I believe that Spartan Energy Acquisition (NYSE:SPAQ) can potentially join the bull-run for EV stocks. If one business headwind is navigated, SPAQ stock can really run.
The novel coronavirus pandemic has impacted automobile sales globally. However, the manufacturers of electric vehicles have surged higher during the year.
As an overview, Spartan Energy Acquisition is a special purpose acquisition company. Frisker got listed through a reverse merger with Spartan Energy. The former is involved in the development of eco-friendly electric vehicles.
The first factor to be bullish on the SPAC is industry tailwinds. Its expected that the number of electric vehicles sold between last year and FY2030 will grow at a CAGR of 21.1%. For any company that can make inroads in key markets, earnings growth can be stellar in the coming decade.
Positive Business Triggers
Frisker is positioning itself as the world’s first digital car company providing an affordable electric SUV. The company’s first EV model, Frisker Ocean, is expected to hit the roads by the fourth quarter of 2022.
The initial response in terms of pre-orders seems to be encouraging. As of June 2020, the company had 25,000 soft orders from 118 countries. This provides a revenue visibility of $1.3 billion. With 24 months to launch, the response provides a strong reason to be optimistic.
In terms of revenue guidance, the company expects to clock a turnover of $0.6 billion in FY2022 with revenue expected to surge to $13.2 billion by FY2025. In my view, this might be very optimistic. Given the stock price movement, the markets are certainly not discounting this optimism.
However, an important point to note is that Frisker is pursuing an asset light strategy. The company believes that the automobile production industry has an overcapacity of 20%. The idea is to use this capacity, then invest in another manufacturing facility.
Therefore, if vehicle sales growth gain traction beyond FY2022, it might not be long before the company turns free cash flow positive.
From a financing perspective, Spartan Energy Acquisition SPAC has been sponsored by an affiliate of Apollo Global Management (NYSE:APO). Apollo Global provides the SPAC with a strong financial backing.
The Key Headwinds for Frisker
There are two factors that would make me cautiously optimistic on the SPAQ stock.
- Frisker has been looking to power its electric vehicles with Volkswagen’s (OTCMKTS:VWAGY) modular EV platform. However, in July 2020, the company reported that it has failed to reach a “cornerstone agreement” with Volkswagen. The company expected to renew discussions in September 2020. There is still no positive update. Frisker is also in discussion with other OEMs and suppliers. Eventually, its likely that the company will reach a deal. The risk here is that the potential time-line for the first model launch will be delayed. This will impact the company’s growth plans.
- A report by McKinsey indicates that automakers launched 143 new electric vehicles last year. Companies further plan to introduce 450 new models by FY2022. Even with a robust industry growth outlook, the EV space is getting intensely competitive. From an investment perspective, it does not make sense to have several EV stocks in the portfolio. If I had to choose, I would go for TSLA stock or NIO stock. These companies have already established brand reputation and market presence.
Concluding Views on SPAQ Stock
Frisker is still two years away from launching its first model. During this period, the potential collaboration for modular EV platform with Volkswagen is the single biggest stock upside trigger. In addition, I expect SPAQ stock to trend higher if pre-orders for the initial model remains robust.
Overall, SPAQ stock would not be in my list of “buy and hold” stocks. However, with the markets waiting for one catalyst (Volkswagen deal), it makes sense to consider some exposure for the medium-term.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.