Polestar: Uphill Battle Continues (NASDAQ:PSNY)

The last couple of years have not been kind to investors in electric vehicle companies. Regardless of their business size, many stocks in this space have done poorly, as these companies have lost tons of money and burned through mountains of cash. Polestar Automotive Holding UK PLC (NASDAQ:PSNY) has been a great example, losing more than 90% of its value since it went public via a SPAC in 2022. Unfortunately for shareholders, even with the price near its recent all-time low, the situation here still remains rather shaky.

I’ve continued to be bearish:

When Polestar officially hit the market in 2022, I cautioned investors that the stock could go lower. Management was on record that it would need more capital to fund its long-term growth plan, and interest rates were on the rise. The company had already cut its delivery forecast for the year before the first half of 2022 was completed, and most EV companies were having trouble growing as fast as they had hoped.

Circle back to earlier this year, when I last covered the name, and things have certainly favored the bears. The balance sheet has gotten much worse over time, and delivery guidance has been cut over and over again. Rental car company Hertz (HTZ) is also taking a step back on its EV plan, potentially taking a big buyer of Polestar vehicles out of the market. Since that time in January, Polestar shares have lost nearly 15%, while the S&P 500 is up 7.5%.

The Q1 2024 delivery dropoff:

Last week, the company gave a business update to investors, one that was not met very positively. For the first quarter, Polestar delivered approximately 7,200 vehicles, including 1,200 units of the new Polestar 4 China. As the chart below shows, this marked the second consecutive quarter where vehicle deliveries were down roughly 40% over the prior year period, despite the launch of a new vehicle.

As in past years, management has said that 2024 deliveries would be weighted towards the back half of the year. The company stated that the new Polestar 3 has started its production in China, with additional production starting in the USA in the summer of 2024. The ramp of the Polestar 4 will also progress throughout the year, with that model’s production expanding to South Korea during the second half of 2025.

The company maintained its forecast for deliveries of at least 155,000 vehicles in 2025, but I will remain skeptical here for now given the past delivery guidance reductions. The original guidance for next year was nearly twice that, but poor sales and delayed model launches have hurt. Additionally, the company has had to trim growth forecasts as well as slash its employee count to keep its financial house in order. Rather than grow units as quickly as possible, the strategy now is to grow at a more measured pace with decent margins and hopefully positive cash flow sometime in 2025.

Bridging the funding gap:

As I’ve continued to detail, Polestar is on shaky financial ground. Working capital finished Q3 2023 at a deficit of more than $2 billion. The company finished that quarter with about $950 million in total cash, but it also had roughly $3 billion in debt. The latest update was that cash on the balance sheet at the end of 2023 was approximately $770 million.

However, the company didn’t release Q4 or full-year results due to compliance issues, and its Q1 report won’t be out until late May. Polestar did close on a new three-year loan facility for $950 million during Q1. Management has said that another $350 million would be needed to get the business to a cash flow break-even point, and this would most likely need to come via equity. That implies more than 11% dilution at this point, a number that could certainly rise if shares continue their decline.

Until Polestar proves it can hit its 2025 targets, it wouldn’t surprise me if it actually needs even more cash. We’ve seen the likes of Rivian (RIVN), Nio (NIO), Lucid (LCID) and others hit the debt and/or equity markets time and time again, with Fisker (OTC:FSRN) on the verge of bankruptcy. Polestar does have a big backer in Geely, which owns a 24% stake in Polestar. This is similar in a respect to Lucid, where the Saudi Investment Fund owns almost two-thirds of Lucid. However, I don’t know if Geely is as willing to pump a lot more funds into Polestar as we have seen the Saudis do with Lucid. Even missing next year’s delivery forecast by a few thousand units could increase capital needs by a significant amount, further diluting investors, who have already seen massive losses.

A troublesome EV landscape:

Polestar is looking to its new models to help nearly triple delivery volumes from 2023 to 2025. However, high-interest rates in the US have certainly impacted EV sales across the board, and the Chinese EV market gets more competition almost weekly. As the chart below shows, analysts have cut their 2024 revenue estimates for Polestar quite handily in the past year and a half, and the Q1 delivery count won’t help that average to rebound anytime soon.

The problem for Polestar is that its vehicle pricing may still be too high, despite all the discounts and promotions it runs. The Polestar 2 starts at roughly $48,000, which is nearly $10,000 more than the Tesla (TSLA) Model 3, with the Polestar 4 starting at $54,900 and the Polestar 3 at $73,400. With manufacturing currently ongoing in China, Polestar doesn’t have access to valuable US EV tax credits like Tesla has with the Model Y, for instance. A trade war between the two countries could only worsen things for the company until it gets more production in the US. Even then, Polestar doesn’t have the brand recognition that many EV players have, and it doesn’t have the financial resources that traditional automakers have to spend on marketing.

Valuation / risks:

Given its ongoing struggles, it may not be a surprise that Polestar has a low valuation. The stock currently trades at 0.55 times its expected 2024 sales. As the chart below shows, this is well below what industry leader Tesla trades at. In fact, Polestar doesn’t even fetch what Nio or Rivian do at this point, as Polestar is trending more towards the valuation of established automakers like Ford (F) or General Motors (GM).

While the valuation here certainly seems low, it can always go lower. When I first covered Polestar a couple of years ago, the stock traded at a mid-single digits price to sales figure for that current year. Today, shares trade for only a little more than one half of its street estimated revenues for 2024. Recently, struggling EV name Fisker shares traded below 0.2 times their expected sales before being delisted. I don’t know if Polestar will go that low, but with an equity raise on the horizon, I could see the stock trading down to around the 0.3 times the established automakers go for if results don’t improve in the coming quarters.

The main risk here is that Polestar can finally hit its targets through 2025. At that point, getting to cash flow positive territory would likely separate it from a number of other electric vehicle companies, and that could re-rate the stock to a higher level. At the moment, the average street price target is $3.17, implying that shares more than double from here, although analysts have been cutting their targets from the low teens over the past two years. Even if the price to sales figure holds at around 0.55 or so next year, the anticipated nearly doubling of revenues this year and another large jump next year could push shares quite a bit higher from here.

Recommendation / conclusion:

Until Polestar can actually start hitting some of its financial targets, I will continue to rate the name a sell. Losses and cash burn are expected to be seen for at least another year, and I wouldn’t want to buy the stock ahead of the needed equity raise. With the Fed not likely to cut interest rates anytime soon, names like Polestar might continue to struggle, and if shares drop below a dollar, a possible reverse split could become another negative catalyst. Should the company show some progress on the loss and cash burn situation, along with raising the needed equity to get through 2025, I would consider evaluating my rating again later this year.

In the end, the uphill battle for Polestar will continue throughout 2024. The company just had its weakest quarter of vehicle deliveries in more than two years, despite the launch of a new model. While the recent debt raise will help fund things for a few more quarters, the company needs a sizable equity raise to help hit its aggressive 2025 targets. With the financial situation here on shaky ground and the overall EV space not living up to the hype, it would not surprise me if Polestar shares hit new lows moving forward.