- FSR saw shares soar over 50% the past week on a flurry of news developments, bucking the trend in the overall EV valuation crunch.
- With just about seven quarters until planned launch, the intense speculative trading has increased valuation significantly and increases risk.
- However, FSR remains a solid bet for its long-term potential due to strategic partnerships and volume, a decent balance sheet, and a 'safe' valuation.
As the EV industry faces a valuation crunch, one name, Fisker (FSR), stands out from the rest, rising over 50% this past week and nearly 75% in just three days, after a batch of analyst upgrades, a memorandum of understanding with Hon Hai Technology [Foxconn (OTCPK:FXCOF), TPE:2317], and earnings showing more progress in reservations. Although the extremely optimistic, speculative buying seems to have gone too far too soon due to revenues still about seven quarters away, Fisker still remains a solid choice for long-term EV growth from its strategic partnerships and volume, a decent balance sheet, and a 'safe' valuation.
Strategic Partnerships and Large Volumes
Fisker is taking a somewhat unconventional approach to vehicle manufacturing, utilizing established manufacturers instead of building out its own in-house factories, lending to an asset-light model. Fisker will be working with Magna (MGA) in Europe to build three out of the four models planned by 2025, and recently signed a memorandum of understanding with Foxconn to develop the second model, yet to be unveiled.
Why is this good? Outsourcing vehicle manufacturing keeps Fisker's expenses at a minimum, allowing it to focus expenditures almost purely on technological/R&D advancement. Thus, Fisker can focus on UI, design and software in-house, while working with Magna to develop FM29 and Fi-Pilot ADAS/AV. It also minimizes execution risk to a degree since Magna's factories are already established and up-and-running; there's no build-out occurring from scratch. Fisker can find a quicker route to market under this system, estimating idea to launch times of about 29 months, compared to a traditional 60 months, as well as significantly less costs until start of production.
Graphic from Fisker
Leveraging existing, experienced manufacturing facilities also ramp up the production timeline and accelerating scale of production. Fisker will incur lower production costs, letting the Ocean's base model be competitively priced below $40,000, while expecting to see ~100k units at launch, scaling to full capacity at 240k units by 2023 (110k units in a single model).
Fisker's second model comes from the recently-inked MOU with Foxconn, dubbed Project PEAR (Personal Electric Automotive Revolution). The project has yet to announce any details on the video aside from a sketch (see below), with Henrik Fisker claiming that this "new vehicle would be 'futuristic' and 'something completely different," as well as 'affordable,' [with the car to] 'introduce things that probably will almost feel a little scary to some people.'"
Graphic from Fisker
The deal has yet to be completed, with expectations to close in Q2 under a seven-year duration. Under the current MOU, production would start in Q4 2023, as the second model for Fisker's planned vehicle line, with projected annual volumes above 250k units. The vehicle will be aimed at global markets - fast growing China, maturing Europe, North America, and 'infant' India.
Foxconn brings "an exceptional vertically integrated global supply chain and the best supply chain management team" in the ICT industry, providing another link between that sector and EV following the recent Geely (OTCPK:GELYF)-Baidu (BIDU) linkup. Contract assemblers provide an invaluable link to EV by allowing acceleration of time to market - similar to the Magna agreement.
Overall, between the two, Fisker could see up to 500k units in maximum capacity by 2025, half from Magna, half from Foxconn; this is about double current annual target volumes of 200k to 250k. While Fisker does have a lot of room to catch up to in terms of outright unit volumes to leaders like Tesla (TSLA), such an amount of production capacity could lead to rapid deliveries if paired with strong demand for Fisker's cars (reservations keep rising to over 12,400, at about 400% daily growth since October, an early positive sign).
Fisker is also exploring agreements with a battery supplier, supposedly one of the top-four worldwide, to set up battery manufacturing facilities, given the prior history in 2013 where supplier A123's recalls and subsequent bankruptcy was one of the ultimate causes of the previous namesake's bankruptcy. Fisker is looking to use prismatic cells, similar to those supplied by CATL (SHE:300750) to Tesla, or Samsung SDI (OTCPK:SSDIY) (KRX:006400) to BMW (OTCPK:BMWYY). Such an agreement or establishment of a secure battery supply would effectively minimize the risk of such a repeat occurrence.
What are the risks? Fisker isn't prioritizing in-house manufacturing capabilities, instead choosing to rely on third-parties like Magna and Foxconn; by doing this, Fisker could see some delays to the accelerated timeline since, ultimately, it's out of its hand and its control. High expected annual targets at launch are difficult, in general, regardless of the source of the production.
Nothing is fully confirmed with Foxconn, and terms of the deal have yet to be announced; Fisker could see changes to projected capacities under the time-frame or other unexpected occurrences arising, like increased expenditures for R&D on its end associated with the 'revolutionary' nature of the vehicle in development.
In the long-run, since Fisker isn't sourcing production in-house, it will need to prove that the leverage of experienced manufacturers and existing facilities to create 'affordable', cost-competitive vehicles will be successful. If Fisker does not hit delivery or revenue targets, or if sales disappoint, it could find that manufacturers become more hesitant to ink future production deals.
How is Fisker minimizing these risks? With Magna, Fisker is incentivizing the manufacturer with a 6% stake in the company, so that the two are tied in a sort-of mutually beneficial arrangement - Fisker benefits from the cost-leverage, accelerated timeline and high scale of the agreement, while Magna benefits as Fisker scales deliveries and revenues, thus assumed to drive share price higher after delivery commences and revenues are recognized. While the Foxconn terms have yet to be fully completed and closed, it's likely that a similar equity stake incentivization will be included, diluting shares to a degree.
Attractive Balance Sheet
Vehicle manufacturing is an expensive task, and ensuring a strong balance sheet currently as rates rise is important, as capital needed for growth becomes more expensive with higher interest rates. Fisker's balance sheet and expected capex give it a healthy balance ahead of projected launch in Q4 2022.
Why is this good? Fisker's earnings report showed that the company currently had ~$991 million in cash and equivalents on hand, and zero debt. Capital expenditures for the year are guided to be between $210 million and $240 million, thus giving approximately a four-year runway, or until 2025, far after expected launch times and revenue generation.
With the asset-light model and lack of debt, Fisker does not yet need to constantly tap into debt or equity to raise capital, as many of its peers have done to fuel growth - NIO (NIO) raised cash multiple times through equity and convertible notes just in Q4.
What are the risks? Capital raises will occur sometime in the future, and with rates rising, Fisker was not able to take advantage of easy equity offerings or convertible notes offerings at 0% and likely will have to do so at higher rates (3-6.5%). With two planned models due in late 2024-25, more cash could be necessary to hit production volumes with a short span in between both planned launch timelines.
Having just under $1 billion in cash with no debt at the moment is a positive, but the inner workings of the EV industry can see cash evaporate quickly - Hyundai's (OTCPK:HYMPY) 82,000 battery recall for the Kona has a hefty $900 million cost, nearly equal to Fisker's cash on hand. Thus, any occurrences of recalls can burn through cash quickly and leave Fisker exposed.
Valuation 'Safety Net'
Fisker's close at $28.50 gives it a fully diluted valuation of $9.25 billion (current valuation of ~$7.90 billion), fair in terms of Fisker's position about seven quarters out from launch.
However, projected vehicle volumes and revenue forecasts at launch, combined with such a valuation, give Fisker a 'safety net' against peers, with much more reasonable forward looking multiples.
Why is this good?
Fisker's projected annual volume of 200,000 units in 2025 combined with an average selling price of $55,000 (slightly below internal estimate of $59,000) would equal revenues of $11 billion; if Fisker doesn't reach that scale, but hits 150,000 units, revenues still could reach ~$8.5 billion, about equivalent to current valuation. Given the volume targets announced with the Foxconn MOU, Fisker could exceed its internal targets and reach up to 375,000 units per year past 2025, assuming near full scale with that partnership and Magna at full scale.
With a revenue estimation of $9.5 billion by 2025, Fisker is trading at just over a 1.0x multiple to its fully diluted valuation. Compare that to peers at that timeframe: Tesla trades at 6.5x 2025 revenues of ~$100 billion, NIO trades at 3.8x 2025 revenues of ~$19 billion, XPeng (XPEV) trades at 2.6x 2025 revenues of ~$11 billion. Giving Fisker a multiple in between peers, at 4.0x, would equal a $32 billion valuation by 2025, about 400% upside.
Putting it in perspective, NIO and XPeng would be reaching year 6 and 7 of deliveries, and Tesla far over a decade; Fisker would just be ending year 3. Such is the nature of growth within EV that a hefty revenue stream by year 3 could equate to a premium valuation - NIO and XPeng trade at 12-14x 2021 revenues (approx. year 3).
Due to Fisker's asset-light business model, the company estimates under $1 billion in operating expenses on $10 billion in revenues. Lifetime average gross margin sits between 19% and 25%, with the base package gross margin about 5%, rising to an estimated 32% for the extreme package as costs scale relative to pricing (gross profit ~$22,000 per $69,000 price tag). This margin profile combined with low operating expenses as a percentage of revenues early after launch could allow Fisker to command a premium relative to peers as it enters its primary delivery growth phase.
What are the risks? The EV crowd had faced some selling pressure as rates soared last week, due to the high-growth and disruptive nature of the industry. Multiples have been crunched recently, with Fisker's peers all seeing valuations shaved off - Tesla and NIO lost ~25% in one month.
Fisker, on the other hand, skyrocketed with a news-filled week; as such, valuation rose 75% in three days on heavy speculative trading, which is not necessarily healthy, and likely due for a correction. While the Foxconn deal has yet to be finalized and earnings showed a steady uptick in reservations, nothing meaningful will come until Fisker gets within two to three quarters of launch and deliveries; up until then, it's speculation. A lot can change between now and then.
Technological advancements within peers who have vehicles already on the market and changes in pricing of competing EV models is likely a given before Fisker can get the Ocean on the market. As such, current projected average selling prices could be subject to change due to competitive reasons, thus affecting both the top and bottom line and impacting forward-looking revenue multiples. Fisker also runs the risk of having to increase operating expenses and R&D spend to keep up with advancements in autonomous tech or other features, hurting margins.
Since Fisker is still pre-production, with the Ocean not hitting the market until Q4 2022 given current timelines of production, shares are inherently riskier than other established EV startups; Fisker's fully diluted valuation does offer it somewhat of a safety net as the EV market reels from rising rates. Incentivized partnerships with Magna and with Foxconn (although no terms have yet come to light, equity stake is highly possible) aim to hit heavy volumes of production and deliveries right off the bat, allowing rapid scalability. Should that occur, revenues could potentially hit over $10 billion by 2025 given Fisker's target volume of 200,000 to 250,000. Even assuming that Fisker does not reach that target volume, revenues would still equal the current valuation after a massive runup.
However, buying shares after rising significantly on an MOU, earnings, and increased price targets elevate risk as Fisker still has many quarters until launch, and sustaining such a valuation could prove difficult in the face of rising rates hurting growth names. Investing far ahead of revenue recognition for any company in any sector remains risky due to speculation, yet Fisker still looks primed for long-term success.
This article was written by
Analyst’s Disclosure: I am/we are long FSR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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