Why Polestar Automotive Stock Crashed 20% After Its Reverse Stock Split This Week
Key Points
Polestar performed a reverse stock split to get above the minimum share price to be eligible for the Nasdaq exchange.
The company is burning money, with no path to positive profitability anytime soon.
Its troubling balance sheet should keep investors away from this stock right now.
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Shares of Polestar Automotive (NASDAQ: PSNY) crashed 19% this week, according to data from S&P Global Market Intelligence. The company is struggling to generate a profit and has seen a crashing stock price, recently having to perform a reverse stock split in order to have a high enough stock price to be listed on the Nasdaq exchange. Electric vehicles have gone through a boom and bust cycle, with Polestar struggling to generate a profit and burning a lot of money.
The stock is now down 96% from all-time highs. Here's why Polestar shares were falling yet again this week.
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Struggling in a crowded electric vehicle sector
Back during the electric vehicle (EV) boom, Polestar was able to raise $890 million through a SPAC (special purpose acquisition company) to fund its growth plans. With multiple models coming down the pipe, it aimed to offer a premium EV brand and ride the wave of the electrification of the automotive space.
A few years later, these plans did not pan out whatsoever. As of this writing, Polestar has a market cap barely above the money it raised through its SPAC, and recently had to perform a reverse stock split to raise its share price above the Nasdaq minimum threshold. These are all developments that are leading investors to get more and more bearish on Polestar stock.
Last quarter, Polestar grew its revenue 48% year-over-year to $2.1 billion. However, it has negative gross margins, burned $1.6 billion in free cash flow over the last twelve months, and has a balance sheet loaded with debt. Unless the company can reverse its fortunes and generate positive free cash flow in the near future, Polestar is in serious trouble.
Image source: Getty Images.
Time to buy the dip?
Even though Polestar is a penny stock that looks like an exciting buy-the-dip candidate, the stock is one to avoid right now.
This is a highly unprofitable business heading into a hypercompetitive moment in the automotive space, where electric vehicles keep losing market share. Its balance sheet is in terrible shape, and it keeps burning cash. Polestar stock is likely to fall lower and lower from here.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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