driver of their cost savings is “proprietary composite materials that do not require capital intensive metal stamping plants, welding facilities or paint shops.” Each 200,000 square feet microfactory will take six months to build at a cost of $45-$50 million and will be able to manufacture 10,000 vans per year or 1,000 buses per year assuming two shifts per day. Assuming 80% utilizations, that equates to 22 vans per day or about 2 buses per day.
Because this company has so many things going on at once, we need some simple metrics to monitor progress. The next big milestone will be completing a microfactory of any type and having it start producing vehicles. After that, we need to see customers pay for them. Revenues are the only proof of traction, and we would never invest in any company that doesn’t have meaningful revenues which we define as at least $10 million per annum.
Bringing a new vehicle to market is challenging, especially when approximately 70% of the Arrival Van and 40% of the Arrival Bus represents components either owned or controlled by Arrival. Now they’re said to be conducting road tests in the U.K. for their bus, but there’s a big difference between testing a beta prototype built as a one-off and testing a vehicle that’s rolled off the factory line. Bulls are hearing lots of what worked for Tesla in the Arrival story – first principles thinking, advanced production automation using robots, impressive total cost of ownership (TCO) metrics, and mostly a play on electric vehicles that isn’t Tesla. But a lot can go wrong for Arrival, a company with no prior automotive manufacturing experience that’s relying on an Italian firm named Comau for help in realizing their microfactory vision.
Revenues aren’t expected until next year, so investors need to focus on the progress being made towards having one operational microfactory that’s working at a reasonable capacity and churning out vehicles at the pace mentioned earlier. Forget about new agreements, grants, potential customers, expansion plans, new factories being built, all of that. Until the competitive advantage has been proven, there’s a reasonable risk that this aggressive value proposition doesn’t meet all its KPIs. Or even worse, they get caught in a mire of perpetual schedule slippages and erode shareholders with dilution as they struggle to survive.
The Fall of Arrival Stock
A video produced by Bloomberg several weeks ago – A Tour of Arrival’s Microfactory – seems slightly misleading. What we see in the video appears to be a showroom floor and R&D center where the master plan is coming together along with some robots doing things. At its best, it’s a tour of a microfactory being built. We want to see the video where Arrival’s vehicles are coming off the production lot and being fired up. The Bloomberg correspondent mentions the share price decline since November 2021 noting “Arrival warned it would build fewer vehicles than planned when production starts.”
The black line above denotes the SPAC debut price, so it’s safe to say plenty of investors are underwater and concerned with hearing about delays. Never mind that. Your biggest concern should be that the company opens an operational microfactory and starts producing vehicles. Whatever the revised date is, hold their feet to the fire. If that keeps slipping and slipping, there may be some systemic problems with the microfactory platform.
The day Arrival began trading shares were priced at $22 a pop giving the company a valuation of roughly $13 billion. Today, that’s fallen to $2.34 billion, a drop of about 82%. The last time Arrival took private funding was a $118 million Series B in October 2020. At that time, sophisticated investors like BlackRock Hyundai Motor Company, Kia Motors Corporation, and UPS decided the company was worth $2.9 billion. Today, you get the same company at a discount of about 19%.
Arrival Milestones to Watch
In researching Arrival, we noted a great deal of positive publicity being generated around the company. Everyone on the beat just assumes the company’s grand ambitions are inevitable. An article by Electrek several weeks ago featured a visit to Arrival in New Yawk to see their beta prototype electric van where they were regaled with visions of geofenced fleet depots and high voltage battery models. Here are the microfactory production deadlines to watch taken from the article:
- The Arrival Bus
- Bicester facility in the UK before July 1st, 2022
- The Arrival Van
- Production in the UK before October 1st, 2022
- Production in the US – Charlotte microfactory before January 1st, 2023
Those are the dates investors need to pay attention to, particularly what the company tells the SEC, not what they tell reporters. Every company puts a spin on their story for public relations, but some version of the truth is always found in what they tell the SEC. As for us, we’ll revisit this complicated company as soon as vehicle sales start happening.
We don’t invest in companies unless they have achieved meaningful revenues. That simple rule weeds out all the chaff that never manages to build a product that customers will buy at a profitable price point. We’ll be excited to hear about how production goes at the first microfactory they build. Not long after that happens, we should start to see vehicles getting sold and meaningful revenues pouring in. That’s when we plan to take another look at Arrival as a possible way to play the electric vehicle thesis. Until then, there’s just too much that can go wrong.
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