On Friday, June 24, Swedish electric performance car maker Polestar (PSNY, Financial) began trading on the Nasdaq following its merger with Gores Guggenheim, a special purpose acquisition company.
This marks a new chapter in the company’s history, and Polestar plans to use the funds from the acquisition to super-charge its growth. It has set ambitious goals to release a new model each year and reach profitability by 2025.
SPAC mergers do not really have a good track record, with companies often choosing to go public via this route so that they can gain enough funding to actually produce something. This is not the case with Polestar, though. Polestar already has more than 55,000 cars on the road globally.
Given that its cars have a good reputation, it has a clear plan to turn profitable and it can rely on support from its founders, Volvo Cars and Zhejiang Geely Holding Group, which combined have more than a century of history as vehicle manufacturers, could Polestar be the “next Tesla (TSLA, Financial)” that investors have been waiting for?
Polestar’s advantages
Polestar goes public from a place of strength in the market, which is a key prerequisite for success as it means the company is far more likely to hit its milestones, securing the confidence of investors and avoiding delays in getting its cars on the road.
“We go public as an operating and successful business — not to raise capital to build a business,” Polestar CEO Thomas Ingenlath told CNBC in an interview. “It’s because the next three years will be super-fast growth, the company is geared up for that with the product portfolio.”
These next few years will be critical for the formation of the EV industry as a whole. Now that Tesla has proven that EVs can be profitable at scale, other players are entering the market left and right to meet demand. A report from Facts and Factors estimates that the EV market will expand at a compound annual growth rate of 24.5% through 2028.
Competition will be fierce, which is why scaling up rapidly is not optional at this point for companies that want to seize significant market share. This is where Polestar having the backing of its founders will come in handy. Volvo Cars still owns 48% of Polestar, giving it a vested interest in the company’s future, and Volvo Cars is in turn fully owned by Zhejiang Geely Holding Group. (Note: Volvo Cars should not be confused with Volvo AB (VLVLY, Financial), nor should Zhejiang Geely Holding Group be confused with Geely Auto (GELYF, Financial)).
In addition to its existing production capacity in China at a factory that is shared with Geely, Polestar plans to begin production in a South Carolina facility shared with Volvo later this year. It plans to sell all of its vehicles in Europe, China and the U.S.
Polestar is also working on building its network of business partners. Through Volvo, it signed a deal with Alphabet (GOOG, Financial)(GOOGL, Financial) to develop the world’s first built-in Android-powered vehicle operating system. It has also signed agreements with ChargePoint (CHPT, Financial) and Electrify America to provide charging stations, as well as deals with Enterprise and Hertz (HTZ, Financial) to sell vehicles for their rental fleets.
Customer perspective
Even more important than a company’s ability to scale is its ability to offer products that are popular with consumers. How likely are drivers to prefer a Polestar car over something offered by Tesla, General Motors (GM, Financial) or any of the other increasingly numerous EV manufacturers? Are they able to offer more or less value for their price point?
Polestar is focused on the luxury EV market, with its base models around $155,000 for the flagship hybrid model Polestar 1 and $48,000 for the all-electric Polestar 2. It has not yet set a price for the Polestar 3, its upcoming electric SUV that is scheduled to premiere in October 2022.
With tax credits, the Polestar 2 ends up being slightly cheaper than the base model Tesla Model 3. It also offers a similar range and similar acceleration. One area where the Polestar 2 underperforms the Tesla Model 3 is on battery efficiency, but on the other hand, a frequent observation among drivers is that the Polestar 2 handles better, feeling more stable and controlled.
These two cars are often compared to the slightly more expensive BMW i4 from German automaker Bayerische Motoren Werke (XTER:BMW, Financial). The i4 may offer similar stats on paper, but it has the other two beat in terms of ride quality and comfort.
Just from the comparison between these three EVs, we can see this market is shaping up to be every bit as competitive as the market for gas-powered cars. A lot will come down to drive quality, overall feel, aesthetics, cost and availability.
Valuation prospects
Due to the kind of market it is entering, Polestar simply does not have the opportunity to obtain a valuation multiple similar to Tesla’s.
With 72% of the U.S. EV market, Tesla occupies the top spot in investors’ share of mind by a long shot, resulting in a phenomenon where investors often equate Tesla’s profit potential with the projected growth of the entire EV market.
That being said, high growth in and of itself could still drive the share price higher. So far, Polestar’s growth is really taking off, with 2021 sales reaching the target of 29,000 vehicles, up 185% year over year. It now operates 100 retail locations in 19 markets and plans to expand to 150 retail locations in 30 markets by the end of 2023.
Unlike gas car juggernauts like General Motors and Ford (F, Financial), Polestar is starting from a small base, which will allow it to report impressive growth numbers and establish an all-electric brand image.
Overall, while Polestar will not be the next Tesla, it does have an established product and a promising outlook in a rapidly growing market, which could make it a more attractive EV investment than older automakers or competitors that have yet to really get off the ground.
