Fisker (FSR) is not without its faults, but the market underestimates its chances of becoming a profitable EV maker.
That said, as growth stocks continue to experience downward pressure, shares will likely move lower.
Keep FSR stock on your radar, as the opportunity to buy at a favorable entry point could arrive soon.
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Although it spiked a few times during last year’s electric vehicle (EV) stock rallies, Fisker (NYSE:FSR) has never been a top EV play. FSR stock has long been an “also-ran” compared to other EV startups, like Lucid (NASDAQ:LCID) and Rivian (NASDAQ:RIVN).
But the prospects of this vehicle electrification play are much better than its critics would suggest. That’s not to say it’s not without its faults, but its asset-light approach to scaling up could give Fisker a clear path to profitability within a few years.
At around $10 per share today, its valuation appears reasonable compared to these prospects. However, as growth stocks continue to go out of style due to rising interest rates, now’s not the time to go contrarian. Keep an eye on FSR stock, as when the dust settles, this may be a great contrarian play to scoop up.
FSR Stock Remains a Solid Contender
Fisker didn’t exactly set the world on fire with its latest earnings report, but it didn’t completely disappoint investors, either. Although it reported higher-than-expected losses for the quarter, losses were only slightly worse than analyst estimates.
Outside of that, this pre-revenue company appears to be on track to start production of its Ocean SUV model. Not only that, it continues to see reservations come in at an elevated pace. Ocean reservations now number 45,000 versus 31,000 when the EV maker last reported earnings.
This may explain why several Wall Street analysts, while cutting respective price targets, have maintained their “buy” ratings on FSR stock. There was little in the earnings report to suggest the story has changed for the worse. Fisker is seemingly set to experience a meaningful scaling up over the next few years.
Hitting profitability within the next few years may be attainable as well. Unlike some other EV startups, it’s not trying to go it alone when it comes to manufacturing. Instead, it has Magna International (NYSE:MGA) as its contract manufacturing partner. This could enable it to scale up with fewer headaches and a leaner cost structure.
While There’s Big Potential, Wait to Buy
Yes, special purpose acquisition company (SPAC) projections should be taken with a grain of salt. Even so, the numbers provided by Fisker when it went public via the SPAC route in 2020 give us an idea of its potential profitability once it starts to scale up.
Per its projections, Fisker could hit adjusted EBITDA margins of 13% if it gets to $3.3 billion in annual revenue. Margins could hit 19% if annual revenue hits $10.6 billion. The company may have been aggressive, estimating it could hit this figure by 2024.
But even if it doesn’t hit this figure until, say, the mid-to-late 2020s, the resultant jump in its valuation could make buying today a profitable move. Right now, FSR stock has a market capitalization of about $3 billion. If this company were to hit $2 billion in adjusted EBITDA, its per share value would certainly be many times what it is today.
Still, that doesn’t mean you should buy in today. It’ll likely continue to pull back in the months ahead, as the Federal Reserve keeps raising interest rates to fight inflation.
Keep FSR Stock on Your Watchlist
Rising interest rates are bad news for speculative growth plays like FSR stock in the short-term. The selloff in these shares has reduced the present value of the future earnings their valuations are based on, and it may be far from over.
Fisker has been already more heavily discounted than names like Lucid. Downside risk may be limited. Nevertheless, with the high chance it will experience another double-digit drop, why buy today?
A few months from now, the Federal Reserve’s tightening measures may start to bring inflation to heel. With rates at that point priced in, EV plays could bottom out. More promising than its critics give it credit for being, FSR stock is a buy once the dust starts to settle. At the right entry point, it could result in stellar returns.
On the date of publication, Thomas Niel did not have (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.
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