PSNY - Polestar Faces Significant Competition In A Sea Of Battery EV Startups

2023-10-11 15:25:57 ET

Summary

• Polestar, a brand acquired by Volvo in 2015, went public via a SPAC financing in June 2022.
• Most SPAC mergers with EV companies have not worked out well for investors.
• Polestar faces financial struggles and may need a capital infusion soon, which could dilute shareholders or add to the company's debt.

The Polestar (PSNY) brand may be familiar to investors of a certain age who recall that it was created as a racing enterprise and then acquired by Sweden-based Volvo Cars in 2015. Volvo by that time had been acquired from Ford Motor Co. (F) by Geely, the Chinese automotive company, and its self-made billionaire chairman Li Shufu (who sometimes goes by the name Eric Li).

Volvo, of course, had been known mainly for safety, reliability and its Swedish design heritage rather than sporty handling or quick acceleration. The automaker, under control of Geely, announced in 2021 that it was pivoting to all-electric vehicles by 2030.

The ownership, connections to China and branding history are relevant to potential investors in Polestar Automotive Holding UK PLC shares in order to understand the company’s complicated risk factors as well as some potential advantages. The company went public via SPAC financing in June, 2022 at $13 a share. Lately, shares have been trading around $2.60.

At the time of the IPO, CEO Thomas Ingenlath said Polestar would use the $890 million raised to fund a three-year plan to manufacture battery-electric vehicles (BEVs) and eventually reach profitability.

SPAC financing

As CNBC pointed out last year , most SPAC mergers with electric vehicle companies haven’t worked out well for investors. Even the relatively more successful cases of Lucid Group (LCID), Fisker (FSR) and Nikola (NKLA) are currently trading well below their post-merger highs. EV truck maker Rivian (RIVN), which went public via a traditional IPO, also has struggled.

The reasons why Tesla ( TSLA ) prospers and most of the rest of the EV enterprises struggle are numerous. The main reason is scale: Tesla models are regarded by many as status symbols among the affluent in the U.S., the world’s most profitable car market. Tesla shrewdly established its own charging network, thereby addressing potential range anxiety. By allowing other brands access to its chargers, Tesla also may establish a profitable ancillary revenue stream from rival automakers.

Tesla also boasts an extremely effective brand ambassador, Elon Musk, who also serves as CEO.

While electrification of automobiles is a rising trend in the three major automotive markets worldwide – North America, Europe and China – the regulations, incentives and consumer preferences in the three regions differ from one another markedly. Which means that a business strategy and vehicle tailored for China may be ill-suited to the U.S. or Europe.

BEV bonanza

In China, for example, about 40 different automakers make BEVs for the local and export markets. Geely not only builds Polestar, which is sold globally, it also makes Zeekr, built and sold in China and exported to Europe but not the U.S. Zeekr sold 72,000 vehicles in China in 2022 and hopes to double that number this year.

The Zeekr 009 minivan has more than 500 horsepower and a range of more than 620 miles – about double most BEVs sold in the U.S. According to the China Association of Automobile Manufacturers, BEV sales reached 6.9 million in 2022, up 93.4% from a year earlier. In 2022, 809,700 BEVs were sold in the U.S., more than 60% were Teslas.

Polestar sold 51,000 vehicles globally in 2022, fewer than 10,000 in the U.S., where a $7,500 tax credit applies only to cars built in the U.S. The Polestar 2 models starts at about $50,000. The new Polestar 3 SUV, due later this year, starts at about $84,000.

Polestar's Q3 vehicle deliveries are up 39%. YOY vehicle deliveries up 37% on strength of Polestar 2 model. Deliveries of the Polestar 4 model set to begin in Q4; the company is forecasting as many as 70,000 deliveries in 2023.

Not surprisingly, Polestar posted a $313 million loss on revenue of $1.23 billion of sales in the latest six months ended June 30, compared to a loss of $502.7 million on revenue of $1.04 billion during the same period a year ago. The company may need a capital infusion soon, which could dilute shareholders or add to the company’s debt, which stands at $2.5 billion or about one-third of Polestar’s $7.5 billion enterprise value.

From a fundamental viewpoint, Polestar appears to be a financially struggling startup that earns extremely “Factor Grades,” according to Seeking Alpha’s methodology. Which is why its Quant Rating is “sell” while analysts from Wall Street and Seeking Alpha assign it a “hold” rating.

Most startups struggle financially, which is not in and of itself a reason not to own a company. In Polestar’s case, the fact that Li Shufu and related entities own roughly 48% of the equity is extremely relevant. From a distance, it appears that Li and Geely are pursuing BEV sales along parallel brand paths: Polestar, Volvo and Zeekr. The engineering, personnel, intellectual property, production and other resources from one brand may be shared with another, which means that Polestar enjoys advantages that other BEV makers don’t.

At the same time, Li could decide in the face of financial pressure or international political tensions to fold one brand into another, wiping out or reducing the stake of current shareholders.

Full disclosure: I have driven Polestar 2 and rate it a well-designed, nicely performing BEV that stands a strong chance of finding an audience in the U.S. How large (or small) that audience will be – and how soon – is a subject of some debate since mainstream BEV adoption is growing more slowly in the U.S. than anticipated due to the price of BEVs, range anxiety and a skimpy charging infrastructure, especially outside of California.

Long works better

Second full disclosure: My bias leans toward long-term investments. PSNY’s low share price at the moment obviously adds to its attractiveness. With a limited downside and a great deal of post-Tesla investor interest in BEVs, a move upward could prove extremely profitable to traders. From my long-term perspective, the playing field is simply too crowded with small BEV manufacturers selling their vehicles to a public (especially in the U.S.) that isn’t yet sure it wishes to give up gasoline.

I rate PSNY a SELL. If your shares already are in the red, swallow the medicine and get out. If you’re looking for a longer-term BEV play, you might as well try TSLA.

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