Gogoro stock looks undervalued, but China expansion could run into trouble (NASDAQ:GGR)

Introduction

I like to write about companies that lack coverage on SA and today I want to talk about Gogoro (NASDAQ: GGR). It is a Taiwanese battery exchange company that was listed at the beginning of April through a merger with a special purpose acquisition company (SPAC) named Poema Global Holdings. Overall, I like Gogoro’s business and its valuation, but I’m worried that competitors are starting to emerge, and I doubt the planned expansion into China will go smoothly. Let’s review.

Presentation of the activity and finances

Gogoro was founded in 2011 and has built a network of 2,200 electric scooter battery swap stations in Taiwan that supports 10 brands and over 47 different vehicle models. The company is also involved in the development of transmission technology and has so far produced more than one million batteries.

In my opinion, the idea of ​​battery swapping makes perfect sense for the e-scooter market, as it deals with range anxiety. Energy density technology is simply not advanced enough yet to provide long range in this market and scooters are a very popular choice for Asian consumers these days. There are over 500 million two-wheelers in Taiwan, China and India alone.

Gogoro has a first-mover advantage and started rolling out its stations in Taiwan in 2015. I’m impressed with the company’s growth rate as it had an 82% market share in 2017.

According to Reuters, the company had sold more than 34,000 electric scooters by September 2017 as it closed a $300 million funding round. The new funds were to be used for an expansion in Europe, but it seems that didn’t work out. Still, Gogoro’s business is doing more than well in Taiwan, and its revenue in the country has grown steadily over the year thanks to its strong hardware sales as well as a subscription model. The company says there is price parity at purchase because subscribing to the Battery Swap Service removes the cost of the battery from the purchase price, resulting in a lower total cost of ownership. . Gogoro stations can also be autonomous for a total of 64 hours, which means there is limited risk to the network in the event of weather events.

As of December 2021, Gogoro has over 450,000 subscribers in Taiwan, which translates to 23.5% growth from 2020.

Turning our attention to the company’s financial performance, 2021 revenue came in at $366 million, beating its forecast of $39 million. Looking at past financial performance as well as future projections, we can see that Gogoro has managed to remain profitable during the COVID-19 pandemic and growth is expected to be rapid, with EBITDA exceeding CAPEX by 2024. business growth is expected to come from China, while India is expected to account for $210 million in revenue by 2024.

There are currently about 300 million two-wheelers in China, and the company has more than 140 stations in the country. The network is currently active in three cities and this number is expected to increase to six in 2022. Gogoro has a partnership with local businesses DCJ and Yadea, which together have around 50,000 outlets. It looks like electric vehicles in China are set to see rapid growth over the next few years as new environmental regulations are expected to phase out around 270 million two-wheeled vehicles in the coming years. I think now is the perfect time for Gogoro to think about expanding its operations in China, but I’m afraid capturing a significant market share will prove more difficult than in Taiwan. The Chinese government has recently cracked down on several industries, including technology. In my opinion, this could extend to other sectors of the economy in the future. Additionally, China’s relationship with Taiwan has been more strained than usual in recent months and local regulators may not be okay with letting a company from that country like Gogoro take a large chunk of its market. battery exchange.

Another concern is that Japan’s biggest motorcycle manufacturers are entering the fray through a motorcycle battery swap program called Gachaco. Electrek reported that it’s like a blue version of Gogoro’s technology. It looks like Gachaco will initially only be available in Japan, but I think a decision to launch this product in the rest of Asia could create some serious competition for Gogoro.

And finally, we have to talk about the funding situation and why Gogoro’s share price has gone down since the listing was completed. The original plan for the SPAC deal was to get about $557 million in fresh funds on the balance sheet for an enterprise value of $2.35 billion. Along with the $242 million from the bank, this was to fund Gogoro’s expansion into China and India.

However, Gogoro revealed on March 31 that it would only receive $335 million in merger proceeds, including $295 million in private equity investment (PIPE). NASDAQ data shows that there are currently 239.2 million shares outstanding.

Overall, Gogoro is still well funded until EBITDA exceeds CAPEX in 2024, but it will have little wiggle room should it go wrong with China expansion. At the moment, I think Gogoro looks cheap as its enterprise value is around $873m at the time of writing, which means it trades at less than 5x EV/EBITDA. However, there are several challenges ahead and I believe the stock price may continue to decline in the near future as the market shunned technology companies due to rising interest rates.

Takeaway for investors

Gogoro has a profitable business in Taiwan, which it wants to replicate on a larger scale in China. The company has a good track record, although it should be noted that nothing has come out of its plans for Europe. Gogoro seems cheap at the moment, but is too dependent on a successful expansion into China and I think things might not go smoothly if tensions with Taiwan continue to rise. Additionally, Gogoro may face significant competition from Gachaco in the future. And last but not least, the Nasdaq just had its worst month since 2008 and there seems to be no end in sight to Gogoro’s stock price plunge.

All in all, I think Gogoro could be a compelling investment but too dangerous to open a position at the moment. I plan to put the company on my shortlist and will consider opening a position if the initial expansion into China is successful.

Author’s Note: Thank you for reading my review. Please note that I will soon be launching a market service named Bears and Resources. I plan to share my live portfolio and shortlist and discuss exclusive investment ideas. Early subscribers will receive a legacy discount. Stay tuned for more details.