Helbiz business model in crisis: a future doomed by increasing regulation
Helbiz (NASDAQ:HLBZ) aims to offer sustainable, cheap, and reliable micro-mobility solutions around the world. They plan to reach this goal through a fleet of small electric vehicles that can be rented and used for a limited amount of time and thus a cheap price. They currently deploy the majority of their e-mopeds, bikes, and e-scooters in Italy, but started expanding in the US as well.
(Source: Helbiz Website)
The micromobility “revolution” that is taking place in many European and American cities will help reduce pressure on CO2 emissions and help citizens better address their mobility needs. But will this business ever be profitable, scalable, and long-term oriented? For the nine months ending September 30, 2021, they reported a net operating loss of $36 million. After running out of cash to invest in June (zero cash reported in the 10Q filing) they returned to the market with a new raise back on Oct 27, when they registered the S1 filing that allowed HLBZ to sell up to 4.2 million shares following the conversion of notes and exercising of warrants. Many projects and innovations are approaching public markets favored by more-friendly regulation, high-risk tolerance among investors, and the possibility of raising money through frequent equity raises. The probability of HLBZ being just another name trying to sell unprofitable, unscalable, and overly-optimistic business models is really high.
Then there’s regulation. In Italy, following the widespread of micromobility, incidents and even deaths caused by the misuse of e-scooters rose consistently. This led to increasing regulation that may cause permanent damage to the industry’s dynamics. A recent proposal of mandatory use of helmets and the mandatory underwriting of insurance policies (like cars) would significantly impact the use of both e-scooters and e-mopeds. This is probably not priced-in at the current price, with the company post-SPAC trading at more than $300 market cap and still almost zero revenues and a precarious business environment ahead. Management made the following statement regarding expected revenue and EBITDA for 2025:
Turning to the projections, over the next five years, we are planning to invest in both organic growth and through partnerships in selected cities across the U.S. and Europe. We will do this by leveraging our existing infrastructure, technology, and customer base. While micro-mobility accounts for most of our revenue, we expect advertising and other adjacent markets or verticals to contribute meaningfully in the next several years. By 2025, we expect to achieve approximately $450M of total revenue and $190M in EBITDA. Our business model is ideal to support this growth trajectory, given our compelling unit economics
(Source: Article quoting SPAC filing on business acquisition)
Very generous assumptions about future growth that if not met could trigger a crash of the stock or, in the case of sustained negative FCF, even bankruptcy.
Industry overview: competition, margins, and funding
According to McKinsey, the micromobility industry is facing big tailwinds in terms of funding. Since 2015, more than $80 billion dollars have been invested in this field, with both startups and market leaders receiving generous checks from private (and public) investors. This helped many companies reach decent economies of scale and even profitability. Still, the sector is quite overcrowded and players of the industry are required to operate at really high levels of efficiency to reach a positive FCF conversion rate or even positive net income. This is an extract from McKinsey study about profitability-per-vehicle:
(Source: McKinsey study on micromobility solutions)
As shown, the break-even point for each e-scooter is reached after four months, assuming an average of 5 trips per day of 18 minutes each. This is the equivalent of one hour and a half per day. While this seems a conservative estimate, it does not include negative impacts for damages, technical issues that require a reparation, or the need to lower fees because of high competition in certain areas. In Italy, the main market for Helbiz, there are at least other 3 competitors per city. This high competition is a synonym of low margins, high cost of acquisition per client, and constant need for Capex to sustain fresh and innovative e-vehicles.
Besides McKinsey, there are many different reports that forecast growth over the next decade in the micromobility sector. Global Newswire expects the sector to be worth as much as $70 billion by 2028, while PR Newswire sees it at about $200 billion by 2030, one of the more optimistic. In the company’s presentation, the forecasted market TAM for the end of the decade is between $300 and $450 billion, or 2 times the most optimistic source.
(Source: Helbiz Investors Deck presentation)
Since they are basing their forecasts on revenues, net income, and margins on this assumption, it is clear that they could be easily not reached, tanking the stock.
Helbiz financials: discussing profitability dynamics
This is where troubles begin. Q3 results are out and they are probably much worse than any forecast prior to Covid. For the first nine months of 2021, they reported revenues of $8.7 million, and $4.7 million for the quarter. While this data seems good compared to 2020’s results, margins are really bad and they can’t even reach a nearly positive gross margin. Net income is negative for more than $50 million for the year, with probably more to come as they continue scaling unprofitably. The gross margin stands at -150%. The majority of revenues comes from the Mobility segment, which refers to their main business: micro-mobility. Then there is the Media segment, with sources of income like Rights commercialization and subscriptions. Negative working capital of $2 million as of Sept 2021, suggesting that their need for equity raises is not gone. I think that showing data as presented in the 10Q filing is the best way to understand this:
(Source: Helbiz 10-Q filing, Q3 2021)
This is a $300 million company focusing on a hyped market that is going to be regulated soon, with constant need for cash to scale, as the first stages to establish operations in a market are capital intensive, and diversification (too much) at the speed of light.
Assessing a fair price for Helbiz: a scenario-based model for every outcome
On October 18 they announced a new capital raise that could bring 5 million additional shares to the market. As of today, there are about 15 million total outstanding shares and 30 million implicit outstanding shares (assuming every warrant and convertible note get converted). From December 2020 to the last filing date, the aggregate number of shares allowed by the SEC passed from 4.7 million to 30 million. A shareholder owning 10% of the company about 9 months ago, would see its participation cut to a mere 1.5%, or about one-tenth of the initial investment (if every warrant and note get converted). This is an “invisible” cost that significantly impacts shareholders even if not reported on the balance sheet or income statement.
Since shareholders that get diluted are facing lower returns, this risk should be included in the valuation model through an increase of the discount model (assumed as the WACC). The other important point is the scenario-based nature of the model. Since Helbiz is a newborn, growing and unprofitable company, the most unbiased way to approximate its value is by building different scenarios. Each scenario would then receive a probability and the final price would be weighted for the different probabilities.
Low-case scenario: the company is not able to profitably scale the business and thus continue to produce negative FCF and access the equity markets for the constant need of cash infusions. After 2 or 3 years of very bad stock performance, the company files for Chapter 11, and existing shareholders get completely wiped out. The current Altman Z score is -5, and while this is a very static measure of the probability of bankruptcy, it shows that the overall cash position is not great without access to equity markets. The probability of this scenario to take place over the valuation period (5 to 10 years) is 35%.
Medium-case scenario: HLBZ is successful at growing revenue at very high rates, despite lower CAGR than previously expected. Both mobility and media segments grow steadily and revenues are set to get close to management’s targets for 2025 ($450 million in revenues and $200 million EBITDA). Margins are still their weakest point, with net margin not positive before 2026. Fair price per share at $5.5. The probability of this scenario to take place is set at 55%.
(Source: Chart with DCF model data for medium scenario)
High-case scenario: Helbiz is a really disruptive company, successfully beating every estimate and competitor in every single market. Both Italy and the US are great markets, regulation is not a threat and margins grow as fast as revenues. The initial estimates of $450 million revenues for the fiscal year 2025 are easily beaten and the company is set to report more than $600 million in that year. Fair equity value at $1.6 billion, or $50 per share. Probability set at 10%.
The discount rate used is 12% (WACC + 2%) for the first 5 years, and then 15% from 2025 on. The need for such a high discount rate is to properly reflect the impact of future equity raises since they are mostly an invisible cost in the financial statements. Capex is expected to be as high as 10% for the first years, and then lower down to 5% as the company matures and surpassed $800 million in revenues. The biggest difference between cases 2 and 3 (medium and high) is on revenue growth and net margin, with the second one expecting growth rates as high as 120% from now to 2026.
The final, weighted (for probabilities) fair price is about $8, with an implied overvaluation of about 20%. This result is assumed to be representative of both the most extreme painful scenario, and the one where things go well and they are even able to beat their own revenues expectations.
Helbiz is a peculiar company operating in a very particular market. They presented themselves as a revolutionary force that is able to change mobility forever, and they presented very generous assumptions about their future growth. With regulatory concerns on the horizon, bad margins that are eroding cash every quarter, a confused strategy on diversification of the business model, and, last but not least, the constant access to the market for cash, this stock is navigating in turbulent waters. As of today, Nov. 18, the stock is not a buy and is overvalued by about 20%.