Faraday Future (FFIE) Stock: Unclear Outlook, High Competition

Introduction

Faraday Future (NASDAQ:FFIE) shares have risen 165% YTD. Obviously, the attraction of additional financing provided serious support to FFIE stock in the conditions of low trading volumes. According to management, raising additional funding is currently one of the key factors that could help the company continue to exist in the market and finally bring the FF 91 to market. Thus, the main goal of raising capital is the release of the EV model, which has been repeatedly postponed. Despite the fact that the news is positive, I still have a few concerns about the future business outlook and associated risks.

New round of financing

The company announced a new funding round of $135 million. The firm entered into an agreement in the form of convertible bonds. According to management comments, the funding will enable the company to begin production of the FF 91 Futurist.

Thus, in my personal opinion, sufficient capital and the ability to start production of a flagship model is definitely positive news for the company. However, in my personal opinion, it is too early at the moment to be optimistic about the company’s future prospects. So, just the fact of the start of production and sales of the product does not say anything about the future operational and financial efficiency of the business.

On the one hand, I understand that at the moment the very fact of the start of production is the primary and key driver for the company, however, the next catalyst, in my opinion, may be an indicator of efficiency in the market, where the company has a huge number of competitors both from outside new EV companies, as well as from traditional EV manufacturers, which already supply tens and hundreds of thousands of models to the market.

In addition, a number of the company’s competitors are highly integrated companies that are engaged not only in the production of cars, but also in the production of batteries and charging stations. In addition, the economies of scale of a number of competitors allow them to pursue the most effective pricing policy to protect their own market share.

Short overview of EV market

Market growth

The company operates in a rapidly growing EV market. Thus, according to the conservative forecast, the number of EV models will grow from 18 million in 2021 to 200 million in 2023 with a CAGR of over 30%. The largest markets will continue to be such countries as: China, the USA and Europe. You can see the details in the chart below.

Competition

A rapidly developing market with huge growth potential not only attracts new players, but also forces old manufacturers to transform. So, in the EV segment, the company’s competitors are not only pure EV manufacturers, such as: Tesla (TSLA), Lucid Group (LCID), etc., but also classic OEM manufacturers that are actively investing in the segment and are going to actively compete with the largest EV manufacturers. You can see the details in the chart below.

Risks

New model launch: delays in the launch of the new model (FF 91) could lead to continued pressure on the company’s shares and increased uncertainty for investors about the company’s future prospects

Vertical integration: the low level of vertical integration deprives the company of some of the competitive advantages due to the inability to flexibly manage the production of batteries.

Competition: strong competition in the sectors from EV manufacturers and traditional OEMs could lead to a decline in market share and company revenue in the future.

Effect of scale: at the moment, in terms of projected volumes, the company lags far behind its competitors, as a result, the scale effect will support the level of operating profitability to a lesser extent. Thus, the main competitors of the company can be more competitive and investment attractive.

Supply chain: supply chain delays, component shortages and rising battery prices are additional risks for new models to be launched on the market.

Cash burn: delays in launching new models and the continued pace of operating expenses could lead the company into bankruptcy due to insufficient cash on the balance sheet to continue funding operations.

Macro: declining real consumer incomes, declining consumer confidence and rising interest rates could lead to lower consumer spending in the discretionary segment, which could have a negative impact on the company’s financial performance in future periods.

Drivers

New model launch: the successful launch of the model (FF 91) may lead to a reassessment of the company and its capabilities by the investment community, as a result, this can be a positive driver both for the growth of financial performance and for the attitude of investors towards the company.

Macro: rising consumer confidence and rising real disposable income could drive up consumer spending, potentially positive for the company

Conclusion

Despite the fact that the company operates in a dynamically developing EV market with huge growth potential, I believe that now is not the best time to go long FFIE stock. At the moment, my recommendation is “Sell” due to the company’s unclear future prospects. It is very difficult to make assumptions and build a financial model. Regular delays in the release of a new model, a high level of competition in the sector, the inability to predict future cash flows and solvency of the company, and the low level of vertical integration are stop factors for me. I will gladly reconsider my view in the future if the company can showcase an EV model to the market.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.