Gores Guggenheim (NASDAQ:GGPI) stock is a lot like some of my earliest romantic relationships: the right name at the wrong time (or so I thought). Sometimes when a good thing comes around, we’re just not ready to make the leap. Such is the story of my relationship with GGPI, which will ultimately become Polestar.
Polestar is a global pure-play electric vehicle (EV) company with lots of potential, expected to go public in a transaction valued at $20 billion. And unless you’ve been living under a rock, you already know that EVs represent a significant, investable portion of the global economy, with exponential growth expected over the next decade.
The reverse SPAC merger follows on the heels of two other red-hot IPOs: Rivian Automotive (NASDAQ:RIVN) and Lucid Group (NASDAQ:LCID). Both of these EV startups are essentially pre-revenue companies, yet already are valued over $80 billion and $60 billion, respectively.
By contrast, Polestar is a more established company — both in sales and production — yet the stock trades at a fraction of its peers.
In many ways, Polestar is the ‘right’ emerging electric vehicle stock to buy, with an almost perfect combination of good long term fundamentals and smart strategic positioning. Trouble is, the timing is off.
Keep your eye on GGPI stock. But at a 17% premium to trust value, don’t buy GGPI stock now. And in a more tepid market, investors shouldn’t expect Polestar’s IPO to have the same sizzle as those previous EV IPOs.
Bullish investors should wait for GGPI shares to approach $10 before buying in. Here’s why.
GGPI Has New Terms For the Polestar Merger
In late December, Gores Guggenheim filed an updated Form F-4 with the SEC announcing revised transaction terms relating to the merger with Polestar. First, GGPI assigned a portion of its commitment to purchase $63M in ListCo Class A ADSs (American Depositary Shares) to other investors. GGPI also agreed to subscribe for approximately 2.15M ListCo Class A ADSs for a purchase price of $9.09 per ListCo Class A ADS on the date of closing, for an aggregate investment of approximately $19.5M.
Importantly, GGPI has also added a $136 million PIPE subscription to support the merger. The lockup agreement has also been amended to increase the number of Class F shares to be canceled at the closing from 1,501,651 shares to 1,533,873 shares. The original deal terms, announced in September, called for a $250 million PIPE and approximately $800 million in the Gores Guggenheim trust (assuming no redemptions).
At GGPI’s current share price of $11 and an estimated 2.125 billion shares outstanding, Polestar is implicitly valued at approximately $25 billion. In other words, Polestar is implicitly trading at 7.8x estimated 2023 sales ($3.2 billion).
And Now, A Word About Gores Guggenheim’s Sponsors
Gores Guggenheim is led by Chairman Alec Gores, the founder and CEO of The Gores Group; CEO Mark Stone, who currently serves as a Senior Managing Director of The Gores Group; and President and Director Andrew Rosenfield, who currently serves as the President of Guggenheim Partners.
Gores Guggenheim completed its initial public offering in April 2021, raising approximately $800 million in cash. It’s the 13th blank check vehicle sponsored by The Gores Group, a reputable sponsor with several successfully completed de-SPAC’ing transactions. Notably, in the automotive technology sector, Gores Metropoulos I facilitated a $2.9 billion IPO for lidar sensor maker Luminar Technologies (NASDAQ:LAZR) last August. Gores has also remained on the board of post-merger companies including Nikola (NASDAQ:NKLA), Clover Health (NASDAQ:CLOV) and Luminar, suggesting some level of continued support and involvement in those company’s operations.
The Business Case for Polestar
Based in Sweden, Polestar was originally spun out of Volvo Car Group in 2016 and is jointly owned by Chinese automaker Geely Holding Group (OTCPK:GELYF) (50.5%) and Volvo Car Group (49.5%). Geely acquired Volvo in 2010. Notably, Polestar CEO Thomas Ingenlath was previously Senior Vice President of Design at Volvo Cars.
In 2017, Polestar was recast as an electric performance brand. The company is in production with electric cars in 14 markets across Europe, Asia, and the US. Polestar is currently shipping 2 models: the coupe Polestar 1 (a hybrid performance car) and an all-electric sedan, the Polestar 2. The Polestar 3, a luxury SUV model, is expected to ship in 2022. The company has also announced a luxury sport EV, the Polestar 5.
A strategic business partnership with Volvo and Geely is an important advantage which should allow Polestar to rapidly scale its manufacturing output over the next few years. The company currently operates a single manufacturing facility, the Polestar Production Centre in Chengdu, China. However, unlike most EV competitors, which are investing significantly to build and manage their own manufacturing facilities, Polestar will leverage six production facilities owned by its partners. The Polestar 3 will be manufactured in Volvo’s U.S. assembly plant near Charleston, South Carolina (the same plant building the Volvo S60 and the next-gen XC9).
By leveraging the operations of two well-established vehicle manufacturers, Polestar can scale cost-effectively and in line with demand. These relationships should also help alleviate the well-documented production and quality control issues experienced by Tesla and other EV startups during the early ramp-up stage. The combined research and development efforts of Polestar, Volvo, and Geely could result in greater innovation and technological advancement given the diversity of products and geographical footprint across the companies.
For 2021, Polestar should deliver 29,000 vehicles and generate revenue of $1.6 billion (2021 deliveries and revenues have not been confirmed as of this writing). The company expects to ramp to 750,000 units annually at full production. As a comparison, EV manufacturer Tesla (NASDAQ:TSLA), which operates 6 manufacturing facilities, shipped 936,000 cars in 2021. Rivian and Lucid, which each operate a single U.S. manufacturing facility, expect to ship 150,0000 and 53,000 vehicles respectively, in 2022.
By 2023, Polestar expects to be in 30 markets and breakeven on an operating basis. By 2025, the company sees revenue growing at a compounded annual growth rate of 83% to $17.8B, generating roughly 9% margin on earnings before interest and taxes. Polestar also expects to deliver 290K vehicles by the end of 2025.
Updated Cap Structure
At an implied valuation of $25B, Polestar would garner the highest valuation of any SPAC connected with the Gores Group. The company is expected to raise over $995M in cash through its IPO. Notably, the IPO of Rivian Automotive raised nearly $12 billion, the largest IPO in the U.S. since 2014.
Post-merger, Polestar will own 94.1% of the overall business. GGPI investors will own 3.8%, the Sponsor will own 0.9% and PIPE (private investment in public equity) investors will own the remaining 1.2%.
Of note in the capital structure is that the sponsor, GGPI, is expected to retain a 0.9% stake in the company. At a $25B valuation, that stake is worth $230 million for an initial $20,000 investment in founder shares and $18M invested in warrants.
While the sponsor incentive is lucrative, the Gores Group has a track record of successful SPAC transactions and a history of sponsor engagement post-IPO. The latter bodes well for potentially reducing stock volatility in SPAC IPOs around lock-up expiration dates.
Valuation and Trading Activity
The electrification of the auto industry is well underway. Accordingly, EV valuations reflect the pervasive investor sentiment that electric vehicles will carve out a larger piece of the $5 trillion automotive market. Notably though, the current market constraints for automakers have little to do with demand, and rather with supply.
The long term drivers supporting growth are strong and sustainable. But investing in the EV sector has proven both speculative and volatile. GGPI shares reached a peak of $14 in December, representing a 40% premium to trust value. Since then enthusiasm has dwindled, as a more hawkish Fed has led to sector rotation into names with more positive exposure to rising interest rates. GGPI shares have retreated from their highs and trade at 17% premium to trust value on an average daily volume of under 9 million shares.
Unlike other EV market entrants such as Rivian and Lucid, Polestar is in full volume production and generating meaningful revenues. At an implied valuation of $25 billion, Polestar trades at 7.8x estimated sales. That’s a significant discount to competitor Tesla at over 20x and even Nio at 9x. That said, given the current premium to trust value, we think there is some near-term downside risk to GGPI shares, particularly as the entire EV and related technology sectors have been under pressure in recent weeks.
Key Risks and Catalysts
Polestar’s strategy to leverage its relationships with Volvo and Geely provides several time-to-market advantages. Global automakers have pursued alliances to respond better to the cost of the transition to electric cars, tougher emission rules and new technologies like autonomous driving. However, the reliance on external parties for purchasing, manufacturing, engineering, and design comes with long-term tradeoffs. Notably, Polestar has less control over manufacturing costs, as these agreements are structured as a percentage of Volvo/Geely costs plus an incremental markup.
The interdependence of Polestar’s partner relationships may raise questions regarding the company as an independent standalone business longer-term. Accordingly, potential investors should consider the quality and capabilities of both Volvo and Geely. Unfortunately, we have limited transparency into the financial and operational health of Volvo and Geely (a foreign listed company). Since abandoning plans to merge with Volvo in February 2021, Geely appears focused on Polestar as an integral part of its expansion into the global automotive market.
Competition And Addressable Markets
As a new EV manufacturer, Polestar faces significant competitive risk, primarily from Tesla, which currently dominates the EV market, but also from other startups. Public perception and branding are critical for this sector.
For the most part, Polestar’s primary competitors, Tesla and Lucid, are perceived to have superior battery technology and more attractive vehicle designs. But unlike EV startups such as Rivian and Lucid, which have targeted specific niches (e.g. SUVs and luxury vehicles), Polestar targets a broader addressable market. A single-motor Polestar 2 MSRP starts at $38,400 (after tax credits). A dual-motor Polestar 2 starts at $42,400 (after tax credits). In contrast, a Lucid Air Dream starts at $77,400 and Rivian’s R1T electric pickup starts at around $67,500.
While Lucid and Rivian are expected to be regional players, at least initially, Polestar appears positioned for a larger addressable market globally. However, the company’s entry into the highly profitable SUV market with the Polestar 3 will face considerable competition. The SUV segment is the largest EV segment, with about 370 total electric car models available in 2020, a 40% increase from 2019. Notably, Rivian, which is currently trading at a $93 market capitalization, is expected to be a formidable player, with its much-anticipated full-size electric SUV, the R1S, expected to ship in 2023. Tesla’s Cybertruck is also expected in 2023.
Polestar’s focus on sustainable materials and manufacturing appears to be a key differentiator. The company aims to be carbon-free in its entire production process. Polestar also plans to make sustainability declarations, common in industries like food and fashion, standard practice for all future models.
The Bottom Line on GGPI Stock
The electric vehicle market represents a significant investable portion of the global economy, with exponential growth expected over the next decade. Polestar has strong underlying fundamentals, and unlike recent EV IPOs, is a more mature company, in full volume production and generating revenues. However, from a valuation perspective, the EV market appears overheated and in the midst of a broader sector correction. Amidst a more tepid macro outlook and a 17% premium to trust value, I see a limited short-term arbitrage opportunity in GGPI shares.
As a comparison, the most recent IPO in the electric vehicle space, Rivian Automotive, took place in November 2021. Notably, RIVN stock was up more than 21% from its initial opening price to the close of trading on Nov. 12, 2021, three trading days after the IPO. That said, we do not anticipate the same kind of momentum in Polestar stock. The company has a more complicated ownership structure. And EV valuations are overstretched by almost any measure.
Polestar has a promising strategic proposition of leveraging the existing infrastructure and tested manufacturing capabilities of Volvo and Geely in order to scale. In the short term, we foresee continued volatility in GGPI shares, and expect a market correction to alleviate the current valuation disparity among EV stocks. Over the long term, Polestar appears relatively well-positioned in a high-growth market. That said, investors should be wary of risks related to the company’s dependence on its partners and competition.
Your comments and feedback are always welcome. Let’s continue the discussion. Email me at [email protected].
Disclosure: On the date of publication, Joanna Makris did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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