Investment Thesis

Abstract

Initiating coverage on Arcimoto, Inc. at Buy with a $9.00 price target. We see Arcimoto as an emerging all-electric utility vehicle producer tapping into a unique market of short-distance commuters looking for a fun and safe vehicle for their daily drives. The company's flagship product, the 'Fun Utility Vehicle' or FUV, has a striking profile where one could easily imagine Ming the Merciless comfortable behind the wheel, and a ride experience somewhere between a safe motorcycle and a sports car. The FUV is a two-seater, three wheel, all-electric vehicle that has an enhanced safety profile from the open safety cage, and is technically classified by NHTSA as a motorcycle. Strong pre-order momentum with pre-orders from every state in the U.S., a reasonable price versus comparable transportation options, and the fun factor impacting consumer buying decisions, all support our view Arcimoto should see positive momentum. Reservations backlog provides good visibility for the initial revenue ramp, in our view. Customers can make pre-orders for the FUV for a refundable $100 deposit, and at the end of 2Q18 Arcimoto had 2,800 pre-orders for the FUV, up from 2,421 in 1Q18, and 1,523 in 2Q17. With the company adding an average of over 300 reservations per quarter for the trailing four quarters, we see continued order momentum as a healthy positive, even before the units are visible on the road. The company has hosted over 50 ride and drive events for potential customers in the past three years, with California delivering some of the strongest pre-order momentum, and additional orders clustered in Oregon, Texas, Florida, and New York. Volumes and experience in adjacent markets suggest good potential for Arcimoto to achieve positive sales momentum. We believe the market Arcimoto is looking to serve is larger than many might appreciate, as more expensive comparable vehicles often achieve substantial volumes. For the big picture view see the broader U.S. motorcycle market was 470,000 units in 2017, and annual golf carts sales of 60,000+ units as strong positives, particularly given the popularity of golf carts in vacation destinations and retirement communities. Both the Polaris Slingshot and the Can-Am Spyder sell around 8,000-9,000 units annually, and are roughly 30%-60% more expensive than the FUV when including typical options. We believe the 'FUV Hub' rental model could provide dual synergies, with rapid paybacks for in-rental fleets, and important visibility and hands on customer experience in key markets. Arcimoto has opened its first company-owned rental location in Eugene, OR on October 27 th , and operates a second in Encinitas, CA in partnership with Hula Electric. The vision is to establish locations in active rental markets, where a typical location could have 100 FUVs generating over $3 million in annual revenue, and $1 million in profits. The experience of other rental operators often seeing paybacks of a year or less suggests good potential of a profit generating sales operation, where many customers could become buyers. We forecast 2019 and 2020 revenue of $28 million and $125 million, which assumes Arcimoto will deliver around 2,300 and 10,300 FUVs, respectively. We believe there is good visibility for the initial revenue ramp, supported by the reservations backlog of 2,900 units, and initial fill at third party rental locations. If we assume Arcimoto retains relatively positive controls on sales and marketing expenses, as well as other frictional costs, we believe the company could be cash breakeven exiting 2020, with 2019 and 2020 net income of ($13.0) million and $4.7 million, and EPS of ($0.62) and $0.19, respectively. We are introducing a $9.00 price target, using a 1.75x P/Sales on our 2020 revenue estimate of $125 million, also accounting for dilution from future equity financings. We see a 1.75x multiple on 2020 estimates as fair for Arcimoto's growth outlook, given the unique product with a substantial reservations backlog, offering an attractive transport option at a low price. Possible impediments to the achievement of our target price could come from weekly production or the rate of delivery below levels necessary to meet forecasts, and the potential challenges in managing the supply chain during a significant revenue ramp. Investors in Arcimoto will face risks related to the company's access to capital, which could introduce volatility to the stock. The company also faces typical competition from OEMs in adjacent markets, where many have significantly greater resources. If Arcimoto's products were found to have a flaw, this could drive a material warranty expense, and negetively impact the brand.