Polestar (NYSE: PSNY)
is a Swedish electric car maker, which is a part of the Volvo group. The company went public through a special purpose acquisition company (SPAC) with The Gores Guggenheim Group. The stock is up over 20% from its IPO and may continue to increase on positive results from the coming quarters.
The Polestar SPAC begin trading on NASDAQ with a merger with the Gores Guggenheim Group. The SPAC was valued at $21 billion and raised $890 million, including $690 million from Gores Guggenheim. Volvo currently owns 49.5% of the total shares in Polestar.
Polestar’s Business and Products:
Polestar’s product continue to explosive growth as consumers take a liking to EVs. Polestar sold 29,000 units in 2021 and expects to sell 65000-70,000 units in 2022. Polestar has two models, Polestar and Polestar 2. Polestar is the premium hybrid model and costs upward of $155,000, and Polestar 2 is the standard sedan, which starts at $45,000. The company expects to compete with similar car makers like Tesla and other mid-high range sedans. The company plans to launch three new cars by 2024 and expects to sell a whole range of new electric vehicles, including a couple of luxury SUV’s. The company expects to sell 124,000 vehicles in 2023, 225k vehicles in 2024 and 290k vehicles in 2025. Currently, Volvo as a group sells around 42,000 vehicles. As a result, Polestar’s current projections may run into issues as the number of competitors in the EV market increases.
Global Electric Vehicle Growth 2022 and Polestars Projections
Electric vehicles grew by 75% in the first quarter of 2022 from the same period in 2021. Total sales are expected to grow by 40% in 2022, based on projections from the latest sales reports. In April 2022, there were 542,000 global EV sales. The global electric vehicle market is expected to grow at a rate of 25-30% CAGR per year until 2028 when it will reach a total of $980 billion in sales. Projections also state that total EV sales in 2025 will amount to 20 million, which would be around 20% of all passenger vehicle sales. Polestar currently expects to have approximately 1.5% market share of total sales of EVs by 2025.
But, competitors continue to bring in newer and newer models onto the market, with most major brands bringing new models to market over the next couple of years, the new competition could put a lot of pressure on Polestar to stay competitive and retain market share. China remains the biggest market for electric vehicles, and competition in the market remains fierce. China expects total EV sales in 2022 to be around 5 million vehicles, followed by the United States, where sales are expected to between 2.4 million to 2.6 million. Polestar expects to sell around 65,000-70,000 vehicles in 2022. Management has projected that the company will sell about $18 billion’ worth of vehicles, up from $3.2 billion’s expected sales in 2025. The company also expects a net profit of $1.6 billion in 2025.
Financial Outlook and Valuation
Polestar’s valuation at the time of the IPO was 13x sales, but with management expectsing a significant ramp-up in deliveries during the year, this should bring down the valuation significantly. The stock trades at a forward P/E of 18-20x on projections from 2025, which investors might consider a bit rich. Electric cars have a slightly higher average net profit margins than combustible engine cars, and the stock would trade at 100x P/E if the Polestar had normal EV margins of around 6%. Many would consider such a valuation expensive, but as Tesla has shown, EVs with specific to-market strategies can get their profit margins into double-digit figures. Considering the market and growth potential of the sector, investors could be interested in getting in on the stock.
Is Polestar investable?
Polestar trades at pretty steep valuations, and investors may not be willing to invest in a stock that depends on multi-year projections to justify its valuations. On the other hand, the high growth rate and market potential for electric vehicles could make this stock quite attractive. Risks remain as new competitors could affect growth, and the cost of inputs such as lithium could rise significantly, which in turn could make vehicles more expensive. Finally, a slowdown would negatively affect the stock since any minor hiccup in the company’s results could lead to a quick correction.