Fisker: Not Buying Just Yet

Earlier this week, we received a double dose of major news from electric vehicle startup Fisker Inc. (NYSE:FSR). The company announced its Q2 production figures, along with detailing a major convertible bond offering. FSR shares jumped on the news, and Monday's high put the stock almost 65% off its 52-week low. While I believe this company is making some positive strides currently, I'm hesitant to recommend buying Fisker shares right now.

Q2 production did disappoint

Pretty much every electric vehicle ("EV") maker has hit speed bumps along the way. No production ramp has gone as smoothly as hoped, and Fisker certainly has seen its share of troubles. For the second quarter, the company announced that it produced 1,022 Fisker Ocean SUVs for customers as well as marketing and engineering purposes. Supplier challenges were noted and management provided the following additional commentary:

Fisker exceeded its targeted assembly rate of 80 units per day at the end of June and expects vehicles produced to exceed 1,400 in early July. Looking ahead, Fisker is investing in additional battery pack capacity to protect the compressed manufacturing timeline this year and support higher volumes than originally anticipated next year.

This production number was well short of guidance for 1,400 to 1,700 units. However, the result was even more disappointing when you consider that guidance was for customer vehicles only, and we don't know the exact numerical breakdown of those that were produced. Also, the press release was issued on the morning of July 7th, so we were a little past the "early July" timeline without an update on how close they were to that 1,400. Yes, there was a weekend in there, but after six days of the month there could have been a little more clarity here.

As a reminder, Fisker expects to have a steep ramp-up in Q3, followed by a monthly run rate of approximately 6,000 vehicles for the rest of the year. At the Q1 report, management forecast 32,000 to 36,000 vehicles produced in calendar 2023, which itself a guidance cut from the original forecast of about 42,400 vehicles. With Q2 falling a bit short, that adds to the pressure for the current quarter, and we'll get a detailed update from the company on August 4th when full Q2 results are detailed.

Major debt offering

Also, like many electric vehicle startups, Fisker has found that this is a very capital intensive industry. This week, the company announced that it had offered $340 million in zero coupon convertible notes due in 2025. The conversion price will be $7.80 per share, but the major item here is that the notes have an original issue discount of approximately 12%, resulting in gross proceeds of $300,000,000 to Fisker.

There is also an option here for the investor to purchase nearly $227 million in additional principal notes. If that option is executed, Fisker then also has an option that the investor has to purchase an additional roughly $113 million, equaling another $340 million in total principal. These funds will be used for working capital purposes and future growth initiatives, including an additional battery pack line to support growth in 2024 and beyond.

The need for more money was one of the key items I detailed in my previous article on the name. The company had been raising money through an at-the-market equity sales program, and that was diluting investors over time. Ongoing losses were leading to cash burn, and it seemed inevitable that more funds would be eventually needed.

For now, this latest capital raise shows Fisker is going the debt route, with zero interest expense, but it was priced with a very large discount. If Fisker shares do well in the next year or two, these bonds could result in quite a bit of additional dilution, but at least in that case the debt would be wiped off the books.

The upcoming growth story

With Q2 production coming in light, I'm not expecting that much for results when we get them. Analysts are currently looking for $139 million in revenue for the period, but that number is likely to come down, as just four analysts have estimates, and so this week's news likely has to be digested further. Analysts may also need to cut Q3 numbers as well given this steep production ramp, unless Fisker continues to use expensive air transportation to get vehicles to the U.S., which then will pressure margins.

2024 is where things really start to get interesting, as the company starts to push towards $1 billion in quarterly revenue. Based on current estimates, the stock goes for about 0.6 times expected 2024 revenue, which is about half of what a comparable name like Polestar (PSNY) goes for. The average price target on the street for Fisker of $9.60 implies significant upside from here, but that average has come down about $2 since my previous article. It would not surprise me if we get a few more target cuts in the coming months if execution doesn't improve and analysts factor in the capital raise.

Conclusion - not buying Fisker quite yet

While I still like Fisker's potential growth story and the valuation does seem reasonable, I'm not pounding the table today. The company is showing the traditional growing pains that many EV names have seen, and so I'd like to see a bit better execution before I would totally jump in. There is certainly a chance here for guidance to be reduced again at the Q2 forecast, and that could pressure shares a bit. I'd also really like to hear management give reasonable guidance for 2024 before I become a full supporter, because I don't want to see a repeat of this year where guidance starts high and then is cut again.

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