Microvast Stock is a Pure Play on EV Battery Technology
Few things seem to get our readers more charged up than articles about battery technology. (Thankfully, they also generously forgive the occasional bad pun.) Did you know that the first battery potentially dates back to 200 BC in Mesopotamia? The so-called Baghdad battery used a clay pot, an iron bar, copper plating, and a solution likely consisting of wine or vinegar to generate a charge. It took another 20 centuries or so to get to where we are today: Driving horseless chariots without using any fossil fuels (unless you count all the carbon emissions involved in manufacturing most of the electric vehicles and supporting infrastructure).
As we noted in our earlier article on EV battery stocks, electric cars are just batteries with wheels. The company that can design a system that is lightweight, robust, and faster to charge than the competition could stand to win big in the inevitable transition to an electric vehicle economy, with global revenues breaking $1.9 trillion by 2025. Most major automakers are investing billions into electrifying fleets:
In the same article, we profiled a little-known company called Microvast (MVST), which was the only one on the list with significant revenues. We had promised to take a deeper dive into Microvast when it released its first full-year results in 2021. The time has come.
About Microvast Stock
While nominally headquartered in the Houston area since 2006, Microvast is in reality a Chinese company, with a subsidiary called Microvast Power Systems located in Huzhou, China. That’s also where the company manufactures its battery cells and packs, which are designed specifically for commercial vehicles such as trucks, vans, buses, trains, and more. (Nearly 80% of the company’s assets are located in China.) Microvast claims its battery packs already power about 30,000 vehicles in nearly 20 countries.
Last year, Microvast generated $152 million in revenue, a jump of 41% compared to the year before. That sounds great and all until you consider it had projected triple-digit growth to $230 million based on a February 2021 investor deck intended to hype its merger with a special purpose acquisition company (SPAC). When management misses their estimates by nearly 34%, that doesn’t do a lot for investor confidence The SPAC deal eventually closed in July 2021, and the stock has been on a pretty steady decline ever since, reaching close to a 50% discount off the SPAC price with a market cap of $1.65 billion as of April 8.
While we generally ignore losses when it comes to high-growth companies, it’s hard to write off more than $200 million in 2021, especially when the company had experienced relatively moderate losses previously. A big chunk went toward share-based compensation that kicked in after the merger, though it doesn’t appear that Microvast is nearly as hamstrung as Ginkgo Bioworks, something we recently pointed out about the popular synthetic biology company. Presumably, these fat bonuses decline over time, but who knows when it comes to SPACs. They’re like invasive species that need to be monitored over time to see how they impact the ecosystem.
Regardless, Microvast has a long way to go to make good on promises to reach $2.3 billion in annual revenue by 2025.
Microvast also took a hit of nearly $53 million to cover warranty costs on a legacy product that apparently didn’t meet performance standards. The product has been phased out, so there shouldn’t be too much additional financial fallout, but it does raise some quality control concerns. The exact problem was never defined, though the company apparently conducted a “root cause analysis” and found someone else at fault.
That brings us briefly to the technology: Microvast manufactures rechargeable lithium-ion batteries with different designs and chemistries for commercial EVs. Last month, it introduced two new lithium-ion cells and a fourth-generation battery pack that delivers 20% more energy and power. Both battery cells are metal oxides of lithium, nickel, manganese, and cobalt – for those who keep track of such things.
Trying to figure out if Microvast has the superior product is beyond our scope here, because the best tech doesn’t always win. And, of course, we’re just MBAs, not battery engineers. Probably the most relevant thing to note here is that the MpCO-48Ah cell can reach a charge of 80% in just 16 minutes, with a life cycle of more than 7,000 charges. That potentially keeps a commercial vehicle like a bus or utility truck in service nearly non-stop based on the average 15-minute smoke break. We know that fast charging times is one of the most important selling points for mass adoption of EVs.
Microvast emerged from its merger with more than $700 million, which should be more than enough to cover the costs of its expansion plans, including $445 million for its existing facility in Huzhou and a new factory in Clarksville, Tennessee. The company also recently opened a manufacturing plant near Berlin, Germany. After cutting all the red ribbons, Microvast expects to have a production capacity of 4 GWH. In comparison, Tesla’s gigafactory in Nevada – reputedly the highest-volume battery plant in the world – was churning out roughly 20GWh back in 2018.
The new U.S. and European facilities, including an R&D center in Florida, reflect the company’s strategy to expand in those markets. Last year, sales in China accounted for 61% of revenues, with the Asia/Pacific region representing 86% of total revenue (just one customer accounted for more than 10% of revenues at 11%). The rest mostly came from Europe, with the U.S. market barely a blip at the moment at less than 1%. That’s quite a scale-up at a time of inflation, supply chain disruptions, and unreliable labor. That’s a lot to manage for a company with little operational history in the United States, despite being headquartered there.
Another strategic point outside of geographic expansion is to expand the company’s product markets, including passenger EVs, energy storage, and consumer electronics. We would certainly score them high on business diversification, if and when it happens. The competency is presumably there: Microvast claims its intellectual property portfolio, which spans all four major battery components, is fully owned and protected by more than 550 patents. Like above, the question is whether the leadership is worthy of those share-based bonuses. Guess we’ll see.
Should You Buy Microvast Stock?
While Microvast has been around for more than 15 years, its public history is pretty short, so asking questions about whether a company can go from local to global in one SPAC-fueled leap is legit. Conversely, Microvast definitely needs to scale quickly, given the vast competition that already exists. Again, we’ll refer you back to our original article on EV battery stocks, which noted large conglomerates like LG Group and Panasonic already own substantial shares of the battery market. It’s these types of businesses that Microvast is competing against, not necessarily other emerging energy storage companies.
However, Microvast may benefit in a big way thanks to its partnership with Oshkosh Defense, an aerospace and defense contractor that was recently awarded a $6 billion job to replace the U.S. Postal Service fleet with a new generation of vehicles. Microvast stands to fill the order for EV batteries, though it remains unclear and even controversial how many of the new USPS trucks will be electric.
Finally, investors need to be aware that they’re investing in a Chinese company, as much as a U.S. one, which brings its own set of regulatory and even geopolitical risks these days. The PRC government can sometimes exert a more obvious and direct control over the private sector. On the flip side, the United States could suddenly decide to scrutinize batteries made in China, though presumably the new U.S.- and European-based manufacturing facilities would deflect those concerns. Couple that with an 8% revenue exposure to Russia in 2021 and the geopolitical risks alone are enough for us to pass.
Considering the dearth of even semi-viable pure-play EV battery stocks, Microvast could be an interesting stock to watch if it can successfully expand beyond commercial EV batteries and tap into a U.S. EV market that should be up to speed before the end of the decade. That is, if you’re okay with nearly all the company’s operations being located in the PRC (especially following the planned $445 million expansion plans for Huzhou). The stock is trading fairly cheaply, with a simple valuation ratio (market cap/annualized revenues) of 10. Anything 40 and above is considered overpriced based on the size of the company and the amount of money coming in. Despite their valuation, Microvast isn’t going to find its way into the Nanalyze Disruptive Tech Portfolio anytime soon.
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Great article, but slightly falls flat as to what makes this company so interesting, and where the real risk is. For starters what is really interesting here it is vertically integrated. As in they are manufacturing there own cathode, electrolytes, anode, separator, etc. Meaning it has far more competitors, but also far more opportunities as they look to also sell individual components. I don’t see it as a risk considering that nearly 99% of EV vehicles are in China. You’d actually be surprised to know that its South Korean competitors like SK have their largest Gigaplants in China.
The real risk here is that for battery performance, excluding cost, you are picking: energy, cycle-life, or safety. Now pick two! Microvast historically went with cycle life and safety, which had costs that could not be justified to OEMs, LTO based chemistries were significantly more expensive than LFP, NMC, etc. They relied on subsidies to get orders. They are now claiming overhead costs will come down with advances in manufacturing, economy of scale, new products, etc. Recent advancements are vetted and have received awards by American and international organizations.
The second risk outside of lowering costs, is capacity. Not mentioned here is that since the SPAC merger they have almost doubled contracted revenue to $2.5B. This includes recently winning a contract with Iveco. While it is all impressive it means nothing if it cant be built (as we’ve seen with the COVID issues). Morgan Stanely recently downgraded them because they will only have about $200M after spending about $300M to bring capacity up to 11GWh. It is unsure to me if that capacity would be enough, and if it isn’t they will need to take on additional debt.
We have thousands of interesting companies in our research queue. We’re not looking for what makes them interesting, we’re looking for reasons why we wouldn’t invest in them and we found enough. Good point on the “pick two” dilemma facing many tech companies. As for China, spend some time there and you’ll quickly see just how extremely risky it is to be a foreigner investor trying to look in. Having an address in the United States and saying you’re a U.S. company doesn’t seem right. What’s happening in Shanghai right now is a great example of just how much country risk you’re dealing with when you invest in a company that does most their business in China. Like most stocks, there’s a great story to tell, we’re just not investing in it right now.
Great comment. Also consider that Microvast could license particular parts of battery technology, to leverage their technology without building the capacity. So, they could license the use of their Aramid separator, to improve other manufacturers battery safety. MVST has over 500 patents and invests heavily in R&D. So, cash will be tight in the short term, but once the factories are complete, I see a rapid expansion and move to profitability. They seem to be ahead of the curve here.
They could do a million things. The stock is too risky for us to consider.