Fisker (NYSE:FSR) stock has officially arrived. The merger of the electric vehicle manufacturer and Spartan Energy Acquisition closed last week.
Investors seemed to like the news: FSR stock closed up 13% on Friday — its first full day of trading. But it’s not clear that the merger itself was the cause.
For one, what was formerly SPAQ stock had been plummeting. It had failed to rally in 10 of the 11 trading sessions before Friday’s bounce. Over that stretch, Fisker stock dropped 37%. And so Friday’s gains may well have been something of a “relief rally.”
More importantly, the merger doesn’t change all that much for the stock. Spartan Energy was a so-called SPAC, or a special purpose acquisition company. Its sole purpose was to bring a private company to the public markets. Once Fisker was chosen as a target, the merger closing was all but a certainty, particularly with SPAQ stock trading above $10 at the time of the shareholder vote. (Shareholders could have chosen to redeem their shares for $10 a share plus interest.)
That mechanical issue also gets to the broader concern with Fisker stock going forward: I’m not convinced all that much has changed. There’s an intriguing case, certainly, but SPAQ/FSR has ridden the coattails of a broader rally in EV stocks. At some point, the company needs to deliver on its own, and it hasn’t yet proven it can do so.
Not the First Rodeo
It’s worth remembering that this is the second incarnation of an EV manufacturer led by well-regarded auto designer Henrik Fisker. Fisker Automotive developed the Karma at the beginning of the last decade. By 2013, it was bankrupt.
To be fair, the stories are not necessarily the same. Fisker Automotive took a big hit when its battery supplier, A123 Systems, went bankrupt in 2012. And Fisker Inc. (the official title of the new company) has plenty of cash. With the merger closed and redemptions minimal, the company expects to have over $1 billion in cash on the balance sheet.
But history offers a lesson. Automotive manufacturing is not easy. Competition will be intense, with established ICE (internal combustion engine) manufacturers developing their own electric fleets, and electric-only rivals beating Fisker to the punch.
Notably, automotive manufacturing is capital-intensive as well. Fisker’s own business plan suggests that nearly $800 million of that cash will be used up before the start of production.
This is not to say that Fisker Inc. is doomed to the same ignominious end as Fisker Automotive. Rather, it’s simply to suggest some caution. Fisker’s own plan suggests little room for error from a capital standpoint, which could in turn drive additional shareholder dilution down the line. The base model SUV is expected to sell for about $40,000, but Fisker only expects gross profit of about $2,000.
That’s the definition of thin margins. And it, too, suggests some reason for caution.
The Case for FSR Stock
To be fair, FSR stock is somewhat intriguing. I’m as big a bull on electric vehicles as anyone: I believe EVs are one of the megatrends that will define this decade.
Fisker may be able to find a niche. The cars admittedly are beautiful. A market capitalization around $3 billion (based on an expected 294 million shares outstanding post-merger) is perhaps not that onerous. It’s not as if the market is pricing FSR stock as a market leader.
But it bears repeating: the risks are real. And the decline in the stock before Friday’s rally is worth noting as well. At a time when larger EV stocks are still doing reasonably well, investors sold off Fisker shares at a rapid pace.
It’s possible those investors are swapping into other EV names — and I can’t say I blame them. Particularly with the SPAC boom, investors have more choices in the sector than ever. That includes not just manufacturers across geographies and end markets, but suppliers as well.
I’m a long way from believing that FSR stock is the best of the group. Intriguing? Perhaps. But compelling? Not quite. And given the risks and the long runway to production, let alone profitability, I think investors can leave Fisker stock be for now.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.