How is the cash flow of American electric car startups?
Established carmakers and startups are launching new models to meet growing demand. Increasing production of new models is already worrying and costly, while rising material costs and tricky regulations on federal incentives are further squeezing cash flow.
The prices of lithium, nickel and cobalt, the raw materials for many electric car batteries, have soared over the past two years because of surging demand, and it could take years for miners to significantly increase supply.
Further complicating matters, new US rules on incentives for buyers of electric cars will require carmakers to purchase more of these raw materials in North America in the future so that their cars will be allowed to be sold.
This will lead to new cost pressures on already expensive production processes.
Before new cars are delivered, automakers typically spend hundreds of millions of dollars designing and installing production lines to produce vehicles in large quantities. Almost all global carmakers now have cash reserves of $20 billion or more. These reserves are intended to ensure that the company can continue to develop the next batch of new models in the event of a recession (or epidemic) and a decline in sales and profits over multiple quarters.
All this money and time can be a risky bet: if the new model is not popular with customers or if manufacturing problems delay the launch of the new car or damage the quality, then the carmaker may not make enough money to cover the money spent.
For the new power of car building, there are financial risks in designing new electric vehicles.
Tesla, for example, before it prepares to launch Model 3, Musk and his team plan to build a highly automated production line for Model 3, including the use of robots and specialty machines worth more than $1 billion. But some of the automated production lines did not produce as expected, and Tesla transferred some of the final assembly tasks to a tent outside the factory.
Tesla learned a lot of expensive lessons in the process. Musk later called the launch of Model 3 a "production hell" and said it almost brought Tesla to the brink of bankruptcy.
As electric car startups increase production, more and more investors understand that cars are capital-intensive from design to production. In the current environment, falling share prices and rising interest rates make it harder to raise money than it was a year or two ago, and their cash flow is being closely watched by Wall Street.
Here are the cash flows of some famous American electric car startups over the past few years:
Rivian
Rivian is by far the best-positioned electric car startup, with cash flow of more than $15 billion at the end of June. Claire McDonough, the company's chief financial officer, said on the company's earnings call on Aug. 11 that this would be enough to fund the company's plans to launch a small R2 car in 2025.
In the face of supply chain obstacles and early manufacturing challenges, Rivian has been working to increase the production of R1 series pickups and SUV. The company, which burned about $1.5 billion in the second quarter, said it planned to reduce short-term capital expenditure this year from $2.5 billion to about $2 billion to ensure that long-term goals were met.
Several analysts believe Rivian needs to raise cash by 2025. After Rivian's results, Morgan Stanley analyst Adam Jonas expects Rivian to raise $3 billion through a secondary offering by the end of next year and another $3 billion through additional financing in 2024 and 2025.
Jonas currently has an "overweight" rating on Rivian, with a target price of $60.
Lucid
Luxury electric carmaker Lucid Group doesn't have as much cash as Rivian, but it's not in a bad position. The company's cash flow reached $4.6 billion at the end of the second quarter, down from $5.4 billion at the end of March. Sherry House, Lucid's chief financial officer, said earlier this month that the money would be sufficient to last until 2023.
Like Rivian,Lucid, it has been trying to increase production since it launched the Air luxury sedan last fall. It is planning to spend heavily on expanding its Arizona plant and building a second plant in Saudi Arabia. But unlike Rivian, Lucid has a deep-pocketed sponsor, the Saudi Public Investment Fund. The fund, which owns about 61 per cent of Lucid, is sure to help if the company runs out of money.
For the most part, Wall Street analysts don't care about Lucid's cash consumption in the second quarter. Bank of America's John Murphy believes Lucid still has a "runway" in 2023, especially given the company's recent access to a $1 billion credit line and incremental funding from a number of Saudi entities earlier this year.
Murphy has a "buy" rating on Lucid with a target price of $30. He compared the potential future profitability of the startup with that of Ferrari.
Fisk.
Unlike Rivian and Lucid, Fisk has no plans to build his own factory to make electric cars. Instead, the company, founded by Henrik Fisker, a former Aston Martin designer, will rely on contract manufacturers Magna International and Foxconn of Taiwan to make cars.
This represents some kind of cash trade-off: Fisk does not have to spend a lot of money in advance to put his Ocean SUV into production, but it is likely to give up some of its profits to pay the manufacturer.
Production of the Ocean will begin in November at the Austrian plant in Magna. Fisk will have considerable expenses during this period, including funds for the prototype and the final project, as well as payments to Magna. As of the end of June, the company had $852 million in cash and may have no problem bearing these costs.
Joseph Spak, an analyst at RBC, said after Fisk's second-quarter report that despite the contract manufacturing model, the company may need more cash, estimated at about $1.25 billion over the next few years.
Spak gave Fisk an "outperform" rating, with a target price of $13.
Nikola
Nikola was one of the first electric car manufacturers to list through SPAC. The company has begun delivering a small number of electric trucks, Tre, and plans to increase production in 2023, while increasing the Tre version of long-range hydrogen fuel cells.
But so far, it may not have enough cash to achieve its goals. It became harder for Nikola to raise money after allegations from short sellers, a collapse in share prices and the resignation of the outspoken founder Trevor Milton. It now faces fraud charges for making misleading statements to investors.
As of the end of June, Nikola had $529 million in cash and another $312 million was available through equity in Tumim Stone Capital. Kim Brady, the company's chief financial officer, said on the Nikola's second-quarter earnings call that the cash was enough to fund the company's operations for another 12 months, but that more money would be needed after that.
Deutsche Bank analyst Emmanuel Rosner estimates that Nikola needs to raise $550 million to $650 million by the end of the year. He has a "hold" rating on Nikola, with a target price of $8.
Lordstown
Lordstown Motors may be in the worst position, with only $236 million in cash at the end of June.
Shares of Nikola,Lordstown plummeted after its founder was forced to quit on allegations of fraud by short sellers. The company has shifted from a factory model to contract manufacturing similar to Fisk. It completed a deal in May to sell its Ohio plant, a former GM plant, to Foxconn for $258 million.
Foxconn plans to use the plant to produce electric cars for other companies, including Lordstown's Endurance pickup truck and the upcoming small Fisk electric car Pear.
Although Lordstown faces considerable challenges, Deutsche Bank's Rosner still gives the stock a "hold" rating. However, he is not optimistic about Lordstown, saying that despite the company's decision to limit the first batch of Endurance production to 500 vehicles, it still needs to raise $50 million to $75 million to fund operations in the second half of the year.
"in order to raise money, Lordstown must demonstrate to its original customers the great attractiveness and positive acceptability of Endurance," Rosner said.
Rosner has a "hold" rating on Lordstown, with a target price of $2.
