The electric vehicle (EV) frenzy, witnessed in 2020 and 2021, driven by special purpose acquisition companies (SPACs), has lost its spark. Skepticism among investors is rising as EV startups tread on thin financial ice, facing the make-or-break challenge of proving their mettle in a fiercely competitive market.
The industry’s capital-intensive nature is fast depleting the cash reserves of startups, with companies prompted to file for bankruptcy. The latest casualty is Fisker Inc. FSR. Per Wall Street Journal, the company has hired restructuring advisers as it eyes bankruptcy filing. And this doesn’t come as much of a surprise considering the cash-burning dilemma of most EV startups. Last year, Lordstown Motors and Proterra filed for Chapter 11 bankruptcy. So, what is it that’s making it tough for the relatively new entrants to make a mark?
EV Startups Under Immense Pressure
Well, firstly, manufacturing and distributing EVs call for high upfront investment related to production facilities and research and development expertise, which strains finances. This has been putting immense pressure on startups that are struggling to scale up production while facing limited funding options. Supply chain disruptions, exacerbated by geopolitical tensions and other developments, can lead to shortages and increased cost of raw materials. Moreover, to stay relevant in this industry where competition is cut-throat, companies need to constantly innovate and keep pace with advanced technological breakthroughs. If they fail to do so, they run the risk of losing the race.
And the competition is not just among these startups. With legacy automakers pouring billions of dollars into electrification, the competition has fiercely intensified, squeezing margins and heightening the financial strain of startups in an increasingly crowded space. And as if these challenges were not enough for these startups to tackle, the lower-than-expected demand for EVs of late is adding to the woes. Even legacy automakers like Ford and General Motors are scaling back their EV production plans in response to slower-than-anticipated customer adoption. Thus, it’s quite understandable that the situation is becoming increasingly dire for pure-play EV startups.
Fisker Finds Itself on Rocky Terrain
Once seen as a promising contender in the EV market, Fisker is now in troubled waters amid financial woes and operational challenges. Its journey to this critical juncture began with much fanfare, highlighted by its $1 billion IPO in October 2020.However, the euphoria surrounding its market debut soon gave way to harsh realities as the company grappled with demand issues and operational setbacks.
Fisker, led by Henrik Fisker, initially opted for an "asset-light" strategy, outsourcing production of its flagship Ocean SUV to Magna Steyr in Austria.This strategy aimed to minimize operating costs and avoid the pitfalls that plagued Henrik Fisker's previous company—Fisker Automotive—which went bankrupt in 2013. Despite that, challenges arose as the company encountered difficulties in transporting the Ocean SUV from the Austrian factory to its U.S. customers. Delays in regulatory approval, parts shortages and executive turnover, particularly in the finance division, added to Fisker's operational woes.
In June 2023, Fisker commenced its first deliveries to U.S. consumers, just when signs of a slowdown in EV sales growth began to surface. Amid struggles to ramp up deliveries, the company slashed its production forecasts twice last year. Due to the heightened EV price war, it also cut the price of its top-trim Ocean Extreme SUV model by as much as $7,500, which further squeezed margins.
In January 2024, Fisker Ocean was marred by a software glitch causing braking problems, leading to investigations by regulatory authorities. This cast a shadow over Fisker's reputation and customer trust.The National Highway Traffic Safety Administration (NHTSA) probe posed additional challenges for Fisker, compounding issues of dwindling demand and difficulties in meeting internal sales targets. Fisker manufactured 10,142 Ocean crossovers for the global market in 2023, missing its target of 13,000 units. Actual deliveries amounted to only 4,700 units. The company’s executives attributed the weakness in sales volume to the direct-sales model.
At the start of this year, Fisker announced plans to shift from a direct-to-consumer sales model to traditional dealerships, which underscores the difficulty in finding a viable market strategy in the fiercely competitive automotive landscape.
Financially, Fisker is running in deep losses. It incurred a net loss of $463.6 million in the fourth quarter of 2023 alone. It used a going-concern warning last month. Layoffs, restructuring and warnings of a potential bankruptcy clouded the company's prospects, sending its share prices plummeting by more than 98% since its IPO. Faced with a looming cash crunch and the specter of delisting from the stock exchange, Fisker finds itself at crossroads, desperately seeking avenues to stay afloat.
If Fisker were to pursue bankruptcy protection, it would mark the second collapse of an automotive venture helmed by Henrik Fisker.
Latest Updates
This Monday, Fisker announced a six-week production pause in a bid to stave off potential bankruptcy, underscoring the severity of its predicament. Fisker disclosed that from the beginning of 2024 till Mar 15, it produced and delivered 1,000 and 1,300 vehicles, respectively. And as of the same date, it held 4,700 vehicles in inventory.
Fisker also announced that it secured a lifeline of $150 million from an existing investor. It is also engaged in discussions with a major automaker (undisclosed yet) regarding a potential transaction, which may include an investment in Fisker, a North American manufacturing agreement, or collaborative development of EV platforms.
Despite these developments, Fisker’s future hangs in the balance amid rising debts (more than $1 billion), diminishing cash reserves and uncertain market prospects.
What to Do With FSR Shares?
Fisker's fate hinges on its ability to secure new investments and manufacturing agreements, as well as streamline its operations to navigate through the storm. The launch of future products, including a crossover and a pickup truck, hangs in the balance, contingent upon resolving its current challenges.
Fisker's journey from a celebrated IPO to the brink of bankruptcy serves as a cautionary tale for the EV industry.
Given the current state of affairs surrounding Fisker, shareholders face a dilemma. If you've held Fisker shares for an extended period, you're likely grappling with significant losses. Selling the shares is not a viable option at current prices unless you are looking for tax-loss harvesting. Having said that, don’t mistake it for any buying opportunity. With Fisker's stock trading at rock-bottom prices and concerns regarding its financial viability, purchasing more shares in anticipation of a turnaround appears overly optimistic and premature.
As it stands, the risks outweigh the potential rewards, and it’s advised to adopt a wait-and-see approach on Fisker now. As the company treads this uncertain path, the industry watches, hopeful yet wary of what the future holds. FSR currently carries a Zacks Rank #3 (Hold).
Key Pick
If you want to invest in a pure-play EV company, LI Auto LI could be a good option. The company’s fourth-quarter revenues and adjusted net income witnessed triple-digit percentage growth on a year-over-year basis. Another standout metric is growing vehicle margins. LI saw vehicle margins expand by 150 basis points sequentially to reach 22.7% in the last reported quarter.The company attributes this improvement to its growing scale, supply chain optimization, and consistently enhanced efficiency.
Li Auto currently sports a Zacks Rank #1 (Strong Buy) and has a VGM Score of A. The Zacks Consensus Estimate for 2024 sales and earnings implies year-over-year growth of 72.3% and 38%, respectively. Over the past seven days, EPS estimates have moved up 16 cents for both 2024 and 2025.
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