FFIE - Fisker: Survival Of The Fittest

2023-04-04 00:23:50 ET

Summary

• Most EV companies that went public in the last few years claimed their approach to EVs was unique.
• Most approaches are on the verge of failing or have failed and Fisker looks like a rare example whose approach may actually work.
• 2023 seems to be a crucial year for Fisker for its EV ambitions to take off.

Quick Take

So many EV companies became public in the last couple of years that even a seasoned investor in the space wouldn't be blamed for failing to keep track of them. Each company came with its own promise and each had high aspirations to fulfill that promise. Fast forward to now, most are on their way to an early demise. What surprised me the most was not that they had failed in their promises, but how fast they failed. Maybe if I had touched up on the history of manias (Ex: the Dot-com bubble), I wouldn't have been surprised at all.

Out of all these companies, Fisker ( FSR ) was also one of the companies that I had my doubts about; but their execution so far has proven otherwise. In fact, the market perception of them has left me thinking of the quote

In the land of the blind, the one-eyed man is king.

As a new startup, they have had their fair share of troubles and it's a miracle that they have come as far as they have. But the road ahead of them is grueling. In my analysis, I will aim to uncover what they have achieved where so many others have failed and the difficulties in the road ahead.

The long road traveled

Let's face it. Most of these companies becoming public was a big by-product of loose monetary policies. There was very little chance of pre-revenue, pre-production, and concept stage companies hitting the market at ridiculous valuations. Soon after they started missing their projections and the market now is littered with companies on their way to an early grave. In fact, the interview from Henrik Fisker (CEO of Fisker), published around 2020 seemed prescient. From the interview -

A majority of the new EV startups will disappear over the next 24-30 months, as they have focused on manufacturing, and they will take too long to learn this highly complex, difficult area. They will not be given enough runway to do trial-and-error. Further, the next wave of EV buyers will have less patience for initial poor build quality and lack of reliability.

Many of these companies started off with a similar footing as Fisker and it's quite likely they would not survive the year.

Workhorse ( WKHS )

The company missed most of its promises and the stock is down more than 90% from its all-time highs. It finally started building and delivering vehicles but it's a question of whether it will be able to shore up enough cash to continue its operations. At its current volume and cost of delivery compared to its cash burn rate, it's more than likely that the company will have to raise debt in a difficult environment or dilute shareholders. A profitable vehicle remains a distant reality.

Lordstown Motors ( RIDE )

This among many others was the subject of a major short report and the company had to admit to several elements pointed out in the report. The stock is down more than 90% and there is an overwhelming opinion that the company could run into liquidity issues if sales don’t pick up fast.

Nikola ( NKLA )

The subject of another infamous short report and currently the founder has been found guilty of fraud. Recently, the company announced a $100 million underwritten equity offering which will be fully backstopped by a fund that already holds more than $200M of the company's senior convertible notes. Bottom line , the company is running out of options and bankruptcy could be on the horizon.

Lion Electric ( LEV )

The company delivered more than 500 vehicles in 2022 and boasts of an order book of close to 2500 vehicles which equals $574M in value. It seems to have a decent chance of survival but it remains to be seen how much value it will be able to return to shareholders in the future.

Faraday Future ( FFIE )

Until the end of last year, the company had major concerns about its survivability as there was a gap in its liquidity and its operational cash demands. To plug this gap shareholders were diluted and recently it raised another $135M to fund its production which it hopes to start in 2023. The company's production plans have already been delayed by more than a year. So far it has invested more than $2B into its operation and there is little to show for it.

Arrival ( ARVL )

I covered Arrival extensively in my coverage of the company. Initially, its approach to production was seen as revolutionary and it quickly ran into challenges in its approach. As of the latest news, it is desperately trying to raise cash to be even able to start production and is going to dilute its shareholders by more than 50%. With revenues out of the picture for 2023 and its history of hemorrhaging cash to run the business, the capital raise seems to be like stopping a flood with a bucket.

Electric last mile ( OTC:ELMSQ )

The company went public in 2021 and has already declared bankruptcy.

XL Fleet (Now Spruce Power: SPRU )

What started off as an EV company, they had to completely pivot its business model as a solar company in order to survive. Management was compelled to reinvent the business as the original model was excessively burning cash, had poor unit economics, and had a short seller report that called most of this out years ago.

Canoo ( GOEV )

Initially, when Canoo became public it came with a lot of fanfare. It described itself as asset-light in that the production of its vehicles will be outsourced to a contract manufacturer. After posting consecutive losses, it expressed concern to survive as a company. It has notable partnerships with Walmart to produce vehicles and has about $2B in sales orders in total. But it is running low on funds before it can even reach production. Its high cash burn rate is continuously decimating its cash position and recently it worked on raising its cash again through another stock sale. Even if it manages to survive it will be years before the company ever sees any profitability and value return for shareholders.

This is by no means an exhaustive list but a good sample of the companies to compare with Fisker and where Fisker is doing well.

Fisker

On the surface, Fisker looks similar to a lot of the companies mentioned here. The company has not started delivering vehicles and has no revenues. In terms of market performance, however, Fisker has been faring better than the majority of the EV companies that became public in the last few years. It is trading at a market capitalization of close to $2B and is down approximately 35% from the initial price of its SPAC offering. Its valuation also makes little sense so what makes this company different?

For starters, its approach to production has made its model asset-light. While a lot of companies are spending heavily on building their plants from the ground up, Fisker has outsourced their manufacturing to contract manufacturers who have experience in the field. This not only assures build quality but also faces fewer hurdles when they need to ramp up production. They even forecast that their capital spend will be less and they claim that the model allows them to be profitable from the first car it delivers. Comparatively, this would make it the fastest EV company to achieve profitability.

The number of reservations that it has racked up has been impressive too. With close to 80,000 reservations it has about $4B in potential sales lined up. The company's first vehicle is promising to be a mass-market vehicle with an industry-leading range of 350 miles at very competitive prices. Also, a mass-market vehicle does not mean that it is skimping on features. Its basic model is coming with advanced driver assist technology and higher models come with Fisker Intelligent Pilot, a world-first digital radar system. Its long list of features even includes a solar sky roof and a power bank that enables the car’s battery to keep a home’s power supply going in the event of a power emergency.

While all this is good, it is important to see where it stands in terms of production (other companies have claimed similar things but started failing once it came to production). In their latest earnings call, they maintained that they targeted to produce over 40k vehicles for 2023. They have already built some vehicles for in-house testing and data collection which is a good sign of things to come. As we saw, the biggest concern for companies at this stage is their balance sheet i.e. if they have enough cash to ramp up production. Their manufacturing contract with Magna also works well in this regard. Currently, its cash position is close to $700M which puts them in a comfortable position till they are able to get running with the climb in sales (Its cash also fully covers its debt which is another good sign)

Henrik Fisker's previous failure resulted in a lot of doubters. All in all, from its humble beginnings as an idea, it has come a long way and has proved many naysayers wrong so far but it still has a long road ahead of it.

The long road ahead of it

Henrik Fisker's previous experience with starting a car company has left him a lot wiser this time around. But it still does not rule out challenges for the future. It may deliver cars and continue to meet its production targets but will it produce returns for a shareholder?

Valuation

With no sales and a market cap of $2B, the valuation is all based on the idea that the company will at some point grow its sales which would justify its valuation. This means that the shareholders may have to contend with a flat-price performance for a time.

Production

While the company has reiterated its production targets, it can still be subjected to uncertainties. We still have to see the results from their initial testing of the first batch of cars and any hiccups here could have a domino effect. Any mistake in manufacturing can severely dent their prospects. Delays could result in frustrated customers canceling their orders. By some orders of magnitude, the whole valuation could now potentially be supported by reservations. If the number of reservations goes down, the effect on the stock price could be catastrophic.

On-Going concerns

Faced by any automobile company, big safety risks can be devastating. Most major car companies are in a position to handle this but a small operation such as Fisker cannot survive a big safety risk. Any lawsuit will risk their reputation as a business and it would be quite hard to bounce back from this. The other concern is with their contract manufacturer. This is a double-edged sword. While this strategy is great to take things off the ground, the manufacturer may start demanding a bigger piece of the pie in the future. Future contracts may be less favorable to Fisker and any canceled contract would completely cut the legs off the company.

A Hold Rating

In most situations, a car company at its stage would be valued much lower but when you look at Fisker relative to other EV companies it looks a lot prettier -

• Contract manufacturing with partners who have experience in the business
• Ability to set up and ramp up production quickly to meet demand
• Experienced and reputable designer behind the wheel
• Features that are quite premium and put it on par with a luxury vehicle
• Balance sheet that would allow it to actually survive till its ramp-up in sales
• Faster path to profitability

These advantages however do not cut off its risks as a car company and its present valuation does not make it attractive enough to invest in as a business. Therefore, I will be rating FSR stock as a hold. I would potentially reconsider this rating at a far lower valuation and/or if there is significant progress in its production and delivery in the future.

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