Gore Guggenheim (NASDAQ:GGPI) is an undervalued SPAC (special purpose acquisition company) planning to merge with electric vehiclemaker Polestar. I estimate that GGPI is worth at least 10% to 20% more, and possibly much more.
The SPAC merger deal was announced on Sept. 27, where GGPI SPAC agreed to merge with the Swedish private EV car maker Polestar. Moreover, Polestar put together a very good slide deck presentation available on their website.
How To Measure Gores Guggenheim SPAC
As it stands now, GGPI stock traded for $11.95 as of Dec. 3, 2021. This gives it a pro forma market capitalization of $25.397 billion.
This pro forma estimate is based on the company’s own estimate of 2.21253 billion total shares outstanding. This is from page 37 of the slide deck presentation. So, if we multiply GGPI stock’s price of $11.95 by 2.21253 billion shares, we get a pro format market cap of $25.397 billion.
But even though Polestar now has a “see-through,” pro-forma market cap of $25.4 billion, we can also estimate the company’s enterprise value (EV). The EV is what most analysts use as part of valuation metrics between different companies.
For example, page 37 of the slide deck shows that Polestar estimates that there will be about $1.253 billion in net cash on its balance sheet. The term “net” means that this is the amount of cash on its balance sheet after deducting all debt.
Therefore, the enterprise value (EV) can be seen as $25.397 billion minus the $1.253 billion in net cash. That works out to $24.144 billion. We can use that to measure against its forecast sales and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization).
Valuing GGPI SPAC
One of the most interesting things about Polestar is that it is already producing electric vehicles (EVs). In fact, based on page 33 of the company’s slide deck, the company expects to produce 29,000 EVs during 2021 and 65,000 by the end of 2022. Both of these years this will just be for its original model, the Polestar 2. By 2023, total production will be 124,000, which includes two more models.
Polestar also estimates on page 34 that its revenue will rise from $1.6 billion in 2021 to $3.2 billion in 2022. Then, with doubled production by 2023, revenue will rise to $6.7 billion in 2023.
Therefore, looking forward two years, the EV-to-forward sales (2023) metric works out to 3.6 times. This is seen by dividing $24.144 billion of 2023 sales by $6.7 billion in forecast 2023 revenue.
Comparing GGPI Stock With Nio
We can use this to compare with Nio (NYSE:NIO) and its forecast sales. For example, NIO has a market value of $57.58 billion, according to Seeking Alpha. In addition, based on its latest balance sheet, its net cash is $4.136 billion, giving it an EV of $53.445 billion.
Given that analysts forecast that its 2023 sales will hit $14.523 billion by 2023, its EV/Sales metric is 3.68 times (i.e., $53.445b/$14.523b).
So you can see that in comparing GGPI (Polestar) with Nio, GGPI stock is slightly cheaper. This is because its forward EV/Sales metric is 3.60 times vs. 3.68 times at Nio.
If we do the same measurement using the EV/EBITDA metric, GGPI stock (Polestar) is cheap as well. For example, on page 42 of the slide deck that Polestar expects to EBITDA profitable in 2023, and by 2024 it will have over $1.44 billion in adj. EBITDA profits.
This means that by its 2024 numbers, the EV/Adj. EBITDA ratio is just 16.8. It is obviously higher on a present value basis, but this is still cheap for a fast-growing electric vehicle company.
What To Do With GGPI Stock
The GGPI/Polestar SPAC merger probably won’t close until sometime in early to mid-2022. This will give the market plenty of time to scrub the details of the merger.
For example, before the deal closes it is likely we will find out how many sales and deliveries Polestar made in 2021. We can then compare that with the projected performance from the slide deck and see if the company is on track. In addition, hopefully, GGPI/Polestar will provide sales and adjusted EBITDA financials. We can then use that to value the stock more closely.
However, Polestar has one thing on its side. It is already in production and is not actually a startup operation. That means it deserves at least a 10% to 20% higher valuation than it presently has right now. That implies that GGPI should be trading at $13.15 to $14.34 per share.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) 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.