From what many of my InvestorPlace colleagues are saying, Gores Guggenheim (NASDAQ:GGPI) stock represents an excellent long-term investment.
I’m not sure if anyone is saying that you must buy GGPI stock right this moment. However, the key theme appears to be valuation, valuation, valuation. So then, why is the fundamentally discounted GGPI absorbing massive body blows?
As with 99% of my articles, let me start with the obvious in a cynical ploy to get you to read more about what I really think is going on with GGPI stock. First, the Omicron variant of the novel coronavirus is rippling through seemingly everything, particularly risk-on assets like technology firms and cryptocurrencies.
Now, don’t shoot the messenger. I’m not saying that this is the beginning of the apocalypse. However, the Wall Street Journal stated that initial indicators suggest that Omicron can spread among vaccinated people. While symptoms appear to be mild, the implications of a possibly vaccine-resistant strain has health experts and the markets worried. So, I’m not shocked that GGPI stock printed red ink.
Second, Omicron raises the prospect of reduced economic activity. If so, more people may decide to stay at home. And if one doctor’s assessment comes true, that the variant could “dominate and overwhelm” the world in three to six months, then that staycation could be extended. Obviously, this would not bode well for GGPI stock and the underlying electric vehicles.
As you’ve probably heard by now, Gores Guggenheim, a special purpose acquisition company, intends to merge with Polestar, a Swedish EV manufacturer. It’s an awkward timing. Yes, EVs are all the rage but the Covid-19 pandemic is now rearing its ugly head again.
Still, my colleagues point to the valuation proposition of Polestar. Compared to its rivals, its shares are cheap.
GGPI Stock and the Low-Margin Microcontroller
InvestorPlace markets analyst Joanna Makris laid down the hard numbers bolstering the bullish thesis for GGPI stock. You should read the article to get the true flavor of her arguments. But to summarize the main point, Polestar’s rivals seem overpriced.
Makris wrote, “Polestar’s implied valuation represents a price-to-sales multiple of 3x estimated 2023 sales and 1.5x estimated 2024 sales.” But then Tesla (NASDAQ:TSLA), Lucid (NASDAQ:LCID), Nio (NYSE:NIO) and Xpeng (NYSE:XPEV) “trade at multiples of between 4x and 11x 2023 sales. Unlike the Titanic, GGPI stock looks more likely to go up than down.”
Another fellow contributor, Will Ashworth, reiterated the point. “Polestar sells 29x as many vehicles in 2021 while generating 23x as much revenue, yet it’s valued at 1%” of the $102 billion market capitalization of Rivian Automotive (NASDAQ:RIVN).
Yet GGPI stock keeps getting cheaper, shedding nearly 10% over the trailing five days since Dec. 3. What gives? In short, microcontrollers.
Ashworth noted that supply chain woes regarding chip shortages (among other components) have made prospective investors jittery. It sounds like an obvious counterargument and it is because we’ve been talking about it for so long.
However, the discussion usually centers on the “what” of the chip problem and not on the technical “why” of the crisis as it specifically relates to automobiles. You see, when automakers initially canceled their orders for automotive-specific chips, the semiconductor firms cynically couldn’t be happier. That’s because the auto industry spends about $40 billion a year on chips, which sounds like a lot but that’s only about a tenth of the global market.
Apple (NASDAQ:AAPL) spends more on chips just to make iPhones. Before you say that EVs use less parts than combustion cars, keep in mind that all vehicles have drivetrains. And modern drivetrains require microcontrollers.
The Luxury Whammy
McKinsey & Company noted that the rise of hybrid and full EVs may lead to the biggest expansion of chip usage (particularly microcontrollers) in cars over the next decade. What’s more, luxury vehicles will account for the largest consumption of chips, which isn’t surprising.
But then, if you’re bullish on GGPI stock, this is another headwind to consider. While the Polestar 2 is a reasonably priced EV (relatively speaking), the Polestar 1 is not, at an MSRP of $155,000. While the 2 is a bit under $40,000, that’s still an expensive vehicle for many households.
So, the problem with Polestar is that it requires a larger haul of these chips, but the semiconductors don’t want to provide them. Why should they? Yes, the automotive industry will expand its orders. But since microcontrollers and auto-specific chips are low-margin products, semiconductors must work harder, use more material for less profit.
In the meantime, you have retail revenge causing a boon in high-profit-margin consumer electronic goods. So Polestar (and other automakers) will probably have to make it worthwhile for semis to prioritize them. That’s going to hurt an EV sector already burdened with the reputation of running operations in the red for many, many years.
On the date of publication, Josh Enomoto 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.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.