- SPAC Gores Guggenheim is merging with Sweden's Polestar in a deal valued at $20 billion.
- Unlike other EV companies that have gone the SPAC route, Polestar has an established business — and the company has further advantages over rivals.
- Valuation is a concern, and the upside here might not be quite as large as for other stocks in the sector.
- Still, this is a solid and intriguing story, and the lack of enthusiasm toward GGPI stock seems like a surprise.
What a difference seven months makes. Electric vehicle manufacturer Polestar is merging with special purpose acquisition company Gores Guggenheim (GGPI) — and investors don't seem all that excited. GGPI stock gained just 4.7% on the news.
To be fair, the deal had been rumored for some time; Bloomberg reported on talks between Polestar and Gores Guggenheim back in July, and GGPI stock did rally on that news. And there was some interest in the deal: volume totaled more than half of shares outstanding last Monday, when the deal officially was announced.
Still, there's an obvious counterpart: Churchill Capital, which in February announced it was merging with Lucid Group (LCID). Those rumors sparked an all-out frenzy; what was then CCIV stock roared from $10 to as high as $57 the day that deal was made official after the close. And while that rally clearly was based on faulty logic, LCID still has made rather solid gains, closing Friday at $24.61 against a $10 merger price.
In contrast, GGPI stock closed Friday at $10.24, even with the heavy volume last week. Clearly, the appetite for EV SPACs has dimmed, as seen not just in the reaction to the Polestar merger but in trading of post-merger names like QuantumScape (QS), Arrival (ARVL), and many others.
But the more negative sentiment toward the space may actually be creating an opportunity in Gores Guggenheim stock, which doesn't necessarily deserve to be lumped in with other EV manufacturers that have gone the SPAC route. Polestar certainly is not a mature company, but it is far more established than the likes of Lucid or Fisker (FSR). Looking forward, there seem to be real and significant advantages to its model versus other startups in the industry.
Even one of the core hurdles to seeing upside in any SPAC — why is the stock worth much more than $10 when the company is willing to sell equity at that price? — doesn't really apply here, given the exceedingly thin slice of Polestar ownership going to GGPI shareholders.
Certainly, there are risks: this is a company with a pro forma market capitalization of more than $20 billion that still needs to produce and sell significant numbers of vehicles across multiple geographic markets and amid intense competition. Success here is not guaranteed, and valuation remains a question mark.
That said, there's a lot to like here, and a far more stable story than most industry participants have to offer. EV bulls need to seriously consider Polestar, and even investors less optimistic toward the sector should be taking a long look.
Not Just Another EV SPAC
As a business, Polestar has two core differentiators against the flood of startups trying to follow in the footsteps of Tesla (TSLA) as a pure-play electric vehicle manufacturer.
The first is that unlike rivals like Lucid, Fisker, or Faraday Future (FFIE), Polestar isn't pre-revenue. The company certainly isn't profitable or even truly established. But according to the merger presentation, Polestar delivered 10,000 vehicles in 2020. Three quarters into 2021, the company is estimating 29,000 unit sales and $1.6 billion in revenue this year. There's already a business here, even if that business at the moment has some work to do: Polestar projects operating margins worse than -60% in 2021.
The second way in which Polestar differs from most passenger EV plays is that the company already has a global footprint established. This in large part is due to its relationships with China's Geely Auto (OTCPK:GELYF) (OTCPK:GELYY) and Geely's Volvo Cars subsidiary. Polestar vehicles will be manufactured at existing Geely/Volvo facilities in China and worldwide. The Polestar 3, a premium sport-utility vehicle launching next year, will have some of its production located in Charleston, South Carolina.
That manufacturing reach has allowed Polestar to move into new markets: 10 so far, with four more coming by the end of the year. Those markets are being served now by the Polestar 1 high-end sports car as well as the Polestar 2 five-door hatchback. As the Polestar 3 (due next year) is joined by the 4 (an SUV coupe) in 2023 and the 5 (a premium coupe, to be launched the following year), the company aims to be in more than 30 markets with over 150 sales locations.
In the merger presentation, Polestar projects that strategy will underpin impressive growth. By 2025, the company aims to reach $17.8 billion in revenue, $1.6 billion in operating income, and $1.3 billion in free cash flow. Obviously, SPAC projections need to be taken with an entire shaker of salt, as many investors have painfully learned this year, but it does seem a bit easier to believe the company can generate solid growth from an existing base of some revenue as opposed to zero sales at all.
Still, it bears repeating: investors must be skeptical toward SPAC projections. That's doubly true in the electric vehicle space. The sheer number of startups, not to mention the flood of investment from legacy ICE (internal combustion engine) manufacturers, is going to create intense competition.
Yes, the market is going to grow; yes, subsidies are likely to help; and yes, many customers are going to switch to EVs from ICE models for reasons ranging from reliability to total cost of ownership to environmental considerations. But the market can only grow so fast, and the simple fact is that there are going to be passenger EV companies that fail.
The good news for GGPI stock is that relatively speaking Polestar seems far less likely than peers to be one of those companies. The fact that the company is moving close to 30,000 units this year itself is a good sign. The outsourced manufacturing with Geely and Volvo also limits capital needs. Between the SPAC contribution of $800 million and $250 million in PIPE (private investment in public equity), Polestar is only raising $1.05 billion in the SPAC merger. Lucid raised more than four times as much and probably will need more down the line.
The relationship with Volvo, which is contributing a good number of components, probably bodes well for reliability as well, though as one outlet noted Volvo's reputation on that front may be somewhat overstated at this point. Finally, the existing Geely/Volvo footprint is allowing Polestar to get out in the market relatively quickly. Current plans suggest that three years from now the company should have five different models on the market. There won't be too many EV rivals that can say the same, providing a potential competitive advantage.
Indeed, in the merger presentation and on the announcement call, executives emphasized that there are only two pure-play EV plays with global reach: Polestar and Tesla. NIO (NIO) and XPeng (XPEV) for now are regional; Lucid will begin that way as well. Yet Polestar, at least from a market cap perspective, receives a far lower valuation than any of those peers:
Market Caps of Major EV Stocks As of Oct. 1, 2021
|Company||Market Cap ($B)|
* - pro forma for merger with Gores Guggenheim
What Goes Wrong for Polestar
It's a good story. It's not a perfect one.
There are the obvious risks. The manufacturing partnership and existing revenue both provide advantages going forward — but neither guarantees success. Again, competitors will be pushing hard in every single market Polestar serves. Many things can go wrong: a massive recall, battery/range problems, or simply a launch (notably the Polestar 4, which is supposed to be a volume play) that receives a soft reception. Polestar still expects to burn over $1 billion in 2022 before getting free cash flow to breakeven by 2024; push targets out a few years and the natural de-leverage in the model can at the least require significant dilution along the way.
And while $21 billion seems reasonable on a relative basis, particularly against Lucid at ~$40B, it's far from cheap on an absolute basis. If Polestar winds up being a relatively niche player, there's not necessarily much upside here — certainly, likely not enough to outpace the market.
One real concern is that, at least for now, this does seem like it's set to be a niche business. While Lucid is following Tesla's strategy of starting at the high end and working down to a mass-market sedan, Polestar is keeping its focus on the luxury EV market.
That will be a big market, certainly:
source: Polestar/Gores Guggenheim merger presentation
But it may not be big enough to spark the upside that TSLA stock has generated over time, or that bulls see in LCID. At the least, it hasn't been enough to spark much optimism.
On this front, the market isn't the only concern. The manufacturing agreement with Geely does limit cash burn and provide a faster path to market — but it also depresses long-term margins. Gross margins are targeted to just 22% in 2025; Tesla hit 27% in the first half of this year.
Polestar is targeting a 9% operating margin by 2025, and said in a "Funding Announcement Q&A" it had an "aspiration" to move that figure higher from that point. But the combination of lower operating margins and a smaller addressable market limits the explosive upside of Lucid, in particular, even if the downside in what will be PSNY stock likely will be lower. For Fisker and Faraday (with market caps of $4.3 billion and $2.8 billion, respectively), lower valuations mean being a niche manufacturer still is enough for potentially significant long-term upside.
Reviews for the Polestar 2 lend a similar sense. Motor Trend said the dual-motor 2 was "a little disappointing." It was more constructive toward the single-motor model, but seemed to still measure it a bit short of the Model 3. The UK's CarWow gave the 2 an 8 out of 10, while similarly giving it a modestly negative comparison to the Model 3. TopGear assigned an 8.5/10 rating.
There's certainly a sense across the board that both Polestar vehicles and GGPI/Polestar stock are solid — but not quite spectacular.
The Case for GGPI Stock
To be fair, all of this analysis is speculative. Pegging the exact fair value of the Polestar business is nearly impossible at this stage. The range of scenarios is enormously wide.
There is a 'feel' aspect to valuing GGPI. And there likely will be a 'feel' aspect to trading GGPI. One interesting aspect of the merger is just how small the effective float will be until the merger, and likely after:
Given lockups that extend 180 days after the merger close (which isn't expected until the first half of 2022), the thin float could drive a good deal of volatility here. The thin slice of ownership available to public investors seems like it could cause some upside pressure (and potentially squeeze any traders who look to short GGPI), but conversely some investors might project post-close selling pressure ahead of lockup expirations. We've seen a number of SPACs simply fall off the table after merger close (often after a strange rally once the deal goes through), and Polestar isn't guaranteed to be an exception to that trend.
Add the short-term and long-term considerations, and it is difficult to pound the table for GGPI stock as a compelling buy. But at the same time, it's not terribly difficult to have at least some optimism toward Polestar. This does seem like a company that is going to be a part of the EV manufacturing landscape for some time to come. How big a part investors expect it to play in the future should inform what investors think of Gores Guggenheim stock in the present.
This article was written by
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