Polestar Automotive(NASDAQ: PSNY) has disappointed a lot of investors since its market debut. The electric vehicle (EV) maker, which was spun off from Volvo, went public by merging with a special purpose acquisition company (SPAC) in June 2022. Its stock opened at $12.98 on its first day, but it now trades at about $1.60.
Polestar lost nearly 90% of its value as software issues and supply chain constraints throttled production. The macro and competitive headwinds also forced it to cut its prices to stay competitive. But could this out-of-favor EV stock bounce back over the next three years? Let's take a fresh look at its business to decide.
Image source: Polestar.
Polestar is producing plenty of vehicles
Polestar was once a racing team that transformed Volvo's cars into high-performance racing vehicles. Volvo, which was acquired by the Chinese automaker Geely in 2010, bought Polestar's brand in 2015. In 2017, Geely and Volvo rebooted Polestar as a stand-alone, high-performance EV brand. That reinvention led to its spin-off and SPAC-backed debut.
But unlike many other SPAC-backed EV makers, which are struggling to produce more vehicles, Polestar already manufactures tens of thousands of vehicles each year. It sells three high-end EVs: the Polestar 2 fastback, the Polestar 3 SUV, and the Polestar 4 SUV coupé in select markets. It plans to launch its next two vehicles, the Polestar 5 grand tourer and Polestar 6 electric roadster, in 2025 and 2026, respectively.
Yet Polestar's growth is slowing down. Its total deliveries jumped 80% to 51,491 in 2022 but only rose 6% to 54,626 in 2023. It pinned that abrupt slowdown on its supply chain challenges and some software issues that delayed the launch of the Polestar 3 from 2023 to early 2024.
In the first half of 2024, its deliveries fell 27% year over year to 20,371 vehicles. But its deliveries still rose 82% sequentially in the second quarter -- and it plans to keep expanding as it gets ready to enter seven new markets in 2025. It didn't provide an exact outlook for 2024, but it aims to deliver 155,000 vehicles in 2025 as it ramps up its production of the Polestar 3 and launches the Polestar 5. It will support that expansion with its new plants in the U.S. and South Korea.
Those growth rates still put Polestar far ahead of other struggling luxury EV makers like Lucid Group(NASDAQ: LCID), which only plans to deliver about 9,000 vehicles this year. From 2023 to 2026, analysts expect Polestar's revenue to grow at a compound annual growth rate (CAGR) of 61% and reach $9.9 billion by the final year.
That's an impressive growth rate for a stock that trades at less than 2 times this year's sales. By comparison, Lucid and Tesla trade at 12 and 7 times this year's sales, respectively. So if Polestar successfully scales up its business, its stock could potentially double or triple and still be considered a bargain.
But the red flags are tough to ignore
Polestar's stock seems cheap, but it's trading at that discount for obvious reasons. First, it delayed its 2023 annual report earlier this year to correct some accounting errors and restate some of its 2021 and 2022 numbers. That delay coincided with a major management shakeup, which replaced both its CEO and CFO. Its new CEO, Michael Lohscheller, also previously led two other controversial EV makers: Nikola and VinFast Auto.
Those abrupt changes rattled Polestar's investors, and its stock dropped below $1 from May to August and triggered a delisting warning from Nasdaq. It climbed back above that threshold over the past month, but it's still on shaky ground.
Polestar already reduced its vehicle prices by thousands of dollars over the past year, and the new European Union tariffs on its Chinese-made EVs could exacerbate that pressure and hamper its planned expansion into more European countries. Those challenges cast doubts on its goal of expanding its gross margin from negative 3.2% in the first half of 2024 to positive "double digit" levels by the end of the year.
Polestar's net loss widened from $466 million in 2022 to $1.17 billion in 2023, and analysts expect it to stay deep in the red through 2026. That's a grim situation for a company that was still shouldering $2.79 billion in net debt at the end of 2023 and holding just $669 million in cash and equivalents at the end of its latest quarter.
Where will Polestar's stock be in three years?
Polestar is producing plenty of vehicles, its long-term goals sound rosy, and its stock looks dirt cheap relative to its sales. However, its alarming accounting issues, management changes, and bloody balance sheet could all limit its gains. That's why I don't think Polestar's stock will bounce back over the next three years. Instead, it could easily miss its ambitious production and gross margin targets -- and its stock could get a lot cheaper before it's considered a bargain.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.
