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Stocks  | June 10, 2021

The startup Fisker is taking a different approach to manufacturing electric vehicles than its rivals. One Wall Street analyst says it could be a smart call.

Tuesday evening, RBC analyst Joseph Spak launched coverage of Fisker (ticker: FSR) with a Buy rating and $27 price target. That is roughly 50% higher than where shares closed on Tuesday.

Fisker stock was up about 6% in early trading. The S&P 500 and Dow Jones Industrial Average were near the break-even line.

“Fisker plans to bring [battery electric vehicles] to the market in a differentiated way, utilizing 3rd-party BEV platforms and contract manufacturing,” wrote Spak in his coverage-initiation report. Fisker won’t own its automotive plants. It will, essentially, design and market cars.

The company is using Magna International (MGA) to build its first product—an electric sport-utility vehicle called Ocean. It has a partnership with Foxconn, the company that assembles iPhones, to build its second car.

“This leverages the billions of dollars the industry is pouring into the market,” Spak wrote. Rather than spending to build factories, Fisker can save its cash and buy batteries developed by third parties. What’s more, Foxconn wants to get into the car business, so it is willing to spend money building assembly facilities.

The shift from traditional car companies that own all of their own manufacturing is possible because EVs might be less complicated than traditional cars. Batteries and an electric motors are more commodity-like than the four-cylinder engines common on cars today.

“If [Fisker] can hit our forecasts…we see potential for significant equity value creation,” Spak said. He projects $10 billion in sales by 2025. “We see 5:1 risk/reward on our upside:downside case.”

In his most optimistic case, Fisker shares could hit $61. His most bearish forecast puts it at $8. That is up about $42 from Wednesday’s levels and down $11, meaning the potential gain is about four times the possible loss. That number is a bit lower than the 5:1 ratio Spak cited, but it is still attractive. Risk/reward ratios are a good way to think about investing in startups that don’t have sales.

Ocean deliveries are supposed to begin in 2022. Spak models 3,000 deliveries in 2022, growing to 216,000 by 2025. With its asset-light operating model, Spak believes the company can generate $875 million in free cash flow in 2025.

Spak isn’t alone in his bullish view. Seven out of 11, or 64%, of analysts covering the stock rate shares at Buy. The average Buy-rating ratio for stocks in the S&P is about 55%.

EV companies don’t have to be asset light to excite investors. Fisker stock is worth about $6 billion, but Lucid Motors, which is merging with Churchill Capital Corp IV (CCIV), is worth about $43 billion. Lucid, like Fisker, doesn’t have sales, but it has its own manufacturing plant and believes controlling manufacturing is a competitive advantage.

Fisker shares are up about 23% year to date, better than the market. Still, shares are down 43% from their 52-week high. Stock in electric-vehicle start ups has been volatile in 2021.

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