Polestar needs cash (NASDAQ:PSNY) | Looking for Alpha

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justin sullivan

The North Star (NASDAQ: PSNY) has just unveiled its new Polestar 3 SUV, which is scheduled for release in late 2023 to 2024 following the discontinuation of the Polestar 1. The startup is also targeting one of the highest growth rates in the electric vehicle industry in the fourth quarter, which is looking to increase its deliveries by more than 110% q/q to reach 20,000 units; Essentially, Polestar aims to deliver 40% of its annual volume in just one quarter. With production and deliveries increasing dramatically alongside a long list of upcoming vehicle models, Polestar will need cash, and plenty of it, to execute its plan.

Rapid delivery growth projections questioned

Polestar is aiming for a massive increase in deliveries in the fourth quarter, after registering a series of weaknesses in the third quarter, which raises concerns about the ability of the manufacturer to increase sales to such a degree with only one vehicle model on the market. .

As a newly listed company, Polestar has limited delivery data to date; however, the startup announced sales figures for the first four months as well as the third quarter, giving an overview of production and shipments.

For the first four months, Polestar announced deliveries of around 13,600 vehicles, or around 3,400 vehicles per month on average. For the third quarter, Polestar reported vehicle volumes of 9,215 units, or about 3,071 per month on average; that leaves May and June volume at around 7,585 units, or 3,793 vehicles per month on average.

Overall, from May to September, Polestar sees average volumes of 3,360 per month, down slightly from 3,400 per month in the first four months. Essentially, what Polestar likely witnessed was a bit of strength in deliveries in the early summer months, followed by a slowdown in the third quarter as delivery volumes fell.

Polestar estimated delivery volumes through Q4 2022

Author’s calculations

During the fourth quarter, the volumes targeted by Polestar, close to 20,000, anticipate a fairly rapid growth rate, compared to the volumes seen throughout the year. Polestar aims to more than double delivery volumes in the fourth quarter, essentially going from a monthly run rate of 3,000 to 3,500 to a monthly run rate of 7,500 to 8,500 by December.

Scaling to this degree could be challenging, but it also raises critical questions about the pace of shipment growth through Q3:

  • Request: if demand was the main limiting factor until the third quarter – if demand was the driver of lower deliveries – Polestar’s ability to double deliveries is in question as it relies on a single model after the shutdown of the Polestar 1. Assuming demand had held Polestar back after hitting a run rate of 4,000 units in Q3 (12,000 units), where did the surge in demand come from to support a execution rate > 7,000? Given that Polestar said a “majority of Polestar 2 cars scheduled for Q4 delivery are ready”, it seems the issues were related to production capacity and/or the supply chain.
  • Sourcing/supply chain: Another factor that has hampered production at a handful of leading OEMs is supply chain constraints, especially for critical parts and chips. Honda (HMC) and Toyota (TM) have repeatedly cut production at their factories in Japan due to supply chain issues as the effects linger. Polestar could be a further victim of supply chain issues, facing increased difficulty in sourcing parts at competitive prices.
  • Production capacity: given Polestar’s manufacturing concentration in China, production capacity has increased, according to the company, paving the way to meet this rapid increase in volumes. However, going forward, exceeding 20,000 units per quarter will be costly and likely to increase OEM cash burn rates until the Polestar 3 hits the market in Q4 2023. Cash is the focus, as Polestar only has about $1.6 billion in cash to ramp up production of the Polestar 2 and bolster production capacity for the 3.

Moving on to 2023, the next question that arises is how much Polestar can increase deliveries with the majority of the year, if not the entire year, focused on sales of the 2. Supply likely to persist, along with risks of economic weakness and containment in China, Polestar could see growth limited to around 70,000 vehicles.

Cash consumption, expenses in brief

Polestar’s last reported cash figure was around $1.38 billion in the second quarter, leaving the OEM with little track before needing more cash – given the planned ramp-up vehicle volumes in the fourth quarter and in 2023, and the expenditure required to develop and scale a new model in the rear. half of the year, Polestar’s cash burn rates are expected to increase. Sharing a facility with Volvo (OTCPK:VLVLY) in South Carolina will help minimize the costs needed to scale production to some degree, since Polestar won’t have to build a facility from scratch.

Looking at Polestar’s cash burn rates and margins, the company is expected to be cash-strapped in Q2-Q3 2023, suggesting a significant capital raise is needed to fund Polestar launch operations. 3 and evolve until 2024.

In the first six months, Polestar posted a gross margin of 5.1%, down about 160bps year-on-year. Operating expenses totaled ~$566.8 million, excluding listing fees. General and administrative expenses increased 60% year-on-year from $278.9 million to $446.8 million due to “rapid business expansion as Polestar significantly increased its global presence during the period “.

Based on the first six months’ numbers, Polestar is on track to burn between an additional $400 million and $500 million in the second half of the year, cashing in nearly $850 million in 2023.

For the fourth quarter and 2023, operating expenses are expected to increase due to the following factors:

  • Increased global presence: Polestar is likely to expand to 30-32 markets, while adding service points and locations, which will increase G&A costs (potentially $30-60 million depending on degree of expansion)
  • Increase in R&D expenditure: Polestar has already “increased spending on future battery electric vehicles and technologies, including the Polestar Precept and the P10 powertrain.” Pilot Pack development and the addition of new features as well as the development of new vehicle platforms are expected to increase R&D spending, potentially up to $50 million per quarter by Q3 2023
  • Scaling up production volumes for 2, and preparing for the launch of 3: Polestar ran at approx. a circulation rate of 3,300 vehicles per month, but plans to increase production to an average of 7,000 per month. Scaling up production beyond these levels for the Polestar 2 in early 2023 will likely increase costs, as more materials and more production changes may be required to support such capacity expansion. Building final validation prototypes and the initial launch pad for 3, and scaling it up quickly, could add an additional $50-100 million in operating expenses.

Overall, Polestar could be looking at spending around $650-720 million in H1 2023, rising to $750-800 million by the end of next year. Given Polestar’s low margin profile, revenues of around $5 billion by the end of next year could only generate $300 million in gross profit, weighed down by around $1.2 billion. dollars to $1.4 billion in operating expenses.

Polestar is likely to raise a significant amount of cash in the first half of 2023 to support its rapid-to-market plans, which could significantly dilute shareholders; Take Chinese startup NIO (NIO), which raised more than $5 billion through the issuance of common shares in the second to fourth quarters of 2020, as production volumes grew from 10,000 per quarter to more than 17 000 per quarter.

Outlook

While Polestar’s targeted production ramp-up in the fourth quarter looks attractive given the massive sequential growth rate of over 110%, the company still faces a major challenge stemming from its cash burn rates and the increase in operating expenses. Extremely thin gross margins will fail to compensate for increased spending, which could stem from expansion plans, volume scaling and new model development. Given Polestar’s $1.38 billion in free cash at the end of the second quarter, combined with the company’s expected cash burn and operating expense rates, Polestar will likely need to raise a substantial amount of cash in beginning of 2023, which will weigh on the outlook for equities due to the dilutive risk of such a capital increase.

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