Polestar Stock: Cash Secured, $8 Price Target (NASDAQ:PSNY)

After highlighting a major need for cash in October for EV startup Polestar (NASDAQ:PSNY), that funding has been secured, with Polestar receiving $1.6 billion in funding commitments from its two major shareholders Volvo and PSD Investment. The funding takes Polestar’s cash on hand to over $2 billion moving into 2023, giving the startup more than enough to scale up the 3 in 2023 and 2024 and build out the 4 in 2024. Initial projections for 80,000 vehicle deliveries in 2023 for revenues of ~$4.3 billion lead to an $8 price target for 2023, about a 40% gain from the current share price in the mid $5.70 range.

2022 Delivery Ramp Exceeds Expectations

Polestar targeted a very strong Q4, aiming for deliveries near or in excess of 20,000 vehicles in order to reach an annual target of 50,000 units. Breaking this down – Polestar aimed to deliver around 40% or more of its annual volumes in just the fourth quarter, suggesting that this is most likely a one-time bump to deliveries as logistics issues ease; Polestar had already said that a “majority of Polestar 2 cars set for delivery in Q4 are ready.”

And Polestar in fact has exceeded expectations for deliveries in Q4 and for 2022. Polestar reported that it delivered approximately 21,000 vehicles during Q3, taking 2022’s total up to around 51,500 vehicles, about 3% ahead of its targeted 50,000 unit volume. This strength in Q4 while peers such as Rivian (RIVN) failed to meet targets demonstrates solid and strong demand for Polestar’s vehicles, leading to a high forecast for 2023.

As previously reported, Polestar targeted delivery volumes to more than double q/q in Q4, essentially moving from a 3,000 to 3,500 monthly run rate to a 7,500 to 8,500 monthly run rate by December (as shown above). This pace of growth does not seem sustainable in the short term, as Polestar currently is only relying on the 2 until the launch of the 3 in mid-year 2023. As such, deliveries are expected to dip back towards to 5k/month in Q1 before scaling back up to the 7.5k to 8.5k/month rate by Q4.

For FY22, Polestar had initially expected to generate $2.4 billion in revenues, signaling about $920 million or more in revenues in Q4. At a similar ASP to Q3 around $47,250, Q4 deliveries of 19,470 are required to reach that $2.4 billion target. However, given the fact that Polestar delivered about 21,000 vehicles in Q4, revenues are projected to come in just shy of $1 billion, bringing full year revenues to $2.48 billion.

2023 Projections

For 2023, Polestar is likely to continue battling COVID-19 related impacts to production in China, similar to what it witnessed in the latter half of 2022 – Polestar noted that it “lost approximately eight weeks of production” at Luqiao during the nine-month period ending in Q3. That’s a significant adverse impact to production and one that threatens to weigh on deliveries in 2023 as COVID-19 cases continue to tick up in China, impacting manufacturing and operations at major ports.

Polestar confirmed that it is targeting 2023 volumes of 80,000 vehicles, or about 55% growth y/y from 2022’s 51.5k unit volumes. For one vehicle model with a mid-year launch and second half ramp up for a second model, 80,000 vehicles in 2023 is a strong target for Polestar, one that paves the way for 120k vehicles in 2024.

For 2023, a delivery setback is expected in Q1 due to some seasonality trends as well as adverse impacts from logistics headwinds in China, before growth resumes in Q3 and Q4 of this year. A delivery runway of 14k vehicles (4.3k per month) in Q1, rising to 26k to 27k (8.5k to 9k per month) in Q4 is a potential trajectory for the year, as the 3 is expected to scale up in Q4.

With a tentative ASP forecast for growth to $48,500 for the 2, and $97,000 for the 3, revenues are projected to come in around $4.35 billion for FY22 on deliveries of 81.5k vehicles, on a product mix heavily reliant on the 2. This forecast assumes about 90% of 2023’s projected volumes come from the 2, given the Q4 launch of the 3.

Financials In Focus

Unlike other startup OEMs, Polestar benefits off of an asset-light model, utilizing Volvo (OTCPK:VOLAF) and Geely’s (OTCPK:GELYF) factories to establish production volume instead of spending heavily to build out its own capacity. While this does have certain disadvantages – such as geopolitical risk from having four manufacturing facilities in China – Polestar’s financials are in much better shape than that of other rivals such as Lucid (LCID) or Rivian.

Even at a scale of 9k vehicles per quarter in Q3 ’22, Polestar operated with a 0.9% gross margin – razor-thin, but still positive; compare this to Rivian, which delivered 6.6k vehicles in Q3 but operated with a (171%) gross margin.

For the nine-month period ending in Q3, Polestar’s gross margin sat at 3.9%, still quite thin but for a company of its scale, a solid margin nonetheless. Lucid operated at a (194%) gross margin for the same period, Rivian at (213%) with impacts from lower of cost or net realizable value charges.

So what we see here is that even at a small scale of deliveries – 3k per month – Polestar is earning gross profit, which not many other startups can claim. Losses are also shrinking, putting Polestar on an accelerated path to profitability unless R&D expenses jump with the launch of the 4 and 5 in 2024 and 2025. In Q3, operating losses shrunk by nearly $100 million as revenues doubled; for Q4, assuming a 2% to 3% gross margin and operating expenses of around $250 million, Polestar is on track to lose $220 million in Q4.

For 2023, gross margin is projected to hover around 3.5% for the full year, given the expected decline in deliveries in the first quarter and a strong Q4, along with easing semiconductor and logistics challenges. With operating expenses around $900 million for the year, accounting for a 20% jump due to costs associated with developing and producing a new model, Polestar is forecast to lose about $750 million, or ($0.36) per share. Should this be the case, Polestar could break into profitability by late 2024, ahead of estimates.

$8 Price Target – 40% Upside

For 2023, we are attaching an $8 price target to Polestar, based on the following assumptions:

• 58% growth in volumes to 81.5k vehicles, slightly above Polestar’s internal target of 80k units
• 75% revenue growth to $4.35 billion from an estimated $2.46 billion in revenues in 2022
• net losses shrinking to ($0.36) per share for FY23, putting Polestar on a quicker path to profitability by late FY24/early FY25
• positive EBITDA in mid-FY24; 17x FY25 EBITDA of $1.1 billion with gross margin expanding to 12% to 14% on projected FY25 revenues of $11.6 billion
• projected FY25 net margin of 6% and EPS of $0.33, or ~24x FY25 earnings

Although some of the valuation metrics in the $8 forecast, startup peers such as Rivian and Lucid trade at much higher FY25 EV/EBITDA multiples, with Rivian expected to still post negative EBITDA and Lucid projected at a 29.8x multiple. Expected profitability is also a strong point, with FY25 profitability boosted by projected 55% revenue growth during that year.

While the EV sector has struggled recently, dragged lower by Tesla’s (TSLA) year-end slump and fears that EV production will overshoot demand in 2023, leading to oversupply, Polestar’s financial positioning, decent margins for its scale, projected ramp-up to over 80k vehicles, and confidence in a visible path to profitability relatively quickly support this bullish view.