Fisker Inc (NYSE:FSR) closed its merger with a SPAC (special purpose acquisition company) on Oct. 30 and started trading under its own symbol. FSR stock now looks like a winner since it received a number of benefits at the close of that transaction.
For one, the company says that it received “in excess of $1 billion” at the close of the business combination. In addition, the combined company was renamed Fisker and now has a market value of $3.1 billion, and an enterprise value (EV) of $2.1 billion. This is because it finished the combination without having any debt on the combined company balance sheet.
Second, the company now says that it will be able to “fully fund Fisker operations and the development of the Fisker Ocean program through the planned start of production in Q4 2022.”
In other words, it won’t need to raise any more capital that would dilute existing shareholders. Even if it does, I highly suspect it would use debt rather than an equity offering.
Prospects for Fisker
The company’s mid-size Ocean SUV will be a direct competitor to other electric vehicles in the market. However, the company expects to be very competitive with its peers.
For example, according to Barron’s, Fisker expects to make 225,000 electric SUVs a year by 2025. Its base price, according to the company’s slide presentation, will be $37,499 for the Ocean. It also expects to have a cheap leasing option of about $379 per month.
Moreover, starting in 2024, the company plans on producing a “lifestyle pickup” EV truck, as well as a sport crossover in 2025.
More importantly, on page 29 of the presentation, Fisker estimates it will make $2 billion in EBITDA (earnings before interest, taxes, depreciation, and amortization) as well as $1 billion in free cash flow (FCF) by 2024. In fact, by 2025 those numbers will increase to $2.8 billion and $1.9 billion, respectively.
Fisker’s Projected Value
Therefore, using a 15% discount rate, the present value of its 2025 EBITDA is worth about 50% of that five-year forecast, or $1.392 billion. As a result, its present value EV-to-EBITDA ratio is very cheap. It works out to just 1.5 times (i.e., $2.1 billion divided by $1.39 billion).
A more normal valuation would be 5 to 6 times, or an EV of $7 billion to $8.35 billion. The implied market value would be $1 billion higher, since one must add back the cash. That puts its value at $8 billion to $9.35 billion in five years. That is 380% higher than today (i.e., $8 billion divided by $2.1 billion market cap today), or 445% higher.
Therefore, FSR stock is worth significantly more than its present price. Even discounting these numbers by 50%, due to potential risks, the stock should be between 190% to 222% higher. Let’s call it 200%. That implies the true value for FSR stock is worth double today’s price of $13.94, or $$27.88.
Moreover, the SPAC merger process seems to facilitate EV companies like Fisker in moving their manufacturing programs forward. This is what Henry Fisker, the Fisker CEO, recently told Barron’s in a podcast about the future of automobiles.
Seeking Alpha recently summed up the podcast interview with Fisker. Interestingly, he said that “the SPAC process raises funds right away, making it easier to ink a deal with a manufacturing partner.” In other words, it allows the company to immediately move forward with its plans.
What to Do With FSR Stock
In my previous Sept. 1, 2020, article on Fisker, I estimated it is worth $38.88. I am not necessarily downgrading the stock with my $27.88 value today. Remember, I took a 50% discount for risks.
So in effect, the real value is between $27.88 and $38.88 over the next five years. That implies that from today, the expected annual return is between 14.9% and 22.7% annually, on a compounded basis. These are very high returns and most investors would be happy to receive this level of ROI.
Therefore, I believe that FSR stock will be a winner for most investors today, as long as the company is able to execute. If it puts the $1 billion it has raised to manufacture the Ocean mid-sized SUV electric vehicle by Q4 2022, expect to see FSR fly much higher.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.