It’s been over a month since the electric SUV startup announced that it was merging with Spartan Energy Acquisition Corp. (NASDAQ:SPAQ) in a deal valued at $2.9 billion. Fisker plans to build its business by doing the opposite of Tesla (NASDAQ:TSLA). Investors ought to be asking themselves if that’s good or bad for SPAQ stock.
Here’s my take on both sides of the argument.
To help make my argument for and against Fisker’s outsourcing plan, I’ll lean heavily on Wards Auto contributor John McElroy, whose understanding of the automotive industry far exceeds mine.
McElroy recently discussed the pros and cons of vertically integrating your automotive operations.
“Fisker, meanwhile, is taking his EV startup in a different direction. He’s outsourcing almost everything. This is going to save him an enormous amount of time and money because he doesn’t have to buy any manufacturing equipment or build any factories. Suppliers are going to do everything for him, including final assembly,” McElroy wrote on Aug. 21.
“All Fisker has to do is set the specs, do the design and control the customer experience. Everything else can be outsourced.”
A Closer Look at SPAQ Stock
As McElroy discusses, Elon Musk followed the Henry Ford playbook when building Tesla. While the company’s grown to become the world’s most valuable car manufacturer, it hasn’t come without a whole lot of hand-wringing and cash flow crunches.
It isn’t cheap building a car company virtually from scratch. Fisker should know. He’s already gone bankrupt once in November 2013 when Fisker Automotive entered Chapter 11 after failing to appeal to car buyers and car critics alike.
But not before burning through $1.4 billion in funds from public and private sources.
McElroy finished his article by arguing that if you want to be successful in the automotive industry, you’ve got to do something different. Utilizing outsourcing, Fisker is leaning on suppliers (Magna) and existing manufacturers (Volkswagen) to get the job done.
Time will tell if Fisker is up to the challenge. However, the asset-light business model should enable the company to stretch the more than $1 billion in funding it will have at its disposal as it gears up a production start of all-electric Fisker Ocean SUV in 2022.
For these reasons, the asset-light business model ought to be good for SPAQ stock.
Vertical Integration and SPAQ Stock
On the flip side, vertical integration means higher margins and greater control delivering the ultimate product. While McElroy makes a good case of why the big automotive suppliers know their products and industry inside and out, vertically integrating allows you to keep a tight lid on future development plans.
By keeping things in-house, not only do you maintain radio silence on your intellectual property, you keep a lid on supplier costs, quality control over the design and manufacture of the vehicle’s components while providing employees with an ongoing education improving the product and the process.
As McElroy explains, most automotive manufacturers, including Volkswagen, use a combination of vertical integration and outsourcing, keeping final assembly, powertrain production, and other vital pieces of the manufacturing puzzle in-house, while jobbing out everything else.
Ultimately, it’s going to be hard for Fisker to make money if it outsources 100% of the steps necessary to produce a mass-appeal vehicle. The margins won’t be good enough.
For this reason, outsourcing could be bad for SPAQ stock over the long haul.
The Bottom Line
Currently trading just under $14, SPAQ stock is 40% higher than its August 2018 IPO price.
Is Fisker’s anti-Tesla plan worth betting on? I honestly couldn’t tell you.
What I do know is that there are going to be more electric vehicle successes in the years ahead, which means the likelihood of success betting on the 2020 version of Fisker has far better odds than the 2013 version.
My InvestorPlace colleague, Mark Hake, made the case recently that SPAQ stock “could easily double or triple by 2023” should Fisker hit its estimated 2023 sales of $3.3 billion.
Based on its potential, I would say that if you’re a speculative investor, betting some of your fun money on the Fisker Ocean shouldn’t be an issue.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.