The last time I wrote about Spartan Energy (NYSE:SPAQ), its stock was trading close to $17. Over the last week of trading, Spartan shares have fallen by 19% through Sept. 25.
At $17, I thought they were a fun buy for speculative investors. With nothing but good news in the past month, I don’t see why speculators wouldn’t be jumping on Spartan at prices below $14. Once it merges with automotive startup Fisker Inc., I suspect it won’t take long to get to $20.
Perhaps the Nikola (NASDAQ:NKLA) scandal has scared away buyers in the near term, but long term, the two stories have very little to do with each other. Henrik Fisker is on his second automotive startup. Every mistake he made the first time will be helpful to his success a second time.
And you have to love the look of the Fisker Ocean, its five-seat crossover.
As the headline states, if you’re a speculative investor and can afford to lose your entire investment, I think betting on Henrik Fisker’s dream isn’t the worst idea in the world. Now, if you’re saving for little Billy’s college education, it’s a terrible idea.
Here’s why.
SPAQ Stock Cash Per Share
As my InvestorPlace colleague, Mark Hake, stated in early September, with $1 billion in cash behind Fisker due to the merger, its stock will be incredibly undervalued.
“Fisker will make an electric SUV in 2022. According to Barron’s, Fisker expects to make 225,000 electric SUVs a year by 2025. Including the $1 billion in capital raise, the deal will be at an enterprise value of $2.9 billion,” Hake wrote on Sept. 1.
“Moreover, on page 7 of the company’s slide presentation, the stock is going to be valued at 0.57 times estimated 2023 revenue of $3.3 billion. It also values SPAQ/Fisker at 4.3 times adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) of $441 million.”
Hake suggests that if everything goes as planned, Spartan Energy’s share price is worth $38.88, or almost three times its current value. That’s a conservative valuation. If you multiply its estimated 2023 revenue of $3.3 billion by Tesla’s (NASDAQ:TSLA) price-to-sales ratio of 15.1, you get a market capitalization of almost $50 billion, or 13% of Tesla’s market cap.
That’s a heck of a lot higher than Hake’s conservative valuation of $10.9 billion.
Will it happen by 2023? I suppose anything’s possible, but I doubt it.
Consider its current cash per share. Hake estimates 272.2 million shares are outstanding. That’s cash per share of $3.67. Spartan is currently trading at less than four times cash.
At the end of June, Tesla had cash and cash equivalents of $8.6 billion. Based on $186.4 million shares outstanding, that’s $46.14 a share. However, on Aug. 31, Tesla completed a 5-for-1 stock split. That means the cash per share figure drops to $9.23 (one-fifth) and a price-to-cash ratio of 44, or 10 times Spartan’s.
It’s important to note that Fisker will burn through a lot of cash as it gets closer to its 2022 production date. As a result, it will have to issue more debt and equity to keep the lights on until it can generate positive free cash flow just as Tesla does.
But it isn’t going to be easy.
The Bottom Line on Fisker’s Plans
In my August article about Spartan and Fisker, I highlighted some recent observations by veteran automotive journalist John McElroy. He pointed out that Fisker is outsourcing most of the manufacturing process, holding on to just the design and software aspects of its new vehicle development.
“We think of the future of automotive the way Apple thought of phones,” Fisker says. “Tim Cook isn’t walking the factory floor at Foxconn. We’re going to outsource the manufacturing. The OEMs haven’t perfected the electric car, but they’ve perfected manufacturing, so why not take advantage of that?”
Why not indeed.
Years ago, I dated a girl whose father was in the juice business. I’d show up at the plant and it would be doing a can run for some other juice producer. It was a way to maintain full capacity on the canning line.
Now, I’m not suggesting automotive manufacturing is nearly as flexible, but until electric vehicles become the norm rather than the exception, manufacturers such as Volkswagen (OTCMKTS:VWAGY) are going to have downtime for their electric assembly lines.
So, until the Volkswagen’s of the world don’t have available capacity, I suspect the Fisker’s of the world will be able to negotiate a manufacturing arrangement that suits both parties.
The closer Spartan’s share price gets to its IPO price of $10, the better the risk-to-reward proposition for speculative investors.
I see Spartan Energy as a long-term buy.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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.
