Polestar Automotive Stock: Buy, Sell, or Hold?

When Polestar Automotive (NASDAQ: PSNY) went public by merging with a special purpose acquisition company (SPAC) in June 2022, it initially seemed like a promising electric vehicle (EV) stock. It was backed by Geely's Volvo, manufacturing thousands of vehicles per year, and had a clear roadmap for the future.

Polestar's stock opened at nearly $13 on the first day but now trades at about $1.30 per share. Like many other SPAC-backed EV makers, it ran out of juice as its deliveries stalled and it racked up steep losses.

Could Polestar actually be a compelling turnaround play for contrarian investors? Let's see if it's the right time to buy, sell, or hold this unloved stock.

Image source: Polestar.

What happened to Polestar?

Polestar sells three high-end EVs: the Polestar 2 fastback, the Polestar 3 SUV, and the Polestar 4 SUV coupé. It plans to launch its next two vehicles -- the Polestar 5 GT and Polestar 6 electric roadster -- in 2025 and 2026, respectively.

Polestar's deliveries surged 80% to 51,491 vehicles in 2022, but only increased 6% to 54,626 vehicles in 2023. In the first nine months of 2024, its deliveries declined 23% year over year to 32,300 vehicles. The company blamed that slowdown on its supply-chain constraints, software problems that delayed its launch of the Polestar 3 from 2023 to 2024, and macro and competitive headwinds across the crowded EV market.

Polestar also delayed the filing of its 2023 annual report earlier this year to correct some accounting errors and restate some of its financials for 2021 and 2022. That delay coincided with the abrupt departures of its CEO and CFO. Michael Lohscheller, who previously led two other controversial EV makers -- Nikola and VinFast Auto -- subsequently took over as Polestar's new CEO at the beginning of October.

As Polestar struggled with those challenges, its revenue fell 3% to $2.38 billion in 2023 as its net loss more than doubled from $466 million to $1.17 billion. It also received a delisting warning from the Nasdaq after its stock dipped below $1.

Reasons to buy or hold Polestar's stock

It's easy to see why Polestar's stock plummeted, but investors shouldn't overlook the green shoots that are slowly appearing. On a sequential basis, its deliveries actually grew 82% in the second quarter of 2024 before pulling back 10% in the third quarter, and it still plans to scale up its business by entering seven new markets in 2025. It didn't provide a full-year delivery outlook for 2024 but is aiming to deliver about 155,000 vehicles in 2025.

Based on that optimistic outlook, analysts expect Polestar's revenue to rise 15% to $2.75 billion in 2024 and surge 146% to $6.77 billion in 2025. They expect its net loss to widen slightly to $1.19 billion in 2024 but narrow to $1.03 billion in 2025.

With an enterprise value of $4.52 billion, Polestar trades at just 1.6 times this year's sales and less than one times next year's sales. By comparison, Tesla trades at nearly 7 times this year's sales. Therefore, Polestar's stock could soar a lot higher if it ramps up its deliveries.

Polestar also believes it can achieve a positive gross margin by the fourth quarter of this year as it overcomes its supply-chain constraints and ramps up production of the Polestar 3. It expects its cash flow can reach breakeven levels by the end of 2025 as it streamlines its spending.

Reasons to sell Polestar's stock

Those goals are ambitious, but Polestar's balance sheet is still a hot mess. It was still shouldering $2.79 billion in net debt at the end of 2023 and ended its latest quarter with just $669 million in cash and equivalents. It secured an additional $300 million in funding in August but will likely need to take on even more debt to roll out the Polestar 5 next year.

Another pressing issue is that Polestar still manufactures most of its vehicles in China (since its former parent Geely is a Chinese automaker), which exposes it to the rising tariffs on Chinese-made EVs in the U.S. and Europe.

It's trying to offset that pressure by expanding its newer plants in the U.S. and South Korea, but that strategy could drive up operating costs as the constant pricing pressure in the EV market compresses its gross margins. Polestar has already cut its prices repeatedly over the past year to keep up with those aggressive competitors.

Is it time to buy, sell, or hold Polestar's stock?

I don't think Polestar is a safe stock to buy and hold yet. It might be faring better than other tiny luxury EV makers like Lucid but hasn't proven it can scale up its business and differentiate itself from its other high-end competitors. For now, I'd either sell or avoid Polestar until it achieves some of its lofty goals.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.