2023-05-11 14:01:41 ET
Summary
- Polestar 3 production start has been delayed to Q1 2024.
- Delivery guidance reduced for second time this year.
- Large losses are leading to more cash burn.
In recent years, one of the most disappointing parts of the market for investors has been the electric vehicle space. A number of startups have continued to report disappointing results, leading to dramatic falls in their share prices. Thursday morning, we got a lousy set of first quarter results from Polestar ( PSNY ), which featured another guidance cut from the company.
For Q1, Polestar reported revenues of $546 million. This was more than 20% growth over the prior year period, but vehicle deliveries in the period were up 26%. Thanks to a more competitive market, especially after EV giant Tesla ( TSLA ) cut prices multiple times, Polestar has needed to be quite promotional , especially in the United States. Average selling prices will increase next year as the company launches two more expensive vehicles, but for now investors should expect pricing to remain a challenge. Of course, the luxury part of the market is the smallest in terms of unit sales, so Polestar isn't going to be one of the names delivering millions of vehicles a year.
With volumes starting to increase, Polestar did swing to a small gross profit for Q1. The company's operating loss narrowed from $258 million to $199 million, but that's still a significant percentage of revenues. Polestar is increasing its focus on cost management, which includes a global hiring freeze and 10% headcount reduction. The reported net loss did improve dramatically, but that was mostly due to a revaluation of certain earn-out liabilities. Excluding those items, the true net loss annualized out to about $890 million.
There are two major issues with Polestar currently. The first is that it again reduced guidance quite significantly. Earlier this year, management guided to 80,000 vehicles, which was a large reduction from the 124,000 units that was originally projected in the below SPAC presentation slide. This time, the forecast has been reduced to a range of 60,000 to 70,000 units. Due to software development issues, the start of production of the Polestar 3 is now expected in the first quarter of 2024. Additionally, management cited a tough economic environment that's impacting the automotive industry.
The second major issue for Polestar is the cash flow situation. In Q1, the company reported cash burn from operations of more than $283 million, and that was before more than $130 million was spent on capital expenditures as well as intangible assets. As a result, the company's cash balance declined from $974 million to $884 million, while borrowings also jumped by more than $325 million. Added interest expenses make the path to profitability and free cash flow even tougher, with the possibility that future additional capital raises come in the form of equity, further diluting investors.
Polestar shares have dropped dramatically since my previous article on the name. I have been worried about the growth path and balance sheet for some time, and both of those concerns were amplified with today's report. Going into Thursday's news, the average price target on the street was $6.74, but that was down a dollar since I last discussed the name. While that valuation suggests dramatic upside from here, I'm guessing we'll see some target cuts coming thanks to the reduced guidance.
In the end, Polestar's disappointing Q1 report sent shares tumbling on Thursday morning. The company's revenue growth was a bit soft as pricing remains challenged in a very competitive EV market, and while losses improved, they remain quite high. Polestar is taking actions to reduce expenses, but it is still burning a bit of cash. Between software issues and the macro environment, management slashed its delivery guidance for the year again, with the possibility that deliveries may only come in at half of what was originally projected. The stock's 10% decline puts it only a stone's throw away from its all-time trading low of $3.14, a price that could be in play moving forward if execution here does not dramatically improve in a timely fashion.
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Polestar Slashes Guidance Again