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The Valuation of Gores Guggenheim Is High Given Polestar’s Weaknesses


Gores Guggenheim (NASDAQ:GGPI) is a special purpose acquisition company (SPAC) that has agreed to merge with Swedish electric-vehicle (EV) maker Polestar. The latter company has some key strengths, but also a number of important weaknesses. As a result, GGPI stock appears to be a risky investment at this point.

A close up of a Polestar vehicle in front of a company sign.

Source: Jeppe Gustafsson / Shutterstock.com

Among Polestar’s strengths are its European location and its support from two major automakers, as well as the help of Alec Gores. Another positive trait of Polestar is the fact that it’s already producing EVs and generating revenue.

Polestar’s weaknesses include the very tough competition that it is facing, the mixed reviews for its upcoming EVs and the high valuation of GGPI stock.

The Strengths of GGPI Stock

In general, Europe is significantly ahead of the U.S. when it comes to adopting electric vehicles. Earlier this year, CNBC reported that:

“Electrics, including hybrids and pure battery electric vehicles, made up just 2.3% of new vehicle sales in the U.S. in 2020. Meanwhile, 10% of new vehicle sales in Europe were electrics, and 6% were electrics in China.”

As a result, Polestar’s headquarters in Sweden — which may allow it to better understand the needs and desires of European car buyers — is an advantage for the automaker.

Additionally, Europe, which has been home to iconic car companies like BMW (OTCMKTS:BMWYY), Volkswagen (OTCMKTS:VWAGY) and its luxury brands like Porsche, arguably has a much better automobile tradition than the U.S. or China. Since Polestar is based in Sweden, that strong tradition will help both its brand and its auto development efforts.

Polestar is reportedly a joint venture between Volvo and its owner, Geely (OTCMKTS:GELYF). As a result, it has access to the factories, cash, brainpower, supply chain and research and development (R&D) capabilities of those two large, well-established automakers.

Consequently, Polestar should be able to ramp up production much more quickly and easily than other EV start-ups. Plus, the automaker is less likely to run into serious problems than its counterparts.

Indeed, Polestar anticipates that it will manufacture 29,000 EVs this year and generate $1.6 billion of revenue. In 2022, it expects to double its sales to $3.2 billion. So when it comes to actual sales, the company is meaningfully ahead of start-ups that have generated little or no revenue.

Further, InvestorPlace columnist Will Ashworth recently pointed out that Alec Gores’ Gores Group, which owns Gores Guggenheim, has a very good track record when it comes to choosing merger partners for its SPACs.

Polestar’s Weaknesses

On the other hand, Polestar has significant weaknesses that make GGPI stock quite risky.

Like most EV makers that are targeting the consumer market, Polestar is facing tremendous competition. Tesla (NASDAQ:TSLA), General Motors (NYSE:GM) and Ford (NYSE:F) are just some of the automakers that, like Polestar, are looking to sell high-end EVs to consumers.

Secondly, the two reviews of Polestar’s upcoming EV that I found were mixed. Car and Driver gave the Polestar 2, due out next year, 8.5 out of 10 stars. More problematically, the publication cited the EV’s drawbacks as its “indecipherable exterior design, the Performance pack’s manually adjustable dampers [and] Tesla Model 3’s longer range.”

Car and Driver did praise the vehicle’s “Agile handling characteristics, upscale cabin environment, user-friendly infotainment system.” Overall, however, it says the Polestar 2 “has a handsome cabin and intuitive tech, but its average range doesn’t fully rectify its odd bodywork.”

BBC’s Top Gear gave the EV a slightly lower score of eight stars out of 10. But actually, its review seemed more positive than that of Car and Driver. According to the website, Polestar 2 is “One of the most complete electric cars money can buy. [It has] superb build quality, and [is] decent to drive ”

TopGear, however, was not impressed with the enhanced shock absorbers, brakes or wheels included in the EV’s Performance Pack, which costs an extra 5,000 GBP.

Moreover, I’m not sure if “decent to drive” will generate the amount of vehicle sales needed to boost GGPI stock — especially given the tough competition that Polestar faces and its shares’ elevated valuation.

The Bottom Line on GGPI Stock

Speaking of valuation, InvestorPlace contributor Mark R. Hake says that, as of Dec. 7, GGPI stock had an enterprise value of $24.14 billion. Based on the company’s 2022 sales estimate of $3.2 billion, that puts its forward price-to-sales ratio slightly below eight times.

It’s true that, as Hake says, Nio’s (NYSE:NIO) valuation is comparable to that of GGPI stock. And for that matter, Rivian’s (NASDAQ:RIVN) valuation is much higher. But Nio seems extremely well-positioned in the huge Chinese EV market. And Rivian has a large deal with Amazon (NASDAQ:AMZN) and is in the less-competitive commercial EV market as well as the luxury consumer EV sector.

Polestar’s weaknesses largely offset its strength, in my view, while Gore Guggenheim’s valuation is quite elevated. Given these points, I’d avoid GGPI stock for now.

On the date of publication, Larry Ramer held a long position in XPEV stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015.  Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer. 

Article printed from InvestorPlace Media, https://investorplace.com/2021/12/the-valuation-of-ggpi-stock-is-high-given-polestars-weaknesses/.

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