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The closing of the merger with SPAC (special purpose acquisition company) Spartan Energy is a possible catalyst: Friday was the first day the stock traded under the ticker FSR. Whatever the cause, the rally seems overdue.
After all, it simply seems like FSR stock has sold off with its sector. Industry leader Tesla(NASDAQ:TSLA) has pulled back 23%. Kensington Capital (NYSE:KCAC), a SPAC which is merging with battery manufacturer QuantumScape, has been halved. The same is true for Lordstown Motors (NASDAQ:RIDE).
But the case for Fisker looks stronger than some of the other sector plays. Valuation seems reasonable. The cars are impressive. And the market looks attractive.
The sell-off in the sector more broadly does make some sense: valuations had become stretched, and investors were bidding up even the weakest electric vehicle names. At this point, however, the sell-off likely is closer to the end than the beginning. If that’s the case, Friday’s bounce in Fisker stock may just be part of a bigger rally.
An Attractive Valuation
It’s impossible to precisely pin down what FSR stock is worth at the moment. This is a company that doesn’t even expect to start production until 2023. Growth of the EV market as a whole will be determined by broader macroeconomic fears (which in turn will be influenced by the progression of the novel coronavirus pandemic) as well as government subsidies.
In that context, any estimate of future revenue and profits is going to be uncertain at best.
Still, from a broad perspective, it does seem like FSR’s valuation is at least reasonable. At $10, the company’s market capitalization is less than 1% that of Tesla, and about one-fourteenth that of China’s Nio (NYSE:NIO).
There’s one more thing to note relative to other SPACs: FSR is back at the merger price of $10. And that, too, suggests valuation is reasonable.
After all, if the company is willing to sell stock at $10 to fund its business, the company itself (and the institutional investors who bought in a private placement at the same time) see that price as attractive. Other SPACs — DraftKings (NASDAQ:DKNG) and even Virgin Galactic (NYSE:SPCE) are just two examples — have traded well above the merger price. In those scenarios, investors are paying $35 (for DKNG) and $17 (for SPCE) for stock that the company was willing to sell at $10.
Finding a Niche
Again, it’s difficult to precisely pin down fair value at the moment. But at the least, it’s certain that this is not a stock priced for market leadership. It’s priced as a niche manufacturer at best. But Fisker seems to have a good chance of getting to at least that position in the market.
After all, Fisker Inc. was founded by Henrik Fisker, one of the most well-regarded auto designers in the world. Even a cursory look at the cars shows real appeal. And with a base price starting at $40,000, the Ocean SUV seems well-positioned.
The Ocean will be competing against Tesla in the SUV space, certainly. But it’s worth noting that Model X deliveries have flat-lined, and the Ocean remains cheaper than the X and even the mid-size Y.
GM admittedly is going full-bore into EVs. But it hasn’t proven that it can be a winner outside of gasoline engines. The same is true for the likes of BMW(OTCMKTS:BMWYY) and Volkswagen (OTCMKTS:VWAGY).
Certainly, nothing is guaranteed. Fisker has a lot of work left to do. But there’s a path to establishing a viable business via the Ocean, and from there the company (as did Tesla) can expand into new models and new categories. If Fisker follows that path, FSR stock has plenty of room to run.
The Risks to FSR Stock
There’s a risk that Fisker Inc. will end up in a similar situation. The SPAC merger and the private placement combined raised about $1 billion in capital. That capital will be spent simply getting to production. If Fisker stumbles before it gets to production, FSR stock can take a huge hit.
But even with the rally on Friday, the rewards seem worth the risks. It’s true that success isn’t guaranteed. It’s also true that success isn’t priced in.