Long gone are the days when Tesla dominated the discussions regarding investing in the electric vehicle (EV) space. Over the past year, the competition for attention has intensified dramatically as SPACs have brought a variety of EV start-ups onto investors’ radars. One such hopeful automaker is Fisker (NYSE:FSR).
Keenly focused on issues of environmental impact, Fisker characterizes its Ocean SUV as “the world’s most sustainable vehicle.” But the company’s self-proclaimed ultra-green bona fides are hardly reason enough for investors to park this EV stock in their portfolios — at least, not on their own.
What’s driving the excitement?
Fisker has emerged as one of the more compelling stories on the EV landscape thanks to its Ocean SUV. Though it has yet to go into production, the company says it will have a range of between 250 and 350 miles on a full charge, will be available in two-wheel-drive and four-wheel-drive models, and come with an optional solar roof.
What’s particularly intriguing about the Ocean, though, is Fisker’s novel plan for leasing the vehicles. With a $3,000 upfront payment, customers will be able to lease an Ocean for as little as $379 per month; the SUVs will have a 30,000-mile annual mileage allowance. But the twist is that the leases will not have a fixed term.
For potential customers who might be wary of purchasing an EV because they have range anxiety or are unsure how convenient it will be to charge the vehicle, that lack of a fixed term will give them the flexibility to return the vehicle without penalty if they decide that going electric wasn’t the right choice for them. And it’s a policy that will significantly distinguish Fisker from car companies using traditional leasing models. The innovative leasing approach, however, comes with a disadvantage: Fisker loses some foresight into future cash flow as customers aren’t locked into paying for a set term.
It will still be more than a year and a half before the first buyers can expect to get behind the wheel of an Ocean; Fisker expects deliveries to begin in November 2022. Nonetheless, demand appears to be growing. As of March 31, Fisker had more than 14,600 reservations for the Ocean — notably higher than the 4,410 reservations the company had a year prior.
This price tag is neither a green light nor a red
Fisker is pre-revenue; therefore, investors won’t be able to evaluate the stock using traditional metrics. But we can use the company’s future sales estimate to roughly gauge the price tag. The company projects revenue of $13.2 billion in 2025. Based on its market cap of about $4 billion, the company is currently valued at about 0.3 times 2025 sales. To put this in context, we can consider another EV company, Lucid Motors, which will soon go public with the SPAC Churchill Capital IV (NYSE:CCIV). Forecasting revenue of $14 billion in four years, Lucid Motors is valued at about 0.4 times projected 2025 sales.
While the two companies have similar valuations in terms of future sales, there’s a stark difference regarding projected cash flow. With Fisker estimating 2025 free cash flow of $1.9 billion, the stock has a valuation of 2.1 times projected 2025 free cash flow. Lucid Motors, on the other hand, forecasts 2025 free cash flow of $321 million, representing a steeper ratio of 18.8.
The other thing to keep in mind is that these are management’s projections. A lot needs to happen in the next four years to go from no revenue at all to more than $13 billion in a single year. While it may help you get a rough idea of how the market thinks about these stocks today, they are by no means a crystal ball.
Does Fisker fit into your portfolio?
There’s some understandable excitement about Fisker at this point, but only investors with a high tolerance for risk should seriously consider picking up shares at this point. For those at the more conservative end of the risk spectrum, are better options for investing in the EV sector.
Although the company’s $1 billion in cash and lack of debt are positive features, suggesting that the company is well-capitalized and not at the mercy of a debt-laden balance sheet, there’s no guarantee that Fisker will hit its production target and begin SUV deliveries in November 2022. Should it encounter delays, they may foreshadow additional challenges that prevent the company from meeting its longer-term goal of expanding its product line to four vehicle models by 2025. Moreover, during those years, Fisker could lose customers to the long-established auto brands that are pivoting to EVs.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.