Dilution Is an Issue for Fisker Stock Moving Forward

To say the least, it has been challenging to stay the course as an investor in electric vehicle start-up Fisker (NYSE:FSR). Over the past 12 months, FSR stock has chopped around but ultimately gone nowhere.

Mobile phone with company logo of US electric vehicle manufacturer Fisker Inc. on screen in front of webpage

Source: T. Schneider / Shutterstock.com

Ideally, a Fisker shareholder should have a strong vision for the company’s future, plus a good measure of faith. After all, this company still isn’t profitable.

On the other hand, a prominent Wall Street analyst set a high price target on FSR stock. That, along with Fisker’s smaller-than-expected earnings loss, could give the shareholders a nice shot in the arm.

But then, the company is raising debt and this has both advantages and drawbacks. As a result, a cautionary stance is likely warranted as Fisker and its investors may have to deal with unwanted consequences.

FSR Stock at a Glance

Over the past year, FSR stock has gone from $14 and change to, well, $14 and change. So, at least there hasn’t been a capital loss, but a lot of time has been wasted.

Here’s the most frustrating part. Along the way, traders sent the Fisker share price to nearly $32 in February 2021. There was also a quick pop to $20 in June.

It’s difficult to determine exactly why the bulls keep getting rejected. Perhaps it’s because electric vehicle mania in the markets has subsided somewhat.

Or maybe, it’s because the investors want to see more evidence that Fisker will be profitable soon.

As of Aug. 25, FSR stock was slightly above $14 and Fisker’s trailing 12-month earnings per share was -$1.55.

Hence, it’s understandable if the investors want to see Fisker swing to profitability sooner rather than later.

Ramping Efficaciously

Fisker’s second-quarter 2021 earnings probably won’t knock anybody’s socks off, but at least they were better than what the experts were anticipating.

Wall Street was bracing for Fisker to post an earnings loss of 24 cents per share. The actual result was a loss of 16 cents per share.

And, as you might have expected, Fisker didn’t report any quarterly sales.

Fisker did have a fairly healthy cash balance of $962 million as of June 30. So, at least there’s that.

Raymond James analyst Pavel Molchanov gave a ho-hum response, calling the quarter uneventful. Molchanov offered a “hold” rating on FSR stock, and didn’t bother to set a price target.

In contrast, Morgan Stanley analyst Adam Jonas gave Fisker an “overweight” rating (similar to a “buy” rating) along with a lofty $40 price target.

Apparently, Jones anticipates a timely vehicle production start.

“We believe FSR may be one of the only EV-related startups to actually launch on time and ramp efficaciously in late 2022,” the Morgan Stanley analyst explained.

A Double-Edged Sword

Jonas’s optimistic outlook may have given Fisker’s stakeholders hope for a brighter future. However, before you take a long position in the shares, you should be aware of Fisker’s recent debt-raising activity.

Reportedly, the automaker enacted an offering of $600 million worth of green convertible notes. As the company states, these are “Green Convertible Senior Notes due 2026,” available only to qualified institutional buyers.

This might sound all fine and good, at first glance. Fisker could certainly benefit from a $600 million capital infusion, right?

Yet, raising debt can be a double-edged sword. Here’s the part that might concern the shareholders:

“The notes will be convertible under certain circumstances into cash, shares of Fisker’s Class A common stock … or a combination thereof, at Fisker’s election.”

The potential conversion of those debt notes into shares of FSR stock raises the issue of dilution.

It’s not necessarily a problem right now, but could put negative pressure on the share price at some point.

Still, at least the stakeholders can appreciate Fisker’s favorable capital position, and the possibility that the company will start producing vehicles on time.

The Takeaway

Admittedly, FSR stock isn’t right for every investor.

You’ll probably need to have a great deal of faith in the company, plus a strong tolerance for risk. Above all else, it will be helpful to have patience as the stock might continue to go nowhere for a while.

As long as you’re fully aware of the pros and cons of owning FSR stock, it may be worthwhile to hold a few shares in your account, wait a while, and hope for the best.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (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.

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