Fisker: Market Showing Less Confidence (NYSE:FSR)

Nearly two months after Fisker (NYSE:FSR) commenced production for its first model, the Ocean SUV, on schedule with partner Magna Steyr (MGA), the market again is showing less confidence in Fisker’s ability to succeed with its commercialization plans — in fact, the debt market is showing less confidence moving into January even as production has kicked off and revenue is just around the corner.

Fisker’s projected volumes are a bit unusual — the company is aiming to average about 100 to 110 units per month for Q1, before quickly scaling that to nearly 2,700 per month on average in Q2 — a 27x increase in one quarter. Fisker is targeting production of 42,400 vehicles during FY23, a shift in tune from CEO Henrik Fisker’s earlier comments that the company and Magna were considering expanding production beyond 50,000 units in 2023 to meet high demand. Even so, Fisker is potentially on track to surpass $2 billion in revenues should it find minimal hiccups as it scales, while potentially benefiting from a financial standpoint.

Market Still Losing Confidence

Fisker has finally started production and is projected to generate far in excess of a billion dollars in revenue after two years of being publicly traded with no financial figures and physical vehicle sales. All else aside, that should be seen as a substantial positive for shares this year, with significant revenues and sales finally happening. But the market is still signaling little confidence in Fisker — and the debt market showing is showing even less confidence than it had in the beginning of November.

Short interest on shares has stayed relatively unchanged since November, with an estimated 37% of its 160 million share float shorted, or about 59 million shares — in dollars, that’s over $430 million at the current $7.27 price per share, or nearly 19% of Fisker’s market cap. Such a substantial level of short interest, on what could be written off by some as simply another small-cap SPAC name, sends a signal that the market is betting more heavily against Fisker — other SPAC EV startups such as Polestar (PSNY) and Lucid (LCID) have about 9% and 26% short interest, respectively. With a cost to borrow around 22%, these short positions are not cheap either.

The debt market is corroborating a lack of confidence in Fisker’s shares, but is also signaling slightly less confidence than it had shown in November’s update. Fisker’s $667.5 million ‘green’ convertible notes due in 2026 are trading far below par value — with the last trade on Thursday, Jan. 12 at $50.22, after rising from $46 the week before, the lowest price the notes have ever traded.

What makes the $46 trade on January 5 interesting is that Fisker’s common stock closed at around $7, about 10% higher than its 52-week low of $6.41. When Fisker reached that level on October 14, the notes traded around $49, a 6.5% premium to January 5’s low. In simpler terms — shares have risen off lows, trading about 13.5% higher to $7.27, yet the notes have continued to fall, suggesting waning confidence in Fisker’s ability to repay, or waning attractiveness in a $19.70 conversion price.

Positives Ahead — $2 Billion Revenue Potential

Although Fisker has one of the highest levels of short interest amongst peers and signs of lessened confidence arising from bond trades, there are now positives to look forward to in 2023 — scaling production, and projected revenues to be at least $2.0 billion.

A production target of ~42,400 vehicles for 2023 reflects positively for shares in that production would be ramping heavily in the back half of the year (after almost five months of very minimal production through Q1) and helping generate strong revenues for the company.

Given that Fisker had initially considered expanding production up to 50,000 units and beyond, a production volume of 42,400 units seems fairly attainable and conservative. Strong production volumes in Q4 from Polestar and Rivian (RIVN) (even after cutting guidance) suggest that headwinds for startups are beginning to ease, allowing Fisker to have a relatively challenge-free ramp.

However, there’s one major item to pay attention to — deliveries. It’s unlikely that Fisker will deliver 100% of the vehicles it produces — Tesla only delivers about 93% of its quarterly production, while Rivian delivered as low as 80% of its production. Assuming Fisker can deliver about 85% to 90% of its annual production, it’s on track for about 36,000 to 38,000 deliveries for 2023.

Breaking down the $2 billion revenue projection:

• at 37,000 deliveries for the year and an average selling price of ~$61,000, given that the high-end $68,999 One and Ultra trims are expected to make up a majority of initial deliveries, revenues are projected to be $2.26 billion, or equal to Fisker’s current market cap
• at 37,000 deliveries and an ASP of ~$55,000, should around half of the deliveries stem from the sub-$50,000 base models, Fisker is still projected to generate $2.04 billion in revenues

Even in a downside scenario in which Fisker struggles to attain 27x average monthly production growth in Q2 and finds challenges scaling up, reaching 26,000 deliveries on 32,000 units production, revenues are still on track to surpass $1.4 billion at a $55,000 ASP.

Financial comparisons can be drawn via Polestar, which assumes a very similar asset-light business model building vehicles at Volvo and Geely’s (OTCPK:GELYY) factories. Polestar operates with a razor-thin gross margin, at 3.9% for the nine-month period through Q3 ’22, compared to Lucid’s (194%) gross margin for the same period, and Rivian’s (213%) margin.

So by the end of FY23, it’s entirely possible for Fisker to leverage the benefits of this asset-light strategy and be selling vehicles for a slight gross margin, allowing it to burn through significantly less cash than rivals — Rivian may burn as much as $7 billion this year, while Fisker may burn $500 million. Similar to Polestar, Fisker could benefit from increased visibility and an accelerated timeline to reaching profitability — should volumes be able to scale to 90,000 or more in FY24, Fisker could be nearing quarterly profitability by FQ4 ’24, or early FY25.

Outlook

Even with potential benefits stemming from an asset-light model using contract manufacturers, such as minimized cash burn and accelerated timelines to profitability via an ability to sell at a positive gross margin early in the production ramp, the market is still showing a lack of confidence in shares. Fisker is one of the most highly shorted EV startups, even as it now has passed a major milestone of kicking off production on schedule, and its bonds are trading lower even as shares have recovered. Revenues could surpass $2 billion in FY23 should Fisker execute to its plan, but the general consensus gleamed from the bond market is that an air of caution still exists with shares, opening up the door to more volatility, both up and down, due to the heavily-shorted nature of shares.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.