The outlook of Gores Guggenheim (NASDAQ:GGPI) stock has improved markedly since I last wrote about the name in February. Still, given the lackluster reviews of merger partner Polestar’s upcoming electric vehicles (EVs) and the elevated valuation of GGPI stock, I continue to recommend selling its shares.
On April 4, Hertz (NASDAQ:HTZ) announced it will buy “up to 65,000 electric vehicles (EVs) over five years” from Polestar. The auto rental company plans to begin offering the vehicles to customers “in Spring 2022 in Europe and late 2022 in North America and Australia.”
Also, as a Seeking Alpha columnist pointed out recently, the Hertz deal could bring $3 billion to Polestar and become “a key marketing tool” for the EV maker. On top of that, the deal may very well give Polestar a crucial “coolness” factor. That’s because it appears Hertz has only made a similarly huge deal for EVs with Tesla (NASDAQ:TSLA), which has a great reputation.
The situation reminds me a bit of how Major League Baseball (MLB) announcers will often compare phenomenal modern-day players with baseball legends like Babe Ruth. By mentioning both people in the same sentence, the announcer is making the modern player look truly awesome. Hertz may have done something similar for Polestar.
According to analysts, Polestar’s market valuation may be as high as $25 billion following its merger with Gores Guggenheim. As a result, GGPI stock is a rather expansive name at this point.
Polestar sold 29,000 EVs last year, most of which reportedly cost $50,000 each. If its average selling price in 2021 was $60,000, its revenue from the vehicles would have been $1.74 billion.
Even if its EV revenue goes up 30% this year and its proceeds from the Hertz deal come in at $600 million (representing the estimated deal total of $3 billion divided by the agreement’s length of five years), Polestar’s 2022 revenue will only be $2.86 billion.
In other words, it would be trading at nearly nine times this year’s revenue. That’s very steep for an automaker, especially one that will probably not be profitable for some time.
As I pointed out in prior columns, the company is facing a great deal of competition in the higher-end section of the consumer EV market. Meanwhile, the reviews of its Polestar 2 have been mixed.
The Hertz deal may be a game changer for Polestar, but it’s too soon to tell if the alliance will move the needle sufficiently to justify the huge valuation of GGPI stock. As a result, I still urge investors to sell the shares.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.