Investors in upstart electric vehicle (EV) company Faraday Future (NASDAQ:FFIE) have certainly seen a wild day of trading. Shares of FFIE stock sunk as much as 15% intraday on a couple of key announcements. However, as of this writing, shares are now down only about 3.5% as investors digest the news.
The first key announcement made by the company actually took place on Monday. Specifically, Faraday announced plans to finance its future growth via equity raises tied to its reverse stock split. This sunk shares of FFIE stock on Monday and shares have continued to sell off as investors digest the extent of these issuances.
In a Form S-3 filed with the U.S. Securities and Exchange Commission (SEC) on Monday, the company outlined plans to sell 1.03 million shares of common stock tied to a private placement dated May 8. Additionally, the company reserved the right to issue more than 16.1 million shares of stock tied to its previous convertible notes, which also involved some warrants.
On top of this key financing announcement this week, Faraday Future also provided a corporate update via a Form 8-K. In the filing, the company put forward a press release dated Aug. 29 that outlines a “Delivery Co-Creation Day” for those that take possession of a vehicle in September, as well as a series of events intended to create value for buyers of the company’s FF 91 electric vehicles.
Let’s dive into what investors may want to make of this news.
FFIE Stock Sinks Again on Key Worries
Like other early-stage EV companies, Faraday Future remains highly unprofitable. The company’s upcoming events tied to its FF 91 EV certainly should build interest around its offerings. However, investors appear to be increasingly focused on profitability within this sector, leading many of them to look past Faraday Future and other early-stage companies toward more profitable names amid the current environment.
Indeed, vehicle manufacturing is a capital-intensive game. And with financing costs on the rise, thanks to the Federal Reserve’s interest rate hiking program, companies like Faraday Future have few decent options to choose from. Issuing stock dilutes existing shareholders and can come with a higher cost of capital than borrowing money in debt markets. Additionally, convertible debt offerings, such as the ones put forward by Faraday in the past, can be a drag on the company’s cash flow in the near term (debt component) while giving away some of the upside tied to the company’s potential future valuation (equity component).
In this market, there aren’t really many decent financing options for companies like Faraday. Thus, this week’s news tied to the company’s move to issue shares has rightfully scared off some investors. While shares of FFIE stock have recovered today, this is a stock I think investors need to be careful with right now.
On the date of publication, Chris MacDonald did not hold (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.
