Polestar: A Turnaround EV Stock For 2023 (NASDAQ:PSNY)

Swedish electric vehicle start-up Polestar (NASDAQ:PSNY) reported two days ago that it delivered 51,500 EVs in FY 2022, a year that was marked by massive global supply chain challenges, aggressive production ramps and higher raw material costs. The EV company beat its previous forecast of 50,000 electric vehicle deliveries in FY 2022 easily due to strong performance and execution in the fourth-quarter. The company also issued a strong delivery forecast for FY 2023 and the risk profile, I believe, is very attractive after shares have seen an exaggerated down-side revaluation in 2022!

Down-side revaluation

Like most other electric vehicle start-ups, Polestar has seen a massive revaluation to the down-side lately which was driven by a global supply chain crisis made worse by COVID-19 lockdowns in China, rising costs for raw materials as well as declining investor interest in the EV sector. In 2022, shares of Polestar have slumped as low as $4.00 before moving into a new up-leg in December. US companies like Lucid (LCID) or Rivian Automotive (RIVN) have also seen large declines in their market caps.

Very strong execution in FY 2022, strong delivery guidance for FY 2023

Polestar delivered approximately 21,000 electric vehicles globally in the fourth-quarter of FY 2022. In Q3’22, the Swedish EV company delivered just 9,215 electric vehicles, meaning Polestar has seen a 128% quarter over quarter increase in deliveries in Q4’22. In total, Polestar delivered 51,500 electric vehicles in FY 2022 which represents a year over year growth rate of approximately 80%. Polestar had more than twice the annual output than Rivian in FY 2022 and the Swedish EV start-up is therefore way ahead of the US competition regarding production and delivery volumes.

For the current fiscal year, Polestar expects to deliver 80,000 electric vehicles which implies a year over year growth rate of 60%. The strong delivery forecast is driven chiefly by the ramp of the Polestar 2 electric vehicle, a popular and award-winning all-electric sedan model that experiences strong demand from customers.

Polestar: revenue ramp and possibility of reaching profitability in FY 2025

Polestar doubled its revenues in the first three quarters of FY 2022 compared to the year-ago period and is ahead of the US electric vehicle competition regarding revenue generation. The EV company generated $1.48B in revenues in the first nine months of FY 2022 while many US rivals are lagging behind: Lucid reported just $351M in revenues in the first nine months of FY 2022 and Rivian achieved a revenue base of $955M in that same period.

Polestar is still losing money, however: the company reported a net loss of $203M from January until September and it generated a loss in excess of $1.0B in FY 2021. However, as revenues are ramping up, net losses are set to continue to narrow and I believe Polestar, with a bit of luck could see its first profit in FY 2024… if the company continues to ramp up production and deliveries of the Polestar 2 as well as the Polestar 3, an all-electric performance SUV, that will launch later in FY 2023.

Polestar’s valuation

Shares of Polestar have lost more than half of their value since the company completed its SPAC merger in June 2022, largely because investors are now less willing to pay inflated valuation multipliers for EV companies, especially those that are still losing money. However, Polestar has a reasonable chance to be profitable in just a few years time and revenues are projected to ramp up nicely in the next two years.

Polestar is expected to generate $5.2B in revenues in FY 2023 and $11.3B in FY 2024, implying top line growth rates of 116% and 117%. Polestar’s prospects in the EV market are currently valued at a FY 2023 P/S ratio of 2.3 X. Lucid has a 2023 P/S ratio of 5.6 X and Rivian is trading at a P/S ratio of 3.0 X. From a valuation perspective, Polestar might be the better bet than its US rivals.

Risks with Polestar

Like all other EV companies with lofty delivery projections, the two biggest risk factors for Polestar are the production ramp of Polestar’s various EV products as well as the valuation factor. Polestar is still not profitable (which is also a risk), but the EV company is moving rapidly towards break-even which in itself could be a catalyst for shares of Polestar to move into a new up-leg. What would change my mind about Polestar is if the EV company were to report a dramatic decline in Polestar 2 deliveries or delayed the market introduction of the Polestar 3 SUV.

Final thoughts

Because of the progress Polestar has made in the last twelve months regarding production and top line growth, I believe the EV company has significant turnaround potential in 2023. The company is projecting 60% year over year delivery growth as the company benefits from strong demand for the Polestar 2 sedan and the EV company could be on track to profitability as soon as in 2024. Although Polestar’s shares are not totally cheap, I believe the risk profile is skewed to the upside for investors that seek longer term exposure to the EV industry!