Fisker Stock: I took a small watch item position in FSR stock

“The most annoying pain is perceived when a man lives aimlessly. -Amit Kalantri

Today we take an in-depth look at an interesting name in the emerging and rapidly growing electric vehicle space. A full analysis follows below.

Company presentation:

Fisker Inc. (NYSE: FSR) is a Manhattan Beach, Calif.-based electric vehicle developer that uses a lean business model that leverages its platform-independent design capabilities to outsource production of its vehicles to third-party manufacturers. The company has an electric vehicle, Fisker Ocean, which is expected to begin production in 4Q22. Fisker was formed in 2016 by Henrik Fisker, famous for his designs of the BMW Z8, as well as the Aston Martin DB9 and V8 Vantage. The company went public in October 2020 when it reverse-merged with special purpose acquisition company (SPAC) Spartan Energy Acquisition Corp, which raised gross proceeds of $552 million upon its IPO in stock Exchange. Fisker’s first trade was executed at $9.25 on October 29, 2020; and it currently trades at around $21.00 per share, equating to a market cap of just over $4.8 billion, after giving effect to 19.4 million pre-funded warrants.

The company is capitalized by two classes of shares: 163.8 million publicly traded Class A common shares confer one economic interest and one vote, while each of the 132.4 million Class B common shares held by individuals confers an economic interest and ten votes. Essentially, all Class B shares are held by Fisker and his wife, CFO and COO Dr. Geeta Gupta, who together control approximately 90% of the voting rights.

Approach

With vehicle designs that can be tailored to match tough spots on a contract EV manufacturer’s platform, Fisker believes it can scale significant volume, bring EVs to market in about the half the time of a standard OEM and do it at a reduced cost compared to a typical vehicle launch, which can be passed on to the customer – delivering better quality at a lower price. From this approach, Fisker has two projects in development.

Fisker Ocean

The company’s first vehicle is Fisker Ocean, a five-passenger EV SUV with three trim levels (Sport, Power and Extreme) priced from $37,499 to $69,900 with leases from $379 to $999 per month, which compare favorably to other SUV EV models. Ocean vehicles will have up to ~545hp, a solar roof that can add up to 25 miles of range (depending on geography), a state-of-the-art driver assistance system, and a range of cruising (depending on the version) from 250 to 350 miles. The Ocean Extreme’s nearly 350-mile range will make it the class leader among any EV SUV near its price. The Ocean will feature “California Mode”, which at the touch of a button will open eight glass panels at once, providing a convertible feel in a fixed-roof frame. Management believes that Ocean will be the most advantageous alternative to that of Tesla (NASDAQ: TSLA) Y-model

To execute the production of the Ocean, the company used the services of subcontractor Magna Steyr, a subsidiary of Magna International (NYSE: MGA), which produces automotive systems, assemblies, modules and components for some of the world’s largest OEMs, including General Motors (NYSE:GM), ford (NYSE:F), and Tesla, among many others. With Magna Steyr, Fisker will avoid having to build its own factory, accelerating Ocean’s time to market while delivering significant cost savings to the consumer. In addition, Fisker will be able to monetize 100% of the emission credits under its agreement which runs until 2029. In exchange, Magna Steyr receives pre-funded warrants representing a 6% stake in Fisker. The first two tranches were acquired with a third and final tranche acquired upon the launch of Ocean production.

In line with its asset-light model, on the service side, Fisker outsources vehicle maintenance to Cox Automotive through its more than 100 global locations in Pivet and Manheim. For batteries, the company has just entered into an agreement with Contemporary Amperex Technology to supply more than 5 gigawatt hours of battery capacity from 2023 to 2025. On the charging side in America, the company has established a non-exclusive agreement with Electrify America, which will provide flat rates to Fisker customers. For Europe, Allego will offer Fisker owners, who take delivery between January 1, 2023 and March 31, 2024, free charging for one year on its network. In exchange, Fisker agreed to invest $10 million in PIPE.

Since the company’s last update on Jan. 5, the company had 24,500 advance reservations. Fisker expects to have 50,000 orders by the time production begins, with Magna Steyr producing around 5,000 vehicles per month in 2023.

Project Pear:

The company’s second vehicle program is dubbed Project Pear, which is a collaboration between itself and Foxconn. (OTC: FXCOF) to mass-produce a compact electric vehicle under $30,000. The initial goal for this company is to start production in the United States in 4Q23 with the first deliveries in 1Q24. The ultimate endgame will involve an annual manufacturing capacity of approximately 250,000 vehicles once production facilities in China, India and Europe are purchased. Although details are still scarce, Fisker is promising a radical exterior design that will share many components with Ocean, further reducing production costs. In fact, Foxconn is providing Fisker with access to enough chips to meet its production goals for Pear, easing a potential supply chain headache.

Overall, the company expects to sell 200,000 to 250,000 units comprising four models by FY25, including a second collaboration with Magna Steyr dubbed Project UFO.

Competitive landscape

Fisker is entering a dynamic market with electric vehicles accounting for 3.5% of all US auto sales in 1H21 (291,933 units across 19 models). The global share is currently below 3% (less than 2 million units), but is expected to grow at a CAGR of 29% to reach 25% of total volume (~25 million units) by 2030. When Ocean will launch its first two offerings, management expects a total of only 10-20 total competing electric vehicles in its segments (SUVs and compacts). However, dozens of electric vehicles will hit the market over the next three years and Tesla’s Model Y SUV has a stranglehold with around 132,000 units sold in 1H21.

Against this backdrop, many would-be EV consumers are still exercising a great deal of restraint due to concerns about both cruising ranges and charging infrastructure that makes longer journeys difficult. The recently passed $1.2 trillion infrastructure bill provides $7.5 billion for building electric vehicle infrastructure, which should help facilitate a more ubiquitous charging footprint.

Review and analysts’ comments:

In addition to capital invested by Spartan SPAC, Fisker raised net proceeds of $562.2 million from an offering of August 2021 2.50% Convertible Senior Notes due September 2026 with an effective conversion price of $32.57, taking into account a capped call option purchase. He also received $89 million in warrant exercises. Through these financings, Fisker had cash and cash equivalents of $1.4 billion as of September 30, 2021. Although it has only used $160 million for operations and deployed $80 million for ( mainly) investments in the first three quarters of 2021, it expects to spend around an additional $100 million in capex for serial production tooling and equipment installation in 4Q21. Additionally, it is expected to experience a significant cash outflow in 2022 as it prepares for the initial production and commercialization of Ocean.

The street is leaning positively on Fisker’s outlook, but a range of opinions dot the landscape, with four buys and four outperforms versus four takes and one sell (Goldman Sachs). Their price targets have a fairly wide range ranging from $10 to $40.

Three members of Fisker’s board of directors appear optimistic based on their late-2021 buying spree that saw them rack up around 57,500 shares from Nov. 15-17 at $21-$23 per share.

Verdict:

Placing a valuation on what a company expects to produce from its revenue in 2023 when it hasn’t generated anything to date requires large error bars. Based on its outlook of 5,000 vehicles per month at an average sale price of $50,000 per vehicle, FSR shares trade at approximately 1.7x fiscal 23E revenue.

Consolidation within industry or a deep-pocketed tech company like Apple (NASDAQ:AAPL) Seeking to enter the market with a bang could give Fisker investors a big payday, but that’s pure speculation.

That aside, despite using a relatively unique asset-based business model, it’s more of a talking point than a selling point at this point. Its model should result in better value for the customer, but that valuation is in the eye of the beholder, and by the time Fisker launches Ocean, the viewer will have plenty of alternatives to consider. Its shares likely trade on quarterly booking updates and the whim of prevailing attitudes about the electric vehicle industry until it starts generating revenue in about a year. As such, Fisker cannot really be considered for a large stake in its portfolio at this time.

That said, I find the name intriguing enough that I recently held a small watch position at Fisker through covered buy orders. Option premiums are lucrative and fairly liquid.

“The ambitious thinks he finds his good in the operations of others; the man of pleasure in his own sensations; but the man of understanding in his own actions.”― Marc Aurèle, Meditations

Bret Jensen is the founder and author of articles for the Biotech Forum, the Busted IPO Forum and the Insiders Forum