PSNY - Polestar: Pump The Brakes

2023-07-12 05:09:31 ET

Summary

• Polestar's recent rally, which saw its shares rise nearly 58% off its 52-week low, may not be justified.
• The company's transparency is in question as it only reports delivered vehicles, not produced ones, and its inventory has increased while customer deposits have decreased.
• Despite significant discounts on its vehicles, PSNY is losing money, with its balance sheet in poor shape and a need for more capital, making its current valuation seem inflated.

In recent weeks, there has been a decent rally in several electric vehicle stocks. Q2 delivery counts have been reported for a number of these names, and investors have been cheering some of the reported growth figures. For upstart Polestar ( PSNY ), however, Tuesday's daily high put the name nearly 58% off its 52-week low, a bounce that I don't think is currently justified.

A lot of EV startups grab headlines when reporting record delivery figures . Polestar did that in Q2, coming in at 15,800 vehicles, but the bigger surprise would be if these names didn't hit records. If you are trying to grow market share currently, you'd better be reporting new corporate highs for deliveries almost every quarter. With many other names out there reporting higher year over year growth rates for Q2, Polestar may actually have lost a little market share over Q2 2022. The company also maintained its yearly delivery guidance range, but that forecast for 2023 has been cut twice already, partly due to a delay with the Polestar 3.

While that 36% yearly growth seems nice, one issue I have with Polestar is its transparency. The company only reports what it delivered to customers, and so we don't know how many vehicles were actually produced. Inventory on the balance sheet was up nearly 29% sequentially in Q1 2023, while customer deposits were down almost 20%. Is Polestar actually seeing a bunch of new orders come in, or is it just working through its initial launch backlog?

I bring up the idea of inventory because Polestar's website shows the company has been heavily promotional in recent months. The company is at a major disadvantage over a number of its competitors at the moment, since the current Polestar 2 is not eligible for the US federal EV credit . For instance, Polestar 2 models are already a few thousand dollars more expensive in the US than their closest Tesla ( TSLA ) counterparts, and that's before including the significant credits that Teslas are eligible for. The following are some of the details of the offers for some of the Polestar 2 variants.

It appears that Polestar itself is providing the "credit" in a sense, thus discounting its vehicles quite a bit. For a company this new, you would hope that major sales programs like this do not need to be made. To go a step further, Polestar is currently offering discounts on the Polestar 3, a vehicle that's not even available to consumers just yet. This is a bit of a red flag, especially if you are in the camp that thinks the US will have a recession later this year or early in 2024.

Providing significant discounts is not a great place to be when you are already losing quite a bit of money. Management has guided to gross margins in the low to mid single digits this year, which is before throwing on sizable operating and interest expenses. In Q1, for instance, the company lost a bit over $200 million when taking out the quarterly adjustment for certain earn-out rights related to its SPAC transaction.

These large losses and the recent inventory build have put the balance sheet in terrible shape. In the past three quarters, net cash went from over $480 million at the end of Q2 2022 to negative $881 million at the end of Q1 2023. The company has been looking to raise additional capital, an issue I've detailed for over a year now , and it does have a major backer in Volvo parent Geely. However, further borrowings add more interest expenses, while equity sales would dilute current investors.

That gets me to valuation, and there's no P/E ratio for a company that's losing money. Polestar shares currently go for more than 1.7 times next year's currently expected revenue . A name that has a very similar strategy as well as production plan is Fisker ( FSR ), which goes for less than 0.65 times its 2024 expected revenue. As the chart below shows, Polestar is well above its 50-day moving average (purple line), so it appears quite overextended in the short term. Now that shares also just got back to the 200-day (orange line), we could see some near term resistance.

In the end, I would be extremely cautious with Polestar shares given the sharp rally that we have seen recently. While record Q2 deliveries showed decent growth, we don't know what production figures were and the company is being heavily promotional right now despite two cuts already to its 2023 delivery guidance. With large losses and cash burn likely for some time, the need for more capital is a major overhang, and the valuation seems stretched.

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