Bankruptcy is a risk for any individual or corporation that has a relationship with a bank. That is to say, no one is safe from the crushing weight of accumulating debt. However, in the case of publicly traded companies, the effects of corporate bankruptcy trickle down directly to investors. That’s because by investing, you take on a portion of the company’s financial risk, not just its profits. Nowhere is the risk of bankruptcy more prevalent than in that of fledgling electric vehicle (EV) companies, which has led to some distressed EV stocks on the market.
As such, investors must be cautious of companies promising a comeback after several quarters of insufficient financial performance. With electric vehicles, consumer demand is not a sure driver of revenue due to the cost of EVs still being so high. Moreover, the cost of developing and manufacturing EVs and their supporting technologies can lead to exorbitant expenditures and debts for new companies. Thus, here are three financially distressed EV stocks to avoid in the coming years.
Distressed EV Stocks: Nikola (NKLA)
For better or for worse, almost everyone following the EV industry has heard of Nikola (NASDAQ:NKLA). The company’s origin was one of fraud, due to its founder, Trevor Milton, lying extensively about Nikola’s capabilities to produce electric semi-trucks and proprietary EV technology. This ultimately landed him in prison.
New management has since taken over with aims to legitimize the business and make good on promised deliveries. Unfortunately, Nikola’s production line is still finding its footing and saw its full fleet of delivered battery-electric trucks recalled in August of 2023 due to battery fires breaking out. Now the company projects it will deliver up to 350 hydrogen-electric trucks in 2024.
Whether or not this will occur or even increase profitability for Nikola at the current production scale remains a question. After all, despite Q1 of 2024 being its first quarter to include hydrogen-electric revenues, the company still reported a net loss of $147.7 million.
Fisker (FSRN)
At one point in 2022, Fisker (OTCMKTS:FSRN) seemed like a genuine contender in the world of EVs. After all, the company had a regional advantage, producing electric vehicles on the European continent with access to a market more interested in EVs than North America. However, whether due to a lack of proper marketing or uncompetitive pricing, Fisker’s sales have led to an abysmal financial situation. Ultimately, this culminated in a net loss of over $463 million for fiscal year 2023.
As a result, the stock has lost 99.6% of its value since going public in 2020 through a special acquisition company merger SPAC. Moreover, its delisting from the the New York Stock Exchange (NYSE) on April 22 has all but sealed its fate. The company itself warned on April 23 that it may have to file for bankruptcy protection in the following 30 days.
Now with Fisker’s Austrian division filing for bankruptcy and its Ocean model car factory shutting down, complete collapse seems inevitable. Thus, Fisker is unequivocally one of the distressed EV stocks to avoid in the coming weeks.
Faraday Future Intelligent Electric (FFIE)
Long questioned about its financial solvency, Faraday Future Intelligent Electric (NASDAQ:FFIE) is more akin to a custom car club than an automobile manufacturer. The company, much like Fisker, went public through a SPAC in January of 2021. Since then, it has failed to deliver any meaningful profits or returns for investors who initially bought in.
Despite its attractively futuristic designs, the company has not delivered more than 10 cars in the last ten years. Moreover, most of these cars belong to executives inside the company, with other buyers being high-profile celebrities rather than EV reviewers or enthusiasts.
Due to this lack of meaningful production and sales, the company has reported $3 billion in net losses over 10 years. Now the company may even lose its headquarters in Los Angeles due to owing nearly $1 million in rent to its landlord. From a financial standpoint, FFIE’s lack of progress signals it is worth avoiding, as bankruptcy might be around the corner.
On the date of publication, Viktor Zarev 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.
