To The Moon

Faraday Future Intelligent Electric (NASDAQ:FFIE) is a pre-production EV company that is launching its luxury crossover SUV, the FF 91, in 2022. Based on the statistics the company released, the vehicle seems compelling.

Thatsaid, it will cost $180,000, which is more than double most of the cars on that chart. They expect to release models in the $60K range by 2023/24 to expand their addressable market and help them reach their target. Production is expected to be minimal through 2023 and ramp significantly with the launch of the lower-priced 81 and 71 series.

Source:Investor Presentation

Late to Market

The problem with investing in FFIE is not just uncertainty about hitting production goals and the fact that they won't produce 100,000+ cars until 2024 assuming they meet the target. Even if they are selling 250,000 vehicles or more in subsequent years, they will have to compete with a field of larger, well-capitalized competitors who've had a head start and will make it difficult to ever earn a profit.

Before you even consider the competition, we should look at the cost needed to build production. Faraday has burned through$2Bin cash just to get to their current stage.

Source:Investor Presentation

They project it will cost another $377M to launch the FF 91. This includes $90m to finish the Hanford production facility, which will have a production capacity of only 10,000 vehicles annually with the ability to expand to 30,000 with additional investment.

Their projections for future capital expenditure are modest, but that's likely because they plan to partner with a third-party manufacturer with the capacity for 270,000 vehicles annually.

Source:Investor Presentation

Not building out their own production saves on capex but their manufacturing partner will obviously still need to be compensated, so it ends up as a cost on their income statement.

Their EBITDA projections are also based on hitting their 266,000 unit 2025 sales goal. They project that most of those sales will come from the lower-priced 81 and 71 series. We haven't seen them launch their first model successfully, and based on the development timeline they gave for the FF 91, both of the next models are still in the development phase. So you don't even know the specs of the car that they are banking on for success. Their FF 91 looks impressive, but it still hasn't launched and there's no guarantee they can preserve performance at a price ~60% lower.

There's also the risk of delays in production. The FF 91 wasoriginally supposed to ship in 2018. Various other EV companies like Rivian (RIVN) and Lucid (LCID) have delayed production times so it's not unheard of. They did bring on a new CEO in 2019 to replace their founder, which might suggest that the delays of the FF 91 won't be repeated. Even if production goes smoothly, they still won't be out of the woods. They are in a low-margin, highly competitive industry.

Competition

You could try to compare Faraday to Tesla (TSLA), which once had cash burn and production delays of its own but has done phenomenally well for early investors.

The difference is that Tesla was early to the EV market and established a leading brand. Elon Musk has proven to be a uniquely capable leader and brings tons of free exposure to the company through his popularity in the media. An upstart like Faraday faces a lot tougher competition launching in 2022 and 2023. EV brands like Tesla and NIO (NIO) are already established and producing at scale. Tesla alone is expected to deliver about 800,000 vehicles this year. At the same time, traditional automakers will be converting their production capacity to EVs faster than ever. They almost all havea planto be fully electric by 2030-40 and expand EV production within the next five years. Volkswagen will deliver 450,000 EVs this year - a small fraction of their total manufacturing capacity - andintroduce50 additional EV models by 2025.

In Faraday's investor presentation, management calls their target of a 3% EV market share by 2025 "modest". It may seem like a small number, but it's not modest when you consider the whole industry. If you look at this list of publicautomakers, you can count 30 others that currently have higher revenue than FFIE expects in 2025. You could do simple math and say that an equal market share is 3% (100%/31=3.2%). But that ignores giants like Toyota and Tesla who will have a much larger share, as well as 10+ smaller competitors on that list and any that aren't on it. So Faraday's projections seem to assume they'll take more market share than their average competitor, which is difficult to get behind when the competition is years into production and they still haven't launched their first vehicle.

Valuation

At a $3.5B valuation and over $500 million in cash as of March 31st, they trade at an enterprise value of $3B. They're projecting a combined -2 billion EBITDA loss in 2022-23. Based on that number they will need to raise over $1.5B in the next several years even if they meet expectations.

If they do hit their goals in 2025, there's potential for shares to do well from here. At $21B in sales in 2025, assuming they trade for TSLA's current 15x EV/Sales multiple, outstanding shares grow by 40%, and we discount by 10% annually for risk, they would currently be worth $123 billion.

You couldn't blame anyone for getting excited at that number, but that calculation has far too many assumptions to trust. Tesla's valuation is exceptional - traditional auto companies usually trade for 1-2x EV/Sales and newer EV companies could see valuations compress as those companies enter their market.

Management's guidance assumes Faraday can go from having no production to a similar market share as established competitors in four years. You have to believe the new models they're depending on for growth will release on time and be competitive in the market for that to happen. We haven't seen the design of those models yet and are still awaiting the launch of their FF 91. Once production does get going, they will be competing in a difficult and extremely competitive market.

Auto manufacturers face heavy regulation, a complex production process, and recall risks. Fixed costs are high but demand is very cyclical, which leads to losses and often bankruptcy during recessions. Customers shop for price because it's such a significant purchase, buttendnot to be loyal to a brand. Such difficult dynamics are made worse by the size of competition Faraday faces. In an industry that benefits from scale, it seems like the dozens of companies capable of producing millions of EVs will have an advantage over them. Toyota alone has an annual marketingbudgetlarger than FFIE's entire market cap. When you include so many existing manufacturers and others in development like Fisker (FSR) or Nikola (NKLA), it's hard to see how Faraday will be able to compete.

Conclusion

With an apparent need for cash in the next two years, a production delay or decline in share price would make even more dilution necessary to stay afloat. When you consider how many risks precede them even being able to compete in a tough market without the scale of competitors, this seems like one to avoid.