Summary
- Electric vehicles (“EVs”) have emerged into the spotlight in recent years, with robust sales growth of 43% year-over-year observed in 2020.
- Europe is expected to have more than 300 EV models by 2025, while the U.S. is expected to have more than 130 EV models by 2026.
- Two of the up-and-coming EV startups include Lucid Motors and Fisker, both California-based with production and delivery expected by the end of 2021 and 2022, respectively.
- We believe both companies are undervalued at the moment, with significant upside potential of more than 150%.
Photo by domin_domin/E+ via Getty Images
Electric vehicles (“EVs”) have emerged into the spotlight in recent years, with robust sales growth observed in 2020 despite a slump in global automotive sales due to COVID-related impacts. Instead of being overshadowed by the on-and-off lockdowns and lingering wariness of economic uncertainty, global EV sales continued its growth momentum in 2020,rising 43% year-over-year while overall automotive sales dropped by 20%. The evolving consumer sentiment on EVs resulting from increasing affordability and practicality thanks to technological advancements, combined with government intervention through subsidies and climate change policies are expected to supercharge the EV sales figures further within the decade; EV sales are expected to exceed 31.1 million units and represent 32% of global new car sales by 2030.
The next decade will be an era of electrification with significant opportunities for the sector as EVs take the center stage. The European Federation for Transport and Environment predicts more than 300 available EV models within the European automotive market by 2025, while the IHS Markit predicts more than 130 available EV models in the U.S. by 2026.
Two of the up and coming brands to break into the U.S. and European EV market include Lucid Motors ((NYSE:CCIV)or “Lucid”) and Fisker(NYSE:FSR). The two California-based companies have already debuted their respective flagship vehicles with reservations now open; initial deliveries are expected in late 2021 for Lucid and late 2022 for Fisker. In addition to their astonishing vehicles, both stock picks have also been showstoppers in the latest tech rally, with share prices peaking at 187% for Fisker and 480% for Lucid since their respective IPO and pre-IPO announcements.
Fisker Inc.
Source:fiskerinc.com
Launched in 2016, the Southern California-based EV maker builds its brand on the mission to provide a “clean future for all” by creating the “world’s most emotional and sustainable vehicles”. The company is currently led by co-founders Henrik Fisker and Dr. Geeta Gupta-Fisker, alongside a strong executive team with years of industry experience in their respective trades. Henrik Fisker is best known for his disruptive designs within the luxury car sector for notable brands including BMW and Aston Martin. Prior to launching Fisker Inc., Henrik Fisker co-founded “Fisker Automotive”, which was best known for producing the world’s first luxury hybrid supercar, Fisker Karma, before its demise in 2012 due to bankruptcy. Giving the fast-changing sector another shot, the car designer has returned to the arena this time with the lessons from his past experience and an innovative business model – the “asset-lean” approach.
The “Asset-Lean Approach”
Fisker’s asset-lean approach entails outsourcing the business components where differentiation is deemed non-essential, including platform engineering, production and assembly, the charging network, and other fleet management services. The business model will not only allow the company to significantly shorten the typical timeline of 60 months, from concept to delivery, to 29 months, but also enable greater capital deployment towards areas critical to customer experience, including design, software, user interface, and advanced driver-assistance systems (“ADAS”). The lowered costs achieved through this business model will also enable Fisker to keep the prices of their vehicles at an affordable range without compromising on quality.
Fisker’s flagship model will be the Fisker Ocean SUV, which is expected to begin production on November 17, 2022 with initial deliveries to be made across Europe and the U.S. before the end next year. As part of the brand’s asset-lean mandate, Fisker has forged a Partnership with Magna Steyr(“Magna”) to co-engineer and produce the Fisker Ocean. The two companies are currently collaborating to create a unique “FM29” platform that will be used as the foundation for their flagship SUV, as well as at least one other Fisker model. By leveraging Magna’s existing technology and established manufacturing facilities, the EV maker will be able to accelerate the timeline of bringing their vehicle to market, while also reducing vehicle development costs. The cross-compatible platform will also allow Fisker to achieve volume pricing on supplies with quality vendors, thus further reducing the costs of building its vehicles to both increase affordability for customers while boosting margins for the company. The Fisker Ocean will be selling at a low entry price of $37,499, with the most premium trims offered at $69,900; combined with a driving range of up to 350 miles, the all-electric SUV trumps its peers within the price category, whose average travel range sits around 250 miles. The Fisker Ocean is aiming to become a “premium with volume” model, with anticipated productions of more than 100,000 units per year.
A similar approach is also applied to the development and production of their second model,PEAR. Fisker has entered into an agreement with Foxconn– widely known for their production of iPhones in collaboration with Apple – to engineer and produce a brand-new platform for the revolutionary vehicle at a sub-$30,000 price tag. Model details are currently limited, but the new model is expected to feature a unique design and revolutionary experience that will differentiate it from any existing segment of EVs. PEAR’s start of production is slated for Q4 2023, with initial full-year productions expected to hit 250,000 units. The vehicle will first roll out in the U.S. with further expansion into the Chinese, European and Indian markets.
Inherent Risks of Fisker’s Business Model
Significant Reliance on Production Partners
Fisker’s business model entails outsourcing a part of their engineering and production processes to third-parties. The company’s substantial reliance on their relationships with third-party manufacturers and suppliers subjects them to significant risks with respect to operations, such as delays caused by quality control issues or capacity constraints. Magna Steyr currently produces for established auto brands including BMW, Daimler, and Jaguar Land Rover. With annual production capacity of approximately 200,000 vehicles, adding Fisker to their production line would mean 50,000 units allocated to each partner of Magna’s on average. Considering Fisker’s call for annual productions of 100,000 units of the Fisker Ocean, Magna may be required to drop one of its existing partners, reduce production levels for other customers, or invest in extending their production capacity to meet the performance targets, resulting in high opportunity costs for the manufacturing giant. In order to incentivize their production partner for success of the Ocean program and mitigate the risk of delays caused by capacity constraints, Fisker has offered Magna a 6% stake in the company, exercisable through achievement of “interrelated performance conditions” (pg. 97 of the 2020 10K).
The same risks apply to Fisker’s partnership with Foxconn to produce PEAR. Foxconn has no prior experience in the manufacturing process of vehicles, which subjects Fisker to potential risks related to quality control and delays. Foxconn is one of the many existing manufacturing industry veterans who have recently started to tap into the OEM opportunities within the growing EV sector. The electronics manufacturer plans to convert its idle plant in Wisconsin to facilitate their EV production ambitions. While Fisker intends to leverage Foxconn’s manufacturing expertise, Foxconn seeks to utilize the experience from producing Fisker’s EVs to pave its way into the larger EV market, with plans to produce EVs for other companies using the same platform in the long-run. Despite Foxconn’s lack of experience in EV production, the partners hope to take advantage of their “minimal automotive legacy to enable a full clean-sheet approach in all aspects”, and compete against experienced car manufacturers who may be restricted by the burden of existing contracts.
Exposure to Inconsistency in Product Quality
Working with multiple partners may also expose the company to inconsistency in the quality of their vehicles, and ultimately impact consumer confidence in the brand. In the unfortunate event that a jointly manufactured vehicle with one partner becomes faulty, it could significantly damage Fisker’s reputation and consumer confidence in the brand.
In addition, consumers may start to take interest in the respective Fisker vehicle’s production partners, given the collaborative nature of Fisker’s business model compared to other brands whose manufacturers are seldom broadcasted as part of the marketing strategy. The highly collaborative nature of Fisker’s business model may cause consumers to start weighing their purchase decisions on the quality and reputation of the manufacturers instead of the brand, which strips Fisker of its credit in the development process of its vehicles.
Overly Aggressive Targets
As mentioned above, Fisker plans to produce at least 100,000 units of the Fisker Ocean on an annual basis, and 250,000 units of PEAR within the first full year of productions. However, these high figures draw curiosity on whether they are reasonably achievable. Under these production targets, Fisker would produce approximately 350,000 units of their vehicles by 2024. This would represent a 7% market share based on forecasted EV sales of 6.2 million units by 2024, which is substantial for an EV startup after just two full years of operations with only two models available for sale. And in comparison to the globally recognized industry leader, Tesla, the assumed 7% market share would be double of Tesla’s global EV sales market share achieved in 2020 of close to 4%. Even if Fisker can offer customers with a pricing advantage, it would be challenging to achieve a 7% market share of global EV sales, especially given the large influx of competing models that will be introduced in the next few years. Based on our consideration of Fisker and their operating partners’ production capacities and anticipated EV demands, we believe these sales volume forecasts would more likely be achieved by 2026.
Financial Outlook
Following Fisker’s IPO through a SPAC reverse merger sponsored by Spartan Energy Acquisition in October 2020, the company received $1 billion in capital injections, which was just the right amount needed to develop and produce the Fisker Ocean SUV according to Fisker’s business plans. With start of productions for the Fisker Ocean just 18 months out, the company continues to execute the development process according to plan and within budget, ending the first quarter with cash and cash equivalents of $985.4 million while maintaining a debt-free balance sheet. And with the newest PEAR model, the company does not anticipate significant capital investments until 2023, which they plan to partially fund with cash generated from operations through Fisker Ocean sales, in addition to external financing obtained from either debt or equity issuances.
We are predicting revenues of $1.2 to $1.4 billion by 2023, generated primarily from sales of approximately 20,000 Fisker Ocean SUVs following its first full year in the market, and a small volume of the PEAR model given its expected deliveries starting Q4 2023. Our forecasts predict a lower sales volume for the flagship SUV that is on par with recent electric SUV launches observed across the European and the U.S. EV market. We believe Fisker will achieve their annual production target for the Fisker Ocean of 100,000 units in late 2025 or early 2026 as consumer demand and brand reception ramps up.
Total revenues are expected to grow at a CAGR of approximately 30% into 2030 considering Fisker’s continued expansion beyond the American and European markets and into the Chinese and Indian markets, as well as the anticipated growth in sales volumes with the launch of two other models in addition to the Fisker Ocean and PEAR model before 2025. We are expecting the company to start realizing profits of between $157 million to $285 million by 2024 championed by continued sales growth, and a lifetime gross profit margin between 19% and 25% based on Fisker’s business plan.
i. Base Case Financial Forecasts:
ii. Bull Case Financial Forecasts:
iii. Bear Case Financial Forecasts:
Source: Author, with data from the 2020 and 2021 Fisker Inc. Annual and Interim Reports and ourinternal financial forecasts.
Valuation
Author, with data from our internal valuation model
Based on the above analysis on Fisker’s fundamentals and growth prospects, our valuation for the business yields an equity value of approximately $4.6 billion (base case) to $10.3 billion (bull case), which translates to $16.29 and $36.94 per share. This represents an upside potential of approximately 11% to 151% based on the last traded price of $14.69 on June 2nd.
i. Base Case Valuation:
ii. Bull Case Valuation:
iii. Bear Case Valuation:
Source: Author, with data from the 2020 and 2021 Fisker Inc. Annual and Interim Reports and our internal valuation model.
Lucid Motors Inc.
Source:lucidmotors.com
Founded in 2007, Lucid Motors was previously known as Atieva, a notable manufacturer of EV batteries and powertrains. In 2016, the company officially rebranded to Lucid Motors under the leadership of Peter Rawlinson, former Chief Vehicle Engineer at Tesla. Currently the CEO and CTO of Lucid, Peter Rawlinson led the company to developing the first Formula-E battery pack capable of powering the cars for the entire race. The technology was later evolved into the battery pack now used in the Lucid Air, the automaker’s flagship luxury electric sedan introduced in late 2016.
The company builds its success on a commitment to develop a world-class, high-performance EV. The Lucid Air’s powertrain is capable of more than 500 miles in range with a full charge, setting a record-high standard for the industry. In addition to their world-class battery technology, the company also operates under the core belief that the future will be tech-driven, and this is what will differentiate them from the surge of new EV models produced by traditional automakers just to satisfy evolving consumer demands. Similar to Fisker’s vehicles, Lucid has prioritized connectivity within their vehicles, offering over-the-air updates to car owners at ease. The company’s vehicles are also equipped with advanced ADAS features like automatic emergency braking, cross-traffic alerts, and a driver monitoring system; level 3 autonomous driving features are also expected to roll out through over-the-air updates when testing is complete with regulatory approval achieved. The Lucid Air will also be one of the first EVs to incorporate facial ID recognition, which will be integrated with predictive analytics technology within the vehicle to automatically load profiles and preferences that are preset or learned over time based on the driver’s behaviour.
The brand is currently positioned for the “post-luxury” market, which Lucid defines as those looking for a luxurious yet non-extravagant experience. Lucid is not afraid to put a premium on their flagship vehicle, which is equipped with some of the most advanced technologies along with a premium exterior and interior composition – the Lucid Air is priced from $77,400 for the base model to $169,000 for the top-tier Dream Edition.
A Highly Integrated Automaker
In contrast to Fisker, Lucid builds its business on a highly integrated model. Lucid performs their own in-house R&D for almost every aspect of its vehicles, including the powertrain, battery technology, infotainment, HVAC, integrated safety, chassis, and ADAS systems. The automaker will also internalize the EV production process at their Arizona manufacturing facility – the first of its kind in North America. The Arizona manufacturing facility will comprise of multiple components, including the “Advanced Manufacturing Plant” (“AMP-1”) which is currently producing the Lucid Air. Phase two expansion is also well underway for AMP-1 as Lucid prepares for the production of their premiere SUV,Project Gravity. Production capacity at AMP-1 is currently 30,000 units per year, and will expand up to 400,000 units per year as sales volumes ramp up with more models added to the line-up. The Arizona manufacturing facility will also house the “Lucid Powertrain Manufacturing Plant” (“LPM-1”), which is where Lucid will be manufacturing their powertrain technology, including battery packs, electric motors, and in-home charging units. Although a capital-intensive project for an EV start-up, the Arizona manufacturing facility will allow greater operational and cost efficiencies for Lucid through vertical integration, as well as greater control over quality and consistency of outputs.
Similar to Fisker, Lucid plans to reuse their engineered platform, the “Lucid Electric Advanced Platform” (“LEAP”), on other vehicle variants to maximize return on their initial capital investments, and enable greater speed and efficiency in bringing their vehicles to market. And true to their business model, Lucid’s LEAP platform is designed and developed fully in-house. The platform includes their signature battery pack and battery management software, electric motors, power electronics, transmission, control software, and boost charger.
Inherent Challenges of Operating a World-Class Manufacturing Facility for a Newcomer
A Capital-Intensive Effort
As mentioned above, Lucid’s newest Arizona manufacturing facility is a highly capital-intensive project for a new entrant in the EV sector who is already carrying the expensive burden of R&D on their first vehicle. Despite already having previous experience in manufacturing their Formula E battery system in-house in Silicon Valley, the Arizona production plant will be operating on a far grander scale, encompassing both parts production and vehicle assembly. In addition to the $700 million planned investment for building the factory, it will also cost Lucid $1.8 million per year to rent the land on which the factory sits on. Similar to many of recent new entrants within the sector, Lucid has already had its brush with bankruptcy once; the company was ultimately saved by a $1 billion capital injection from Saudi Arabia’s Public Investment Fund. Since then, the company has been operating according to plan and on track to commencing delivery of the Lucid Air before the end of 2021. Their latest SPAC reverse merger with Churchill Capital Corp IV will also provide the company with $4.4 billion of capital, which will further bolster their liquidity needed for continued development and expansion.
A Limited Target Audience
Lucid has also positioned itself as a luxury premium EV maker that caters to a niche market within the already-competitive landscape, which further narrows their market share. However, it is evident that the company has acknowledged this challenge since inception considering the unique offerings featured in the Lucid Air, including a powertrain that enables a travel range of more than 500 miles with one full charge, which differentiates them from others within the same price category.
Diverse Revenue Streams
A key competitive advantage for Lucid is their ability to maintain diverse revenue streams. In addition to the production and sales of vehicles, the company is also known for their extensive expertise in developing battery management systems. The global EV battery market is expected to soar in the next five years, with an estimated value of $37.69 million by 2025 due to growing EV sales propelled by the change in consumer attitude and government intervention through financial incentives and strict climate change policies. Lucid plans to leverage their existing expertise and capitalize on the future growth opportunities brought forth by the electrification wave, including the development of an “Energy Storage System” (“ESS”). ESS leverages Lucid’s existing battery and power electronics technologies, which allows the company to maximize return on their capital investments already deployed.
Lucid is also an ongoing supplier of battery packs and software for all OEM racing teams in Formula E. The company plans to evolve their existing battery technology to widen the range of its compatibility with other products, including aircrafts, eVTOL, and other commercial machinery. The growth opportunity would be easily executable through mass production at their new battery manufacturing plant, LPM-1, in the Arizona factory. Again, the opportunity would allow Lucid to maximize return on their capital investments already deployed in both developing their state-of-the-art battery systems and construction of their battery manufacturing plant.
Financial Performance
The company has yet to release any public filings of their complete financial records. However, the latest Analyst Day Presentation indicates that the company has secured more than 9,000 reservations of the Lucid Air to date, with 500 units of which representing the limited production Dream Edition model currently priced at a premium of $169,900 and fully reserved, which indicates robust demand and increasing customer traction. This translates to revenues of at least $84.95 million generated from the Lucid Air Dream Edition, and $657.9 million from other Lucid Air models based on the conservative assumption that they are all base models priced at $77,400. It is worth noting that current reservations are fully cancellable and refundable; however, even if actual sales drop 10% from the number of current reservations, the company is still expected to generate total revenues of at least $712.6 million.
We are predicting revenues of $2.2 billion to $2.3 billion in 2022 considering a full year of productions and sales of the Lucid Air, consistent with management’s forecasts within the Analyst Day Presentation. Total revenues are expected to grow at a CAGR of 30% to 40% into 2030 considering Lucid’s expanding portfolio of premium-priced vehicles, combined with a global sales footprint across North America, Europe and the Middle East. We are expecting the company to start realizing profits of between $631 million to $915 million by 2025 as consumer demand and brand reception ramps up.
i. Base Case Financial Forecasts:
ii. Bull Case Financial Forecasts:
iii. Bear Case Financial Forecasts:
Source: Author, with data from the May 2021 Analyst Day Presentation and ourinternal financial forecasts
Valuation
Source: Author, with data from our internal valuation model (LCID_-_Valuation.pdf).
Based on the above analysis on Lucid’s current reservation rates and growth prospects, our valuation for the business yields an equity value of approximately $9.6 billion (base case) to $14.1 billion (bull case), which translates to $36.54 and $53.83 per share. This represents an upside potential of approximately 55% to 129% based on the last traded price of $23.55 on June 2nd.
i. Base Case Valuation:
ii. Bull Case Valuation:
iii. Bear Case Valuation:
Source: Author, with data from the May 2021 Analyst Day Presentation and our internal valuation model.
Conclusion: Lucid Motors Vs. Fisker
Based on our analysis, both companies are well-positioned to capitalize on the up-and-coming era of global transition to EVs. Despite operating under business models on two extremes, both Fisker and Lucid show capability in countering the inherent disadvantages of their respective business models with unique offerings. Fisker’s asset-lean business model allows for higher capital deployment to other areas deemed more critical for enhancing customer service, and lower production costs to provide affordable pricing for buyers, while Lucid’s capital-intensive and vertically integrated strategy is compensated by greater operational and cost efficiencies achievable through economies of scale thanks to their cross-compatible, state-of-the-art battery technology. Both companies will also be catering to the needs of different markets – Fisker’s top selling point is affordability, while Lucid is positioned to satisfy the needs of those looking for a luxurious yet non-extravagant experience. Both companies intend to adopt a direct sales strategy to maximize customer experience, with showrooms and experience centers to open across the U.S. and Europe.
Although our valuation shows Fisker yielding a slightly higher upside potential than Lucid, we believe the latter makes a safer investment in the near-term given the Lucid Air has already entered the production stage with strong reservation rates and deliveries expected to commence before the end of the year, while the Fisker Ocean is still in testing phase, with core technical features yet to be announced to the public and start of production still 18 months out. However, we are confident that both EV makers are equipped with the talent and resources to excel in the industry in the long-run.