With its stock price down over 45% over the last 12 months and short interest totaling 33% of its outstanding float, Fisker (FSR +0.00%) seems to be shunned by the market because of its heavy losses and business. That said, the company has some potential growth catalysts on the horizon. Let's dig deeper and see if this electric automaker is a long-term winner, or a dud.
Too early for public markets?
2020 was a year of low interest and cheap capital as the Federal Reserve attempted to stimulate the economy in the wake of COVID-19 lockdowns. Fisker was one of many businesses to take advantage of this opportunity by going public through a reverse merger with a special purpose acquisition company (SPAC) even before generating revenue. Unfortunately, these types of listings have burned investors in the past because they allow speculative companies to bypass the traditional, and more rigorous, IPO process.
OTC: FSR
Key Data Points
To make matters worse, starting in 2022, the Federal Reserve embarked on its fastest rate-tightening cycle in history, taking its benchmark interest rate from near zero to over 4.5% at the time of this writing. Higher rates are a double-whammy for Fisker because they increase the cost of capital throughout the economy while hurting demand for growth stocks by reducing the discounted future value of their projected earnings.
How bad are Fisker's losses?
Fisker's third-quarter earnings highlight its business's immaturity. Revenue stood at practically zero (the company didn't have a commercial car production line at the time of the report). But it spends a great deal on administrative expenses and research and development, leading its operating loss to balloon 28% year over year to roughly $140 million.
The good news is that management has already started executing its timeline to rapidly scale up operations.
Image source: Getty Images.
In November, Fisker started production of its flagship electric SUV, the Fisker Ocean. Instead of handling all the manufacturing work itself, the company is working with a contractor called Magna Steyr, which also builds cars for Mercedes-Benz, BMW, and Jaguar at its plant in Austria. The use of an experienced third-party manufacturer could help Fisker maintain build quality and reliability in these early stages of operations.
Management expects to gradually ramp up production from 300 cars in the first quarter of 2023 to 8,000 in the second quarter, and a whopping 42,000 by the end of the year. To put these numbers in context, comparable electric vehicle start-up Rivian produced roughly 24,400 cars in 2022. While Fisker is behind, it looks capable of catching up with its small rivals if things go according to plan. Near term, demand won't be an issue as the company reports 62,000 reservations for its Ocean SUV.
Is the stock a buy?
Fisker has successfully built a scalable electric vehicle company. And that is no small feat. Nevertheless, there are good reasons why the stock is so heavily shorted right now. As the automaker expands its operations, investors should expect cash burn to balloon dramatically, creating the need for external financing like high-interest debt (which increases the possibility of bankruptcy) or equity dilution, which erodes current shareholders' claims to future earnings and cash flow.
While Fisker may be able to navigate these near-term headwinds, the future is far from guaranteed. Investors may want to wait on a few more quarters of data before taking a long-term position in the company.
