Every automaker these days is chasing hard cash as they make the switch from gas-powered to electric automobiles.
New battery-powered vehicles are being released by both established and up-and-coming automakers in an effort to keep up with demand. Increased material costs and complex rules for federal incentives make the already difficult and expensive process of ramping up production of a new model much more difficult.
Lithium, nickel, and cobalt, the basic minerals used in many electric-vehicle batteries, have seen a sharp spike in price over the last two years as demand has skyrocketed; it may be a while before miners are able to significantly boost supply.
Further complicating matters, new U.S. regulations controlling EV buyer incentives may eventually force manufacturers to obtain more of those components from North America if they want their vehicles to be compliant.
The outcome: increased cost pressures for a procedure that was already pricey.
Before a single new car is shipped, automakers regularly invest hundreds of millions of dollars in designing and installing tooling to create new high-volume automobiles. Today, almost all automakers worldwide keep sizable cash reserves of $20 billion or more. These reserves are there to make sure the businesses can keep working on their upcoming new models if and when a recession (or pandemic) temporarily hurts their sales and profits.
All that time and money may have been wasted, and the automaker might not have recovered its costs if the new model didn’t appeal to consumers or if production issues prevented it from being introduced on time or without compromising quality.
The financial risks of developing a new electric vehicle might be existential for younger companies.
Take Tesla as an example. Elon Musk, the CEO of the automaker, and his team designed a highly automated production line for the Model 3 with robots and specialized tools that reportedly cost well over a billion dollars when the automaker started making plans to debut its Model 3. Tesla shifted some final-assembly activities to a tent outside its factory since part of that automation didn’t function as planned.
Tesla made a number of costly mistakes along the way. Later, Musk referred to the Model 3 launch process as “production hell” and claimed that it almost drove Tesla into bankruptcy.
More investors are becoming aware of how expensive it is to produce a car from conception to completion as more recent EV firms increase production. Wall Street is paying particular attention to the cash balances of EV companies in the current environment, where depressed stock prices and rising interest rates have made it more difficult to raise money than it was only a year or two ago.
Here is the current cash position of some of the most well-known American EV companies during the past few years:
With more than $15 billion available as of the end of June, Rivian is unquestionably the most well-positioned of the new EV businesses. According to CFO Claire McDonough, who spoke on the company’s earnings call on August 11, that should be sufficient to support the business’ operations and growth through the anticipated 2025 introduction of its more compact “R2” vehicle platform.
Due to supply chain hiccups and early manufacturing difficulties, Rivian has had difficulty ramping up production of its R1-series pickup and SUV. In order to ensure that it can achieve its longer-term objectives, the firm said it will cut its near-term capital expenditures from $2.5 billion in its previous plan to around $2 billion this year. The company burnt about $1.5 billion in the second quarter.
According to at least one analyst, Rivian will require capital well before 2025: Morgan Stanley analyst Adam Jonas stated that his bank’s model predicts Rivian would raise $3 billion through a secondary stock offering by the end of next year and another $3 billion through additional fundraisers in 2024 and 2025 in a note published in response to Rivian’s earnings announcement.
With a $60 price target, Jonas presently rates Rivian’s shares as “overweight.” Friday’s trading for Rivian saw a share price of about $32.
Although Lucid Group, a manufacturer of luxury EVs, doesn’t have quite as much cash on hand as Rivian, it is still in a decent position. It had $5.4 billion in cash at the end of March, down to $4.6 billion at the end of the second quarter. CFO Sherry House earlier this month stated that there would be enough to last “well into 2023.”
Since introducing its Air luxury sedan last fall, Lucid has struggled to increase manufacturing, just like Rivian has. It intends to make significant capital investments to develop a second plant in Saudi Arabia and expand its production in Arizona. The Saudi Arabian public wealth fund, however, which owns roughly 61% of the California-based EV manufacturer and will almost surely step in to aid if the business runs out of money, is Lucid’s well-heeled patron, in contrast to Rivian.
Wall Street analysts weren’t too worried about Lucid’s second-quarter cash burn, for the most part. John Murphy of Bank of America reported that Lucid still has “runway into 2023, especially considering the company’s recently secured revolver [$1 billion credit line] and incremental funding from various entities in Saudi Arabia earlier this year.”
Murphy has a $30 price target and a “buy” rating on Lucid’s shares. He made the comparison between the startup’s possible future profitability and Ferrari, a high-end sports car manufacturer. Currently, shares of Lucid trade for around $16.
Fisker won’t be creating its own plant to make its electric cars, in contrast to Rivian and Lucid. Instead, the business established by former Aston Martin designer Henrik Fisker will construct its vehicles using contract manufacturers Magna International and Foxconn of Taiwan.
This amounts to a sort of financial trade-off: Fisker won’t have to spend as much money up front to get the planned Ocean SUV into production, but it will almost probably forfeit some profit in order to pay the manufacturers later on.
At a Magna-owned facility in Austria, production of the Ocean is expected to start in November. With $852 million on hand at the end of June, Fisker should have no issue covering those costs. In the meanwhile, the company will incur significant costs, including cash for prototypes and final engineering as well as payments to Magna.
Following Fisker’s second-quarter report, RBC analyst Joseph Spak stated that despite its contract manufacturing model, the firm will probably require more cash, which he expected to be around $1.25 billion over “the coming years.”
The stock of Fisker has a “outperform” rating and a $13 price target from Spak. The share price on Friday at the closure was $9.
One of the first EV manufacturers, Nikola, went public through a merger with a SPAC, or special-purpose acquisition company. The business has started producing its battery-powered Tre semitruck in modest quantities and intends to increase manufacturing and add a long-range hydrogen fuel-cell variant of the Tre in 2023.
But at this time, it presumably lacks the funds to travel there. After allegations from a short-seller, a stock price decline, and the expulsion of its vocal founder Trevor Milton, who is now facing federal fraud charges for representations made to investors, the company has found it more difficult to raise money. Milton was also fired for his outspoken views.
At the end of June, Nikola had $529 million on hand and another $312 million was accessible through an equity line from Tumim Stone Capital. During Nikola’s second-quarter results call, CFO Kim Brady stated that there is sufficient funding to support operations for another 12 months; but, further funds will soon be required.
“Given our target of keeping 12 months of liquidity on hand at the end of each quarter, we will continue to seek the right opportunities to replenish our liquidity on an ongoing basis while trying to minimize dilution to our shareholders,” Brady said. “We are carefully considering how we can potentially spend less without compromising our critical programs and reduce cash requirements for 2023.”
Before the end of the year and possibly later, Nikola would need to raise between $550 million and $650 million, according to Deutsche Bank analyst Emmanuel Rosner. Nikola currently has a “hold” rating from him and a $8 price target. As of Friday’s close, the stock is trading for $6.
With only $236 million on hand as of the end of June, Lordstown Motors may be in the most dangerous position of all.
Similar to Nikola, Lordstown saw a stock price slump after its founder was fired as a result of fraud claims made by a short seller. In May, the firm finalized a deal to sell its Ohio factory, a former General Motors plant, to Foxconn for a sum of roughly $258 million. The company had switched from a factory model to a contract-manufacturing setup like Fisker’s.
The Endurance pickup truck from Lordstown and the forthcoming Pear compact Fisker EV will both be produced by Foxconn in the plant for other companies.
Lordstown faces significant obstacles in the future, but Deutsche Bank’s Rosner still rates the stock as “hold.” But he is not upbeat. Despite its decision to limit the first production batch of the Endurance to just 500 units, he believes the firm will still need to collect $50 million to $75 million in order to cover operating expenses until the end of this year.
“More importantly, to complete the production of this first batch, management will have to raise more substantial capital in 2023,” after Lordstown released its second quarter results report, Rosner wrote. And that won’t be simple given the company’s current problems.
“Lordstown would have to demonstrate considerable traction and positive reception for the Endurance with its initial customers in order to raise capital,” he wrote.
Rosner has a $2 price objective on the stock of Lordstown and grades it as a “hold.” On Friday, the share price reached $2.06.
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