Fisker (NYSE:FSR) stock spiked following the company’s May 13 announcement that it had signed framework agreements for Project PEAR with Foxconn.
The market clearly received the news with open arms, and share prices spiked by 14.57% between May 12 and 14. Then they fell right back off. Investors seemed to be far more interested in the solid first-quarter earnings Fisker posted on May 17.
This makes a lot of sense from where I’m sitting. But that doesn’t matter, because the important thing here is that the Foxconn news raises red flags.
The first issue is based on FSR stock’s price chart movement. What happened on May 13 looks like a classic example of “sell the news.” Traders understood the market would react positively to the news and sold FSR stock immediately after it was announced.
That also means the market didn’t find the Foxconn announcement to be substantive. If they believed the news was beneficial to Fisker, they would’ve held on.
I don’t think the Foxconn news bodes well for FSR stock, and I don’t think other investors should either.
FSR Stock Worries Confirmed
Wisconsin has long been rumored as a U.S. manufacturing site for Foxconn’s production of Fisker’s second vehicle. The entire project was mired in controversy and skepticism within the state. Wisconsin officials remained hopeful that the planned investment worth $10 billion and 13,000 new jobs would become reality.
That promise was made back in June 2018. Since then, there was speculation that several products would be manufactured in the Wisconsin plant. Electric vehicles (EVs) were rumored when an earlier manufacturing agreement was announced between Fisker and Foxconn.
In late April, Foxconn essentially abandoned the Wisconsin project, scaling down to $672 million in investment and 1,454 jobs created. This is a far cry from their original plan.
The latest announcement touted that manufacturing would begin in the U.S., with several sites under consideration. I wouldn’t expect investors to scramble for FSR stock given what happened in Wisconsin.
What is Fisker’s Strategy?
Fisker’s first EV, the Ocean, will be manufactured by Magna International (NYSE:MGA) in Europe. It makes a lot of sense to outsource production to a well-established company like Magna. It should lead to a much higher-quality vehicle than what Fisker could manufacture themselves. The decision made many investors feel bullish on FSR stock, myself included.
With that in mind, relying on Foxconn to build your EV platform doesn’t seem logical. In the press release, Foxconn Technology Group Chairman Young-way Liu pointed to “world-class supply chains in place to support Project PEAR – in particular, securing the reliable delivery of chipsets and semiconductors.”
Semiconductor concerns may be pressing now, but they’ll probably be less of a problem when PEAR production begins in late 2023. The real issue is building a platform for an EV. That’s no small undertaking.
There’s reason to be bullish about the Ocean, but bearish on the PEAR.
The shift in manufacturing strategy raises the question of what prompted it in the first place. It seems unlikely that there’s a quality issue at hand with the Ocean. Again, Magna is well respected and acts as an outsourced manufacturer to world-class automobile brands.
That implies that Fisker views cost or profitability as problematic. Therefore, they’ve enlisted Foxconn to help them.
The Foxconn Agreement Isn’t Good News for FSR Stock
I was starting to believe that FSR stock made sense as a buy, but I no longer do. I still think the Ocean has a great chance to be a solid EV entrant from the company. But I can definitely imagine this decision to manufacture Fisker’s second vehicle with Foxconn turning out badly.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.
