Is Polestar Stock the Best Pure-Play EV Stock Out There?
We recently took a deep dive into why trying to find the next Tesla is mostly a fool’s errand. The super short version is that it’s highly unlikely that a pure-play electric vehicle (EV) manufacturer can replicate Elon Musk’s success – and luck. At one point, Musk revealed, Tesla was only about a month away from bankruptcy. More recently, he repeated the “b” word when discussing challenges with supply chains and covid lockdowns that are keeping his shiny new factories in Germany and Texas largely idle. The most likely contender to unseat Tesla as the world’s leading EV manufacturer will either be a legacy automaker or a Chinese company. And that’s exactly what makes Sweden-based Polestar (PSNY) the dark horse in the race.
Polestar Stock Debuts in June
Polestar wasn’t the typical EV startup in the mold of Rivian (RIVN) or Lucid Motors (LCID) – the only other pure-play EV companies outside of Tesla probably worth talking about. Both were largely funded through multiple, mega-sized venture capital rounds. On the other hand, Polestar jumped off the starting line as a Swedish racing team venture way back in 1996, engineering its own suped-up Volvos in the late 2000s. Polestar was eventually acquired by Volvo (VOLV-B.ST), which itself is a wholly owned subsidiary of Geely (0175.HK), one of the largest automotive companies in China.
Polestar became a standalone EV brand beginning in 2017 and released its flagship EV, the Polestar 2, in 2020. In September 2021, the joint venture company announced it would merge with Gores Guggenheim, a special purpose acquisition company (SPAC), and shares of Polestar stock officially began trading on the Nasdaq last month. Just a trickle of SPACs are crossing the finish line in 2022 after the gush of blank check companies bringing private firms to the public markets over the last two years. In fact, the world’s biggest SPAC is returning $4 billion to investors after failing to find a match. So that was no mean feat.
The Polestar stock merger is especially noteworthy because only 20% of institutional investors opted to pull out their money before the deal was sealed. These so-called SPAC redemptions have averaged about 80% this year, up from about 50% in 2021 and just 20% in 2020, according to the big brains at CB Insights. In the end, Polestar grossed $890 million, with a market cap holding steady at $20 billion – in line with the original valuation announced more than nine months ago.
The company also managed to make good on its promise to deliver 29,000 EVs in 2021, though fell well short of its projected revenue of $1.6 billion by about $260 million. Polestar has already announced that it would also cut back on its production goal this year, dropping from 65,000 to 50,000, saying the “reduction for 2022 is 100% attributable to the lockdowns in China.” That jives with what Mr. Musk said after Tesla delivered 18% fewer vehicles between Q2-2022 and Q1-2022 due to production problems at its shutdown Shanghai factory. The shortage means the company dropped its revenue projections for 2022 from $3.2 billion to $2.5 billion.
Polestar insists that it will be able to recover in time to deliver on its promise to manufacture 290,000 EVs by 2025 – a tenfold increase from last year. In our previous dive into Polestar stock, we compared the company’s progress against Tesla at a similar stage of development and concluded that its projections are potentially reasonable.
The Bull Case for Polestar Stock
That was the original basis for our bull case for Polestar, but the company will need to expand quickly to succeed. There are signs that is happening. It is now in 25 markets, up from just 10 countries two years ago, with plans to be in 30 markets by the end of 2023. It has nearly 130 retail locations and is expecting to add 30 more before the end of this year. Polestar is employing the same direct-to-consumer sales model that Tesla has used so successfully. New EV models are also in the works, including its first EV SUV. The Polestar 3 is scheduled to be out in October, though it doesn’t appear that the company believes it will significantly contribute to sales until 2023. Two more models are scheduled to follow in 2023 and 2024.
Demand is certainly there. Polestar has taken more than 32,000 customer orders for Polestar 2 since the start of 2022, representing an increase of 290% versus the same period in 2021. In addition, it inked a deal with the rental car company Hertz to deliver 65,000 EVs over the next five years, and said it began its first delivery on its biggest order to date last month.
The Bear Case for Polestar Stock
It’s ironic that just as demand for EVs has never been hotter, that Polestar can’t get them built fast enough. EV sales more than doubled in 2021 to 6.6 million, accounting for almost 9% of the global market and all of the net growth in car sales around the world, according to the International Energy Agency.
Still, there aren’t too many scenarios where we see Polestar becoming the next Tesla, despite these favorable market conditions. China remains too much of a wild card, so we’re steering clear of any company with deep connections to the PRC. Polestar certainly qualifies thanks to its Volvo-Greely parentage. The constant disruptions in manufacturing from covid lockdowns is only the latest example of the sort of risks that investors are exposing themselves to when it comes to Chinese-affiliated companies. Maybe that’s why Polestar is looking to outsource manufacturing of its Polestar 3 SUV to a Volvo plant in Charleston, South Carolina (as well as to one in Chengdu, China). Readers can refer back to the “next Tesla” article to learn about some of our other hesitations, a turnaround from the days when it looked like China was going to win it all.
There’s also the “Made in China” factor. We’ve all made the joke about some cheap, low-quality product, assuming it was “Made in China.” Well, Polestar is made in China. The company claims to have won more than 50 awards for its design and engineering, but a report from J.D. Power on new vehicle quality found Polestar finishing dead last, just behind the once extremely dull but reliable Volvo. There were 328 problems reported per 100 newly sold or leased Polestar vehicles, according to the report. Sounds like there are a few bugs to work out.
What Polestar needs to do is try and mimic Tesla’s gross margins of 30%. In 2021, Polestar’s cost of goods sold were about the same as revenues so investors should watch for that margin to expand which shows Polestar can sell cars at a profit.
The window to grab market share isn’t as wide open as it used to be. Legacy automakers are expected to start closing the gap to Tesla as factories re-tool to churn out new lines of EVs. The early favorite is Volkswagen, which was No. 4 (8% market share) for all-electric car sales in Q1-2022, followed closely by No. 5 Hyundai (5.7% market share), according to InsideEVs. Chinese automakers SAIC (10.7%) and BYD (10%) were No. 2 and No. 3, respectively. Tesla had 21.6% of the market in the first quarter of the year, slipping from 25% a year ago. It’s obvious that becoming the next Tesla might not be enough to dominate the future EV market.
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Tesla might still be the best choice for EV stock, assuming one can wait for opportunity when there is some pullback in share price. Tesla reached the low $620 in May, now it is $715. For the last 2 months the price moves typically in the range between $650 and $750.
One recent bad news for Tesla: Tesla AI leader Andrej Karpathy announces he’s leaving the company.
Yep, you’re probably correct about that. People will come and go, though it’s never good to see senior tech people move on.
Good Q3 results, +24% today. teslarati: “Polestar’s (NASDAQ: PSNY) position as one of two global, pure electric vehicle makers was solidified with a strong Q3 earnings report that featured skyrocketing revenue and gross profit figures and an operating loss that was reduced by one-third. The Swedish automaker reiterated its 50,000-vehicle delivery goal, expecting Q4 to be its strongest three-month showing in company history.”
Now they just need to get COGS to be less than revenues by some meaningful amount and they’ll have a viable business.
$1.48B in revenue for 9 months in 2022. They doubled revenue comparing to 2021.
That’s a significant achievement considering how difficult current year was for everybody.
Huge achievement. We’ll have to revisit them at some point in time.